PVH to Buy Warnaco for $2.9 Billion

--PVH agrees to pay $2.9 billion to acquire smaller peer Warnaco in a cash-and-stock deal

--Based on PVH's last closing price, per-share value is a 34% premium over Warnaco's last closing price

--Shareholders at both firms cheered the news, sending Warnaco and PVH sharply higher in Wednesday trading

Apparel maker PVH Corp. (PVH) agreed to pay $2.9 billion to acquire smaller peer Warnaco Group Inc. (WRC) in a cash-and-stock deal that will unite well-known brands such as Calvin Klein, Tommy Hilfiger and Speedo under one combined firm.

Based on PVH's last closing price, the per-share value of the deal is $68.43, a 34% premium over Warnaco's last closing price. Shareholders at both firms cheered the news, as Warnaco jumped 38% to $70.07 in recent trading while PVH rose 17% to $106.70. Both stocks hit all-time highs on Wednesday.

In recent years, PVH hasn't been shy about launching large acquisitions to bolster the company's rank of brands. New York-based PVH, formerly known as Phillips-Van Heusen Corp., paid roughly $3 billion in 2010 to acquire Tommy Hilfiger and spent over $400 million to buy Calvin Klein in 2003. Those two brands represent over 75% of PVH's profits and more than 80% of 2011's $5.9 billion in revenue.

Warnaco shareholders will receive $51.75 in cash and 0.1822 of a share of PVH common stock for each Warnaco share they own. The merger, which has been approved by the boards of directors at both companies, is expected to close in early 2013. Shareholders of Warnaco, which owns and licenses brands such as Chaps, Warner's, Olga and Calvin Klein, will own a roughly 10% stake in PVH when the deal closes.

Cowen & Co. analyst John Kernan in a research note touted the deal, saying Warnaco's infrastructure could help PVH expand the Tommy Hilfiger business into Asia and Latin America. The firm also touted PVH's ability to utilize its supply chain and other operations to significantly bolster sales and margins for both Calvin Klein and Tommy Hilfiger.

"We believe the biggest risks to the acquisition are increased leverage and Warnaco's European exposure," Mr. Kernan said.

PVH expects to generate $100 million of annual run rate synergies, which will be realized over a three-year period, and incur one-time costs of $175 million.

PVH expects Warnaco, also based in New York, will add 35 cents per share to earnings in the first full year, excluding one-time integration costs and transaction expenses but including the potential loss of a license.

Mr. Kernan said he believed PVH was being conservative with its accretion targets, similar to the Tommy Hilfiger acquisition, and that additional synergies could be generated. As a result, Cowen said PVH's stock price could have even more upside.

Barclays PLC (BARC.LN, BCS), Bank of America Corp. (BAC) and Citigroup Inc. (C) have agreed to provide about $4.33 billion to finance the Warnaco transaction, with the funds to be used to refinance debt, fund the cash portion of the deal, pay for transaction-related expenses and provide extra liquidity for PVH.

Looking ahead, PVH projected fiscal third-quarter and full-year adjusted earnings would be "at least at the top end" of its targets announced in early October. Warnaco, which plans to release third-quarter results on Nov. 5, said it expects sales of about $612 million and earnings from continuing operations in line with Wall Street's expectations.

Analysts polled by Thomson Reuters expected Warnaco to post a profit of $1.15 per share on revenue of $648 million.

-Write to John Kell at [e-mail]

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