Levi plans to seek lenders' consent for a Dockers sale

By Paul Deckelman

New York, July 13 - Levi Strauss & Co. said Tuesday that its efforts to sell its Dockers casual clothing business were continuing and said that it would begin seeking consents for amendments facilitating a sale from its senior secured term loan and asset-backed revolving credit lenders "very soon."

Levi officials did not offer a more specific timeframe for either the consent process or for the whole sale process itself, nor would they offer any other specific details or projections related to a Dockers sale.

However, in its 10-Q report for the second quarter ended May 30 that Levi filed Tuesday with the Securities and Exchange Commission, the company disclosed that the proposed amendments would, among other things, provide for the lenders' consent to a sale of the Dockers business - provided that the application of sale proceeds results in a reduction in the company's net debt of at least 30% (as of May 30, Levi's total debt, less cash, stood at $1.96 billion, down somewhat from $2.11 billion at the end of the 2003 fiscal year on Dec. 31).

Levi noted in the filing that Dockers had generated about 24% of the company's revenues in 2003. Company executives sought to offer clarification of the numbers on a mid-morning conference call that followed release of its second-quarter results - during which the possible Dockers sale was a hot topic among the analysts during the question-and-answer segment that followed the company's formal presentation of its results.

Levi's chief financial officer, Jim Fogarty, told one analyst that "the 30 [percent] is greater than the 24 [percent]. That was intended to give some indication - but that's as far as we're going to go in answering the delevering question."

At least 30% debt cut seen

But Fogarty did explain that the 30% net debt reduction figure was merely a floor that Levi was estimating for the purpose of seeking lender consent to the sale, rather than an absolute. Using that hypothetical minimum figure, in conjunction with Levi's nearly $2 billion debt load, to arrive at a possible debt reduction figure of around $600 million, Fogarty said such a number was "certainly in the ballpark" - but he quickly added "just so it's very clear, that has nothing to do with the level of expectation [of a possible selling price] our board has for the asset."

Levi's possible sale of the Dockers business and its intention of using sale proceeds to reduce its debt load have been driving market activity in the company's bonds and bank debt for several months - with the focus intensifying after Levi's May 11 announcement that it had hired Citigroup Inc. to explore the possible sale of Dockers. That announcement was seen as merely official confirmation of what the financial markets had already known for weeks.

Sale estimates vary

Estimates of possible proceeds from a sale of Dockers have ranged from a low of $500 million to as high as $1 billion, with most observers believing the unit will go for somewhere in the $600 million-to-$800 million range.

Fogarty said that while the consent process was about to launch "shortly, we've not talked to anybody [among the debtholders] yet about the process."

Fogarty and Levi's chief executive officer, Phil Marrineau, declined to comment on how the proceeds of any Dockers sale would be specifically used, beyond the broad heading of debt reduction.

"Our intention is absolutely to use the net proceeds to reduce debt," declared Fogarty, but "we're just not going to tell you which debt."

As of May 30, according to the company's balance sheet submitted in the 10-Q, Levi's debt included, among other instruments, $497.5 million of secured term loan debt due in 2009, $448.859 million of unsecured 7% notes due 2006, $377.706 million of unsecured 11 5/8% notes due 2008 and $571.556 million of unsecured 12¼% senior notes due 2012.

In the 10-Q filing, Levi said that if accepted as currently proposed, the amendments, besides giving the debtholders' consent to the sale of Dockers, would also "provide the company greater flexibility than is currently permitted in applying the proceeds of a sale among the various debt instruments currently outstanding, as well as greater flexibility under several negative covenants in the company's senior secured term loan and senior secured revolving credit facility."

Apart from the Dockers sale and its implications for the company's debt load, Levi said Tuesday that net income for the second quarter was $6 million, versus a net loss of $42 million for the second quarter of 2003. The improvement was driven by higher operating income, lower tax expense and a decline in losses on foreign exchange management contracts, offset in part by higher restructuring charges.

Operating income for the quarter increased 23% to $77 million, or 8.1% of revenue, versus $63 million, or 6.7% of revenue, a year ago. Operating income improved in all three of the company's geographic regions, North America, Europe and Asia-Pacific. Higher gross profit and lower sales, general and administrative expenses more than offset higher restructuring charges for the quarter.

The latest quarterly results were impacted by charges related to the proposed closure of two manufacturing plants in Spain and layoffs incurred in the United States as the company streamlined corporate support functions.

Levi further said that as of July 11, it had available liquidity of $552 million, consisting of about $287 million in cash or highly liquid short-term cash-equivalent investments, and $265 million in net available borrowing capacity under its revolving credit facility.

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