Kellwood chief downplays speculation about buying Levi's Dockers

By Paul Deckelman

New York, June 4 - Just a day after his offhand remarks about Kellwood Co. possibly being interested in acquiring Levi Strauss & Co.'s Dockers unit - and his estimating a price well above what most analysts have been saying - had pushed Levi's bonds up several points, Kellwood's chief executive officer appeared to be trying to downplay his comments' significance, telling investors and analysts on a Friday conference call that nothing is happening right now.

Hal Upbin's reported statement that Kellwood might be interested in buying Dockers and that the unit could fetch a price as high as $1 billion goosed Levi's bonds at least 1½ to 2 points on Thursday, its 11 5/8% notes due 2008 quoted by one trader as having "all of a sudden" pushed up to 95.5 bid in late-day action from prior levels around 93 bid, while Levi's 12¼% notes due 2012 and 7% notes due 2006 were each up more than a point to about 94 bid and 92.5 bid, respectively.

After weeks of bond market speculation that Levi might consider selling Dockers, which sells a popular line of khaki pants, shirts and related accessories, Levi announced on May 11 that it would explore the possible sale of the subsidiary, which produces about $1.4 billion of annual revenue. Since that time, there has been no word on what progress - if any - the venerable San Francisco-based blue jeans maker was making in shopping the unit around to potential buyers.

Until Thursday.

Following St. Louis-based apparel manufacturer Kellwood's shareholders meeting, Upbin was reported to have expressed some interest in Dockers - his company currently handles some of the line's manufacturing for Levi under license, to the tune of about $35 million a year - and to have speculated about a billion-dollar price tag.

But on the Friday conference call - where a question about Dockers and the market rumors Kellwood would bid on it was the very first question out of the box during the question-and-answer period that followed company executives' presentation about their quarterly results - Upbin said that given Kellwood's relationship with Levi, "there's nothing extraordinary about [the fact that] if they put Dockers up for sale, we would be a party that might want to look at it."

Kellwood, which does manufacturing under license for such well-known name brands as Calvin Klein, Liz Claiborne and IZOD, has manufactured Dockers items for Levi since 2000, as well as the Slates line of sweaters and tops since 1998.

In fact, he said that this was not new news - citing a Wall Street Journal some months ago in which Kellwood had said that it might be interested in such a transaction.

"In the acquisition business"

He said that Kellwood "is in the acquisition business," and regularly looks at "about a hundred or so" potential acquisitions in the apparel industry - although most of those potential purchases are far smaller than a deal for Dockers would be. In February, for example, Kellwood closed on its acquisition of the Phat Fashions LLC urban contemporary clothing line started by hip-hop music mogul Russell Simmons, a deal worth $140 million.

The CEO said that were it to come to pass, swallowing such a big fish as Dockers would "clearly" be a departure for Kellwood, which has said in the past that it would not "bet the ranch" on any one acquisition, and would not want to over-leverage its balance sheet, which had some $274.6 million of outstanding debt as of Jan. 31, according to Standard & Poor's, including an issue of 7 7/8% senior notes due 2009 and 7 5/8% debentures due 2017, both rated BBB- by S&P and Ba1 by Moody's Investors Service.

But right now, Upbin told the conference call, any possibility of Kellwood buying Dockers should be regarded as "very preliminary. We haven't done anything" concrete in terms of an acquisition, including due diligence, meeting with Levi management, or even formally broaching the idea of such a big acquisition to Kellwood's own board. "That's how far away we are," Upbin said with a laugh.

For now, Levi is just part of "a portfolio of a hundred companies that we look at on a regular basis."

Speaking in hypothetical terms, Upbin said that if Kellwood were to look thoroughly at Dockers "and we liked what we saw and wanted to do a transaction - and there are a lot of 'ifs' there, everybody, please . . . it obviously would be transforming [of Kellwood] because of the size [and] it obviously would require some unique restructuring or financing in order to put the deal together, because it's very large."

Upbin added that before pursuing such a deal, Kellwood "wanted to be comfortable that we could do such a transaction - it's not fair to Levi or us if we looked at it and felt we couldn't put one together."

He said that on Thursday, "I also made the comment that I felt very comfortable that we could do such a transaction, in size," because Kellwood had previously looked at several companies not too much smaller than Dockers, but he explained that "I wasn't referring to Dockers per se."

The Kellwood CEO acknowledged that his Thursday remarks "perhaps were too casual - I was naive, but in my own mind, I didn't think there was anything being said that was ground-breaking."

Upbin also explained that his statement that Dockers could fetch a billion dollars for Levi - the top end of the reported likely purchase price range, though most analysts have pegged it well below that, at between $500 and $800 million - was simply a case of his repeating a figure he had seen bandied about Wall Street and reported in the press and not the result of any kind of due diligence or thorough analysis.

"I was the culprit," he said. "I was repeating what was out there."

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