Swartz: Timberland deal ‘magnificent and bittersweet’

“It’s a magnificent day and a bittersweet day, but the shareholders had to be our only concern,” summed up Timberland Company CEO Jeffrey Swartz about Monday’s $2 billion sale of the company his father founded some 25 years ago to VF Corp., parent company of several high-profile apparel brands, including Timberland’s The North Face rival.Those shareholders will receive $43 a share in the deal, a 43.4 percent jump over stock’s Friday closing price, though already there have been at least five class action “investigations” into the proposal, claiming that shareholders could have done better.One class action suit has been filed by the law firm Levi & Korsinsky over a stock price plummet back in May, alleging shareholders got snookered by overly optimistic Timberland statements.Shares once traded for $45 a share, the firm said, so “the proposed deal price of $43 per share therefore represents no premium, but in fact a discount, to Timberland’s recent trading price.”But the shareholders won’t have much choice in the matter, since the Swartz family and affiliated members control 73.5 percent of the company’s voting stock. (They don’t own that much of the common Class A stock, but most of the class B stock, which gets 10 more votes per share.) And if a better deal does come along by July 26, Timberland would have to pay a $87.2 million penalty to back out of the deal, which should close in the fall.Under the deal, the Swartz family would get about $90 million for their shares (thanks partly to a clause that allows them to trade more than a half-million shares of Class B stock for Class A). Plus change-in-control agreements would mean Jeffrey Swartz, as CEO, would get at least $7 million in severance over the next two years, more or less — “less” because there might be some overlap with the shares held, but “more” because the severance estimation was based on a stock price at the end of last year, which was almost $20 a share lower than the actual sales price.Five other Timberland executives under the change-of-control agreements would get a total of more than $9 million in severance pay out over two year, again at the much lower price.But while the deal is sweet for the Swartzes and other executives, it’s too early to tell if it will be bitter for the company employees.On the face of it, the future looks bright for Timberland. VF said headquarters will remain in Stratham, at least for the time being, and it looks as if VF is looking to expand Timberland rather than consolidate.The North Carolina-based company, which sells 30 apparel brands — including Wrangler, Lee, Vans, Eagle Creek, Ella Moss and JanSport, has been looking to expand its outdoor offerings, its most profitable lines, to 50 percent of sales. It was also hoping to increase foreign sales from 30 to 40 percent. This acquisition gets it to 35 percent.’Leveraging our momentum’VF’s CEO Eric Wiseman used such words as “thrilled” and “transformative” about the company’s biggest acquisition to date, which will increase VF sales by $1.6 billion, to $10 billion, getting it an immediate quarter per-share in earnings after acquisition expenses this year, and another 75 cents in 2012.After all the expenses are paid up, the company hopes for another $2 in earnings per share by 2015And all this with very little added debt, which is often the cause of layoffs down the road.VF – with a cash flow of about $1 billion a year – can slap down a $500 million payment on the deal, borrow $700 million in commercial paper, and borrow another $800 million in debt, if necessary. Half of that debt is to be paid back in two years and the other half in a decade, which would increase VF’s debt-to-capital ratio from 20 percent to a bearable 25 percent. (Wiseman also hinted that the company might sell off other divisions, in order to pay down the debt sooner.)And it doesn’t look like VF is just annexing a stagnant Timberland. VF appears to have high hopes for Timberland’s future, predicting $900 million in sales growth in the next five years, $600 million in footwear, and another $300 million in apparel, mainly the company’s Smartwool brand socks.The company says most this growth would be due to retail experience.”We are confident we can take the big brands and make them bigger,” he said.Swartz too said the merger would be “leveraging our momentum to build our brand further and faster.” Indeed, the company just ended a deal with its North American distributors, clearing the way for VF to expand sales in the homeland.And when asked by one analyst whether there will be any consolidation of rival brands — “cannibalism” was the word used – especially between The North Face and Timberland, the answer was, not really.First, Timberland is primarily a footwear company with an apparel sideline, whereas The North Face is an apparel company with some footwear sales. Second, The North Face products are mainly used “above the tree line” for those with an “adrenalin rush,” whereas Timberland products are more designed “below the tree line” for those who use a “lower heart rate.”And finally, VF and Timberland complement each other in other ways. VF has strong experience in retailing different brands, while Timberland was good in sustainability and energy efficiency. VF might be stronger in China while Timberland has better penetration in Japan.Still, VF hopes that there will be $35 million in “cost savings” from the deal, knocking off 600 basis points in gross margins though cuts in SG&A — selling, general and Administrative expenses.VF’s operating margin, for instance, is around 20 percent, while Timberland’s is at 9 percent. Would that increased efficiency cause some workforce shrinkage, or will that just temper workforce expansion?As one analyst asked, “How do you bring SG&A down without hurting corporate culture?”Wiseman replied that VF has been very respectful of the other brands it has acquired over the years, and Timberland was on the top of its wish list.”VF admired the Timberland brand for a long time. It goes back a decade and more,” said Wiseman.It was just that VF finally had the “financial strength” to acquire it at this point of time.Swartz said he was convinced that VF did buy into Timberland philosophy that “stewarding the outdoors makes good sense for outdoor brands,” and that this deal would create the “most important outdoor coalition on earth.”What will Swartz be doing next? For now, he is focused on the transition. But some of the terms of the contract give a hint. While Swartz signed a noncompete clause, the agreement did carve out a specific exception, that it should not restrict him from “non-commercial activity, either by himself or with, for, or on behalf of any other person or entity, including, without limitation, any corporate social responsibility activity or charitable or philanthropic activity.” — BOB SANDERS/NEW HAMPSHIRE BUSINESS REVIEW

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