Perry Ellis sees higher leverage post-Rafaella deal, but not for long

By Paul Deckelman

New York, Jan. 13 - Perry Ellis International Inc. will see its key leverage measure rise by a few percentage points as a result of its acquisition of women's sportswear maker Rafaella Apparel Group, Inc., but it anticipates bringing that ratio back down fairly quickly using the increased free cash flow the acquisition will bring, its chief financial officer said Thursday.

Anita D. Britt told attendees at the 13th annual ICR Inc. XChange Conference in Dana Point, Calif., that Perry Ellis has been "very focused on managing our balance sheet [and] managing our overall capital structure." She said that as of the end of the 2011 fiscal third quarter on Oct. 30, it had cut net debt as a percentage of total capitalization down to 29%, "and we're very, very pleased with that overall capital structure."

Britt said that "really put us in a good position" to be able to make the Rafaella acquisition "and finance it internally very seamlessly."

Perry Ellis, a Miami-based men's and women's clothing designer, marketer and retailer, announced last Friday that it had agreed to acquire New York-based Rafaella from Cerberus Capital Management for $70 million in cash plus warrants to purchase 106,564 shares of Perry Ellis common stock, subject to net working capital adjustments to the final closing balances. The deal is expected to close on Jan. 28. The company said that it would finance the acquisition through its senior credit facility and cash on hand.

In its most recent 10-Q filing with the Securities and Exchange Commission, Perry Ellis said that as of the end of the fiscal third quarter, it had $13.69 million of cash and cash equivalents on hand and had no borrowings outstanding under the credit facility, a $125 million asset-based revolving credit line with a $75 million accordion feature. It also had $45.5 million available under separate letter-of-credit facilities.

Britt said during the ICR presentation that "on a look-back basis," taking into account inventory, receivables, working capital and Perry Ellis financing the acquisition through its credit line, "at the end of that period, we would be at 38% net debt-to-total cap - definitely a level that we're very comfortable with, but with the free cash flow that we would be generating on a look-forward basis, we can bring those levels down very quickly."

Perry Ellis has touted the deal as accretive. Rafaella generated about $122 million of revenue and $12.4 million of adjusted EBITDA for the 12 months ended Sept. 30, and Perry Ellis said that for the coming 2012 fiscal year, it should add $120 million to total revenues and some $13 million of EBITDA, translating into 40 cents per share in additional net earnings.

According to the companies' most recent SEC filings, Perry Ellis has $105.3 million of 8 7/8% senior subordinated notes due 2013 still outstanding of the $150 million that were originally issued in 2004. Rafaella has $71.28 million of 11¼% notes slated to come due on June 15 still outstanding from the $172 million issued in 2005. Both currently trade at or slightly above par - with the Rafaella paper having jumped to that level last Friday on news of the acquisition deal from its previous levels down in the mid-70s, traders said.

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