The makers of Lee and Wrangler blue jeans have decided to hitch themselves together to go up against Levi Strauss & Co., the granddaddy of jeans companies. But shoppers aren't likely to notice much difference in their denim.
Under terms of an agreement announced Sunday, VF Corp., maker of Lee jeans, has agreed to pay cash and securities worth about $375 million for all outstanding shares of Blue Bell Holding, manufacturer of Wrangler and Rustler. In addition, VF, which also manufactures Vanity Fair intimate apparel, will assume Blue Bell's massive debt.
Analysts applauded VF's move because it will enable the highly regarded company to double its share of the slow-moving, $5.5-billion jeans market and move into a dead heat with San Francisco-based Levi's, which last year had sales of about $2.6 billion. The Blue Bell purchase will add more than $1 billion in sales to VF's $1.5 billion.
"From VF's perspective, this is a consistent move by their management that would give them growth in a mature business," said Joseph Battipaglia, an analyst with Gruntal & Co. in New York. Moreover, he said, customers "probably will not blur the two product lines. There will be a distinction between a Wrangler and a Lee."
He noted that the merger could make things tougher for small jeans companies but that customers stand to benefit as a result. By realizing economies of scale with the merger, "VF can be even more price competitive when they have to be," he said.
VF Chairman and Chief Executive Lawrence R. Pugh said Monday that he expects the merger, which could be completed by October if it wins the necessary approvals, to have little effect on the blue jeans market.
"It's a huge market, the biggest piece of the apparel business," he said. He added that the top three brands cater to different markets, with Levi's appealing to an urban customer, Lee to a suburban shopper and Wrangler, the lowest priced of the three brands, to a rural buyer.
Even so, under federal antitrust laws, the government is likely to scrutinize the merger to determine whether competition will be curtailed. "We don't believe there will be a problem, but we will be submitting (the deal) through the appropriate federal channels," Pugh said.
Analysts generally agreed that the merger probably won't raise many red flags as far as antitrust considerations are concerned.
"It's a very easy business to enter," said Arthur Lichtendorf, an analyst with E. F. Hutton in New York. "This kind of merger doesn't foreclose anyone else from making jeans."
Indeed, although Levi's, Lee and Wrangler corral a good 50% of the market, the rest is populated by an array of brands at all price and design levels. Private-label jeans made by Sears, Roebuck & Co. and J. C. Penney Co. account for 10% to 12% of the market, with the rest divided among such names as Guess, Jordache, Chic and Calvin Klein, which have high profiles but a relatively low share of the market. Because the industry matured some years ago, growth in market share usually comes through consolidations.
Industry leader Levi Strauss reacted with reticence to the merger announcement.
"Even with the merger, Levi's will continue to be the world's largest seller of jeans," said spokeswoman Joyce Bustinduy, adding that in terms of "image awareness and popularity, Levi's will retain the top spot." However, she acknowledged that the combined shares of Blue Bell and Lee would probably exceed Levi's U.S. market share. She said Levi's does not intend to change its strategy and will continue to avoid distributing its products through discount stores, which are a primary channel for Blue Bell products.
Publicly held VF, based in Wyomissing, Pa., is part of a dying breed in the jeans industry, where consolidation and private ownership are the rule. A year ago, for example, the founding Haas family of Levi Strauss financed a $1.1-billion buyout of the company.
VF, which has 32,000 employees worldwide, was founded in 1899 in Reading, Pa., as Reading Glove & Mitten Co. About 1914, the company changed its name to reflect its greater emphasis on its Vanity Fair Mills lingerie business. The VF Corp. name was adopted in 1969, just before the company acquired Lee and its other divisions.
Blue Bell, with 20,000 workers worldwide, was founded in 1904 as Blue Bell Overalls, a tiny company operated out of a grocery store in Greensboro, N.C. In the 1920s, it merged with Big Ben Manufacturing Co.
In a recent evaluation, Value Line Investment Survey called VF "one of the best-managed companies in the country," known for its tight controls on finances and inventories and its ability to hold down debt because of its high cash flow. However, the service noted that acquisitions would be "a must if the company hopes to keep its growth rate up."
VF said Blue Bell, which initiated the merger discussions in June, will be operated as a subsidiary, with current management staying in place for the time being.
Under the deal, Pugh said, VF will assume debt that is now valued at $414 million but could rise to about $425 million by the time the deal is completed. Blue Bell took on a heavy debt load when it converted to private ownership in a $470-million leveraged buyout two years ago. Analysts expect VF to whittle away quickly at the debt, which will increase VF's debt-to-capitalization ratio to 47% from the current 16%.
"We believe that within the third year after the transaction, (the ratio) will be in the low 20% range because of cash flow, primarily from the jeans operations," Pugh said. He added that the purchase will increase VF's earnings per share the first year, a plus in an industry where large acquisitions often dilute earnings in the short term.
The acquisition of Blue Bell gives VF new product lines--notably Jantzen swimwear, Jansport sports clothes and Red Kap work clothes--and distribution channels. In addition, Blue Bell products have a strong presence in the Rocky Mountain states and the West Coast, where Lee jeans are relatively weak.
"Jantzen and Red Kap are important because they diversify our product line without increasing our percentage of dependency on jeans," Pugh said.
Lee jeans account for about 60% of VF's business, he said. VF, which earned $139 million last year, also makes Bassett-Walker sweat shirts, sweat pants and jogging suits and men's slacks.
Under the agreement, VF would pay Blue Bell's shareholders $122.5 million in cash and about 5.3 million shares of VF stock. At Monday's closing price of $34, down 75 cents a share from Friday, the stock is worth about $180 million.
In addition, VF is buying about $71 million of preferred stock owned by Blue Bell's employee stock ownership plan. VF also agreed to issue as much as 590,000 additional shares of common if its stock price falls below an average of $31.62 1/2 during the 10 days before the merger is completed.
For the year ended Sept. 30, 1985, Blue Bell had a net loss of about $11 million. Since then, the company has made a modest profit on generally flat sales.
THE U.S. JEANS MARKET Lee 12% Levi's 23% Wrangler/Rustler 11% Sears 5--6% J.C. Penney 5--6% All Others 42--44% (Others include Chic, Brittania, Guess, Jordache, Gloria Vanderbilt, Calvin Klein, Sergio Valente, Ralph Lauren, various private labels.)Source: Estimates from companies and financial analysts. FO