Golden Gate subsidiary to buy Blair Corp.

On Jan. 23, four days after making a preliminary offer to buy the remaining shares of Blair Corp. that it didn’t already own, Appleseed’s Topco, a portfolio company of Golden Gate Capital, entered into a definitive agreement to buy apparel and home goods marketer Blair Corp. And during those four days Appleseed’s sweetened the pot appreciably: Whereas on Jan. 19 it had offered to pay $37.50 a share, it’s now buying Blair for $42.50 a share, or $173.6 million — a clear indication of Appleseed’s enthusiasm for the venerable cataloger.

Under the agreement, Blair can still solicit additional proposals for 30 days, and as of press time it was planning to do so. But industry observers do not anticipate a bidding war; the transaction is expected to close in the spring.

One reason that no other bidders are expected to step forward is the price: Appleseed’s, a Beverly, MA-based women’s apparel cataloger/retailer, is paying a 15% premium per share, given that Blair’s stock closed at $36.95 a share on Jan. 22.

Appleseed’s is paying 10.5 times earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted for the 8.1% of Blair that it already owns, says Lee Helman, managing director of New York-based investment bank Financo. “This is typically much higher than what Golden Gate pays for its acquired companies.” Sources say that Golden Gate usually pays no more than 7 times EBITDA. Stuart Rose, managing director of Wellesley, MA-based investment bank Tully & Holland, says an average buyout for companies with sales of $250 million-$500 million is about 8-8.5 times EBITDA.

Blair’s recent fiscal performance may also be staving off potential buyers. The Warren, PA-based company’s sales have been on the decline for the past two years. After posting revenue of $581.9 million in 2003, it saw sales drop 15% in 2004, to $496.1 million, then another 8% in 2005, to $456.6 million. As of late January it had yet to announce 2006 results.

The decline in revenue was accompanied by a rise in net income, however. The elimination of unprofitable mailings and the 2005 closing of the Crossing Pointe women’s apparel title and Allegheny Trail wholesale business contributed to a leap in net income for 2005, to $31.5 million from $14.9 million for 2004.

But the bottom line appeared to erode somewhat last year. For the third quarter of 2006, for example, Blair posted a net loss of $1.1 million, compared with net income of $1.4 million for the third quarter of 2005.

A true win-win?

“After careful consideration, in conjunction with our independent advisors, we have concluded that this transaction is in the best interest of our shareholders,” Craig Johnson, Blair’s chairman of the board, said in a statement. “This transaction, which will make Blair a private company, will provide greater resources to accomplish the company’s long-term goals.”

Stefan Kaluzny, Golden Gate’s managing director, said in a statement: “The acquisition of Blair, a marquee brand in this space, significantly strengthens our portfolio and provides us scale and purchasing power that none of the companies has had individually.”

Appleseed’s Topco includes women’s apparel cataloger/retailer Draper’s & Damon’s, women’s clothing catalog The Tog Shop, apparel manufacturer/marketer Haband, outdoor apparel mailer Sahalie, home goods title Solutions, and home goods and gifts cataloger Norm Thompson. Another Golden Gate portfolio company, Catalog Holdings, includes general merchant Spiegel and women’s apparel titles Newport News, Venus Swimwear, and A.B. Lambdin. In addition, on Nov. 13, Golden Gate partnered with Sun Capital to purchase apparel cataloger/retailer Eddie Bauer for $614 million.

Tully & Holland’s Rose believes the deal is a good one for Blair. Blair’s stock price is down more than 10% from a year ago, even though the market is up, he notes.

“Appleseed’s, which has I believe been on a good run and has strong management, is looking to leverage itself through Blair’s larger customer base,” Rose says. Both Appleseed’s and Blair, along with several other Golden Gate titles, target mature consumers.

Ivan P. Feinseth, managing director/director of research for New York-based financial services company Matrix USA, believes the timing is right for Blair. “They weren’t really getting the benefit of being a public company,” he says. “Good company, bad stock, and investors want to see strong growth.” Blair has good cash flow but no real growth to its earnings, he notes, and it would “rather be private than deal with the shareholders.”

Founded in 1910, Blair went public in 1971. “The stock, we thought, was worth a lot more than it was trading at,” Feinseth says. “We thought it was worth in the mid-$40s [per share], which it hit last spring. In our view, companies with a market capital of under $200 million, or even $500 million, should be private.” Feinseth says Blair’s market capital is roughly $150 million.

Blair was an obvious target for Golden Gate, says Mike Petsky, founding partner of New York investment bank Petsky Prunier. Its performance has been flat for years, and it’s one of the largest stand-alone apparel marketers. But size is relative: When private equity groups can readily do multibillion-dollar buyouts, a firm with a few hundred million in enterprise value is not particularly large, he says. “The multiple Blair has been trading at — around 8 times EBITDA and 0.3 times revenue — is also not particularly high for companies of that size.”

The day before the Topco agreement was announced, Blair had named Adelmo Lopez president/CEO, replacing John Zawacki, who’d announced his retirement in December. Lopez had just joined the company in September as executive vice president/chief operating officer/chief financial officer.