A $230 million refinancing by fashion house BCBG Max Azria Group in Vernon has bought the company more time to turn around a German department store chain it bought last year.
If that happens, the company could be picked up by a private-equity firm or another fashion house, sources familiar with the company said.
Moody’s Investor Service on June 21 announced that BCBG had completed the refinancing and used the proceeds to meet a looming $89 million repayment due in August as well as to reduce borrowings on its credit line. Based on the debt deal, Moody’s upgraded the company’s credit rating to “B3” from its previous junk status of “CAA.”
But there’s still trouble.
Moody’s stated that it expects BCBG will suffer a double-digit revenue decline this year because a large contract will expire. That referred to a deal between BCBG and Wal-Mart Stores Inc. to produce a line of girl’s clothing. Under the deal, clothes were marketed with the names of both designer Max Azria and pop star Miley Cyrus on them and sold exclusively at Wal-Mart. But the mix of upscale brand Max Azria and discount retailer Wal-Mart never clicked with consumers.
Mickey Klein, managing partner for consumer goods at consulting firm Astor Group in New York, said BCBG must address the problems that brought it to the debt crisis in the first place. Specifically, Klein pointed to falling cash flow from the failed merchandising deal with Wal-Mart and the acquisition last year of Karstadt, a bankrupt German department store.
“The Karstadt deal is a big cash drain on the company,” Klein said. “This new debt will allow Max the time and resources to turn around Karstadt and hopefully equal or exceed the cash flow from Wal-Mart.”
BCBG manufactures and sells women’s clothes under its upscale Max Azria and Herve Leger brands in department stores, and its own mall-based chain of more than 200 boutiques in the U.S. and six foreign countries. The company had revenue of $950 million last year, according to Moody’s. It is completely owned by its founder, fashion designer Max Azria, and his wife, Lubov.
Dan Gardenswartz, managing director of investment bank Sage Group in Los Angeles, said that before the refinancing, BCBG suspended payments to its vendors, a dire situation that can now be fixed. The new $230 million in debt will come due in 2015, giving the company time to deal with the problems at the German department store chain and prepare for a possible sale to a private-equity company.
“The core business is performing well notwithstanding the liquidity issues,” Gardenswartz said. “It’s a large company with good brands and good distribution.”
Azria has long been aggressive about expanding the company’s reach. In 1998, he bought the Herve Leger brand and integrated it into his namesake line of upscale fashion. In 2006, he purchased the Max Rave chain of 488 apparel stores, but started shutting those down in January. In 2010, the New York Post reported that Azria was trying to sell his company, but weeks later the newspaper said he canceled the sale and instead purchased Karstadt in partnership with German billionaire Nicolas Berggruen.
“We have a fantastic opportunity to turn around this business and make it the jewel of the German retail market,” Azria said in a statement at the time.
The company said Azria was traveling and no other executive was available to comment for this article.
Azria signed an agreement with Wal-Mart in 2009 to produce the Miley Cyrus line. Although the deal didn’t work out, Klein said the company can weather the loss because of the strength of its core BCBG Max Azria brand.
“The brand is not Earth-shatteringly chic, but it’s elegantly simple and stylish,” Klein explained. “It’s a department store favorite, and every year the advertising is top-notch. He really has a lifestyle brand with apparel, eye wear, fragrance and accessories. That’s what you need when you’re trying to create a fashion empire.”
Selling the empire
Gardenswartz said there are persistent rumors swirling around BCBG in merger and acquisition circles, but he doesn’t expect any deal soon.
“Clearly the deal with the refinancing was designed to keep the business intact and ownership in Max’s hands,” he said. “That’s consistent with someone who plans to continue to grow his fashion empire, not a prelude to a sale.”
Paul Zaffaroni, director of investment banking at Roth Capital Partners in Newport Beach, said that if the company were sold, the most likely buyers would be a large European fashion conglomerate or a private-equity group. The buyer would want to purchase a majority equity stake, but keep Azria at the company by leaving him with a minority share.
“With private equity, the entrepreneur can take some chips off the table but still own significant equity,” Zaffaroni said. “He might sell 60 to 70 percent but keep the rest to get a second bite of the apple if the company goes public or is sold again later.”
Zaffaroni added that the big question mark would be the price Azria puts on his company. In 2006, Azria prepared to go public but decided against it when the IPO market declined.
Astor Group’s Klein said the future of the company will become clear by mid-2012, when it should be evident if Azria has succeeded in turning around Karstadt.
“If he gets his earnings up, he could attract a private-equity partner or go to the capital markets himself,” Klein said. “If he did it today, his expectations of value would be higher than what a private-equity investor would pay. But if he can revive those earnings, it’s a whole new ballgame.”
