The pending $86 million purchase of Los Angeles-based Earl Jean Inc. by Nautica Enterprises Inc., announced in late April, may mark the end of one local company’s independence, but it also establishes a toehold for another seeking a place in the local mergers and acquisitions market.
Playing a key role in the cash-and-stock deal was the seven-month-old, boutique investment bank the Sage Group LLC, the six-person L.A.-based firm that brokered the sale.
Founded by three former ING Barings LLC executives, the Sage Group is vying to establish itself as a major force for handling mergers and acquisitions in the $50 million-to-$100 million range. Earl Jean was its first big deal, and the firm anticipates having five more deals done by the conclusion of its first year of business.
“During my five years (at ING Barings), we closed between $7 billion and $8 billion in transactions, but many of them fell within the middle market,” said Mark Vidergauz, CEO and managing director of the Sage Group.
For his team at ING Barings, he said, “there were a couple of big deals, but most were within the $5 million-to-$50 million size range. The more we spent working in this market, the more we realized it was an underserved market where we could bring value. The very large firms don’t focus necessarily on the $70 million transaction.”
In fact, most large firms don’t look at deals less than $150 million, he said.
Led by Vidergauz, a South African native who was a managing director at ING Barings, other Sage Group officers are Brien Rowe, managing director, and Dan Gardenswartz, principal and founding partner. Rowe was most recently managing director in the M & A; group, as well as for equity and debt deals, at ING Barings, and Gardenswartz was a vice president at the same firm.
Initial funding for the Sage Group came from Robert Day, chairman and CEO of TCW Group, one of the largest fund managers in the United States; Bradford Freeman, founder of investment banking firm Freeman Spogli & Co.; and Rockwell Schnabel, founder of Palo Alto-based venture firm Trident Capital.
While the Sage Group has no immediate plans to take equity positions in its client companies and it didn’t take equity in the Earl Jean sale that could change in the near future, Vidergauz said.
Finding buyers
About 90 percent of Sage’s clients are on the sell side of the transaction, and 85 percent of its deals are mergers and acquisitions, although the firm does some capital-raising deals as well, Vidergauz said.
While the apparel industry is not an area in which the Sage Group will concentrate, it does have some experience in the sector. While still at ING Barings, the group worked with Lucky Brand Dungarees, a Los Angeles-based maker of high-end casual clothing. The Sage Group did not actually complete Lucky’s eventual sale to Liz Claiborne Inc. in June 1999; that transaction was handled by Donaldson Lufkin & Jenrette Inc.
But its experience in that field tied the knot for Earl Jean, said Benjamin Freiwald, president and CEO of Earl Jean.
“Lucky is a very comparable kind of business,” said Freiwald. “It’s denim expensive denim and it’s small and L.A. (based).”
For Earl Jean whose dark, high-grade denim jeans with a low waist cut and boot cut legs sell for about $110 a pair, primarily to Japan and Europe the deal marks the capstone to a rapid run-up in revenues. The company is projecting up to $30 million in revenues for this year, up from $1.9 million in 1997.
With its sale to the New York apparel maker, Earl Jean becomes a wholly owned subsidiary of Nautica. Husband and wife founders Benjamin Freiwald and Suzanne Costas Freiwald become president and vice president/director of design, respectively, of the subsidiary.
A national view
While the Sage Group’s first deal was in L.A., about 40 percent of the firm’s future business will be out of the area, Vidergauz said. Clients in the L.A. area will likely come from telecommunications, retail and consumer products startups, he said.
The Earl Jean deal seems to be a noteworthy start.
“It’s a decent size deal,” said Jacquelyn Mercer, senior manager at PricewaterhouseCoopers LLC in Orange County who follows the apparel industry. “It’s not a huge deal, but it’s not a small deal either.”
While the Sage Group does not plan to focus on apparel industry clients, in other respects Earl Jean epitomizes the type of companies that the Sage Group is targeting entrepreneurial businesses with high valuations and strong appeal to potential buyers that would result in a lucrative sale. In some cases, the deal also must fit additional parameters.
“In Earl Jean’s case, they wanted to obtain a fair value for their company but wanted a strong cultural fit,” Vidergauz said. “They wanted to make sure a buyer was someone who, going forward, would understand the protection of the brand. We found a buyer that was willing to pay a fair price.”
