Kenneth Cole Looks for a Cheap Deal From Shareholders (Update 1)

Updated to include added analyst comments, M&A details and updated share prices.

NEW YORK ( TheStreet) - It's not just Kenneth Cole shoppers that may be in a post-holiday bargain hunting mood.

Clothing designer Kenneth D. Cole may be looking to buy his namesake fashion company at an opportunistic price from existing shareholders with a $15 a share bid for Kenneth Cole Productions ( KCP) on Friday.

Citing profitability and competitive challenges, Cole is offering to buy the company at a valuation of $280 million -- or roughly a 26% premium to the company's average stock price in the last 45 days -- but below a post-crisis September 2010 share price high of $16.50.

The move comes at a time when mass-fashion mainstays like Kenneth Cole and Liz Claiborne ( LIZ) struggle with post-crisis profitability and insurgents like Michael Kors ( KORS), Lululemon ( LULU) and DSW ( DSW) report strong earnings.
Kenneth Cole is looking to buy KCP for $15 a share.

But Kenneth Cole may be close to an earnings recovery and the timing of the buyout may be an opportunistic play to get shares on the cheap.

"The market simply has given the company little credit for the value of the brand and the merit of recent turnaround initiatives and we think that Cole recognizes the opportunity to take the company private for cheap, re-build/grow the business with CEO, Paul Blum, and that ultimately would give him the chance to cash out at a substantially higher level," writes Jeff Van Sinderen an analyst with B. Riley & Co. in a note reacting to Friday's bid.

"The proposed transaction values the equity at ~$280M, which is still pretty low, given the licensing stream, brand equity, etc. We would not be surprised to see pressure applied for Cole to raise his bid," adds Van Sinderen. He rates the company's shares a "buy" with a price target of $17.

"We think Mr. Cole will likely offer an attractive premium to the $15 starting point, but is notably still mercurial enough to leave the public entity intact should the public market price trade at above his unknown "drop-dead" level," wrote CL King & Associates analyst Steven Marotta in a Friday note. At $15 a share, investors would bear an 18 months of cost cutting without seeing any of the expected benefit, according to Marotta. He notes when the initiative started, Iconix Brand Group ( ICON) was reportedly in talks to offer $27 a share for Kenneth Cole.

In his $15 a share offer, Kenneth Cole cited competitive and economic challenges that make it better for the company to operate as a private concern and offered a significant premium for the company's shares, which have rallied strongly in 2012.

"Recent market challenges have created a sharply competitive landscape, and I believe it is now more important than ever to embrace a more entrepreneurial perspective," said Cole in a Friday statement. He is currently the company's Chairman and Chief Creative Officer. "I am convinced that private ownership is in the best interests of the business and the organization and that this proposal is in the best interests of the shareholders."

Cole, who founded the New York-based clothing, footwear and fashion apparel designer in 1982 and took the company public in a 1994 IPO holds a 47% of Kenneth Cole's stock and 89% of its voting rights, making him a key to any strategic moves. But problems may arise if shareholders consider the management-led buyout to be unfairly priced or not fairly shopped to other interested acquirers.

Investor expectations signal an increased bid or a higher takeout of the company. Kenneth Cole shares rallied nearly 19% in Friday afternoon trading to $15.52, over 4% above the offer price. The company's shares have surged over 50% year-to-date on improving earnings prospects and the takeover bid.

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Details of the buyout offer signal that while Cole will look for a fair consensus among other company shareholders, he may nevertheless fall into a similar conflict as J.Crew's buyout, which closed in 2011 only after a hotly contested shareholder lawsuit and multi-million dollar settlement.

In his offer, Cole stated that he will not move forward with the buyout unless it's approved by a special committee and a majority of shareholders outside of his holding. Those moves signal a strong attempt at fairness; however, Cole also indicated that he won't look for an alternative sale or merger.

"We believe additional bidders in the process are likely to be non-existent as Mr. Cole's "desire to work for somebody" is notoriously low," added Marotta of CL King & Associates in his reaction to the bid proposal.

If shareholders became frustrated by Cole's attempt to buy the company without conducting an open bidding contest, it might create a legal battle similar to a $3 billion buyout of J.Crew by a consortium of investors that included company chairman Millard S. Drexler and private equity firms TPG Capital and Leonard Green in 2010.

After that buyout was announced, shareholders sued J.Crew and the private equity consortium, claiming that the $43.50 a share bid didn't represent a fair price that would have been achieved with a more open shopping of the company to other suitors. In a 2011 settlement, J.Crew and its private equity buyers agreed to an extended "go-shop" period and a $16 million payment to settle the lawsuit, however no contesting bids emerged and the deal closed in March 2011.

Shareholders may also simply feel the bid is undervalued relative to Kenneth Cole's earnings prospects and turnaround potential after reporting quarterly losses earlier in 2011.

In February, Sterne Agee analyst Sam Poser upgraded the company to a "buy" and gave it a $16 a share price target after increase earnings expectations to 72 cents a share on revenue of $508.3 million. "Updates and new products should allow KCP to begin to reestablish its position as a leading opening price point designer brand," wrote Poser in a Feb. 6 report.

Poser notes that in the fall of 2012, Kenneth Cole will launch a premium-priced "Kenneth Cole New York" collection and reintroduce a women's version of the line that will be sold at 100 high-end retailers like Dillard's ( DDS), Bloomingdales, Nordstroms ( JWN) and the company's branded stores. Those brands will offer shoes and boots retailing for up to $450 and will also feature revival fashions from successful 1990s designs.

Still, Poser notes that Kenneth Cole is likely to struggle in its fourth quarter earnings due on Mar. 1 as profit margins fall on higher costs, store closings and higher holiday discounts. Kenneth Cole is expected to earn 28 cents a share, according to consensus estimates compiled by Zacks.

While some established high end clothes makers like Liz Claiborne sell assets and restructure their businesses and other retailers like Collective Brands ( PSS) and Talbots ( TLB) are reported to be in sale discussions, there are positive signs for the retail industry.

On Friday, a ThomsonReuters and University of Michigan consumer confidence reading showed a rise in confidence to 75.3 from 75, a data point that augurs well for spending. Meanwhile, a Bloomberg compilation of same store sales in seven of the nation's largest department stores signals continued sales growth. The companies reported a 2.23% increase in January same store sales, according to the data, with Saks ( SKS) and Nordstrom reporting the strongest growth. In February, Nordstrom upped its dividend by 17% to 27 cents a share on improving profitability.

Meanwhile, expectations for Kenneth Cole competitors in many of its businesses like Michael Kors, DSW, Coach ( COH) and Ralph Lauren ( RL) continue to rise. Piper Jaffray analysts called Michael Kors' third quarter earnings "stellar" and upgraded their price target to $46 a share.

Michael Kors, a direct competitor to many of the markets and products of Kenneth Cole has surged over 70% since a December initial public offering.

To be seen is whether Kenneth Cole shareholders agree that the company is suffering from a competive market that won't lift shares beyond $15 anytime soon, or if they dig in their heels in anticipation of a higher offer or earnings recovery.

For more on designer fashion investments, see 9 rich kid stocks bucking the terrible economy . For more on Kenneth Cole shares, see TheStreet's ratings report on the company.

-- Written by Antoine Gara in New York

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