Tuesday, March 09, 2010

Warnaco Group (NYSE:WRC): PVH could pay $75/share for Warnaco, upgrade to Outperform - CSFB

Credit Suisse is upgrading Warnaco Group (NYSE:WRC) to Outperform from Neutral while raising their price target to $56 (prev. $45).

Two factors give them confidence in WRC's outlook: 1) rebounding global growth for Calvin Klein, WRC's key business; and 2) the potential for a PVH-WRC deal to combine CK under one roof.

A global brand story. CK is one of the few American brands with global potential, and with 80%+ of company profits derived from CK, CSFB believes Warnaco is well positioned to benefit from CK's international expansion. Less than half the size of Hermes, Coach, and Bulgari in Asia and Gucci, Diesel, Hugo Boss, and Ralph Lauren in Europe, CK is highly underpenetrated internationally. Growing at a 13% CAGR the last 3 years, CSFB estimates that Calvin Klein’s global retail roll-out (from 1,100 to 1,700 own retail doors) coupled with 4-6% comps could drive a 12% int'l revenue CAGR over the next 5 years and 6-8% total growth. And strong results last week suggest CK is setting up nicely for 2010 as constant currency int'l growth accelerated (+11% in Europe and +8% in Asia).

Ticker CK...? Regardless of what happens with M&A in the branded apparel sector near-term, CSFB expect PVH and WRC to unify the Calvin Klein brand under one roof at some point in what they believe would be a highly synergistic transaction. Though it's not clear when such a transaction would occur (or how it would be structured), the case to combine the key licenses and brand ownership is compelling given that Ralph Lauren shareholders were rewarded with $6+ billion of market value creation as the company acquired and consolidated most of its major licenses over the last decade. In a deal scenario, they estimate that PVH could pay as much as $75 for Warnaco and still generate solid EPS accretion and strong returns for its own shareholders.

In an outright acquisition of WRC by PVH, CSFB's merger model concludes that PVH would generate a 30% IRR for its shareholders over 4-years and would drive $3+ billion of value creation for PVH shareholders (WRC shareholders would receive the 68% acquisition premium). They assume PVH acquires 100% of WRC at $75 per share, a 68% premium, with a total deal size of $3.4 billion, financed by 60% debt, 30% equity, and 10% cash. They also assume $75 million of synergies, a 7% forward sales CAGR, and a 17x P/E multiple on the combined company (in line with Ralph Lauren)

Valuation. Despite superb execution and above average sales growth, WRC trades at <14x CSFB 2010 EPS estimate (vs. the sector avg of 15x). However, as Warnaco is increasingly viewed as a great way to play global consumption growth, the stock could benefit from P/E expansion..

Notablecalls: I think this is a significant call from the ever-wonderful CSFB research team. They are pretty much calling for PVH to acquire WRC for $75/share, a hefty premium and it looks like they have the numbers to back it up:

CSFB is out with another call on Phillips-Van Heusen (NYSE:PVH) explaining the rationale behind the potential deal. According to them, PVH is way better served buying Warnaco than buying Tommy (JPM has a separate note discussing a possible PVH+Tommy deal, after WWD reported the outfit was up for sale by Apax).

WRC will see new highs today, putting $47 level in play. Could go higher, if market plays ball.

It's the kind of a call that has power to move the stock for days.

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