Hoping not to go bust again, intimate-apparel retailer Frederick's of Hollywood said Tuesday that it had agreed to be acquired by New York apparel maker Movie Star Inc. for about $34.4 million in stock.
Executives of the two companies said the deal would help Frederick's tap into growing consumer demand for unconventional underwear.
Movie Star plans to offer $20 million in new shares to its current shareholders. Proceeds from that offering would be used to open new Frederick's stores and help the retailer continue its ascent from Chapter 11 bankruptcy protection.
Frederick's shareholders would wind up with 60% of the combined companies, which would be known as Frederick's of Hollywood Group Inc. The companies and their existing management teams would operate separately.
"This opportunity was really great for our strategy to fuel our expansion and growth," said Linda LoRe, Frederick's chief executive.
Frederick's, based in Hollywood, was founded by Frederick Mellinger in 1946 and introduced push-up bras and black lingerie to the American public. The company floundered in the 1990s and filed for bankruptcy protection in 2000 as Limited Inc.'s Victoria's Secret eroded its customer base.
Since emerging from bankruptcy protection in 2003, Frederick's has tried to strengthen its association with Hollywood, recruiting celebrities such as Tea Leoni to design corsets and enhancing the company's link to the color red, LoRe said. Frederick's, which employs 1,500 nationwide and had revenue of $139 million in its most recent fiscal year, which ended July 29, plans to open 50 stores in the next three years. The privately held company does not disclose earnings.
"They have been strapped as far as expansion for lack of capital," said Mel Knigin, Movie Star's CEO. "That's what we bring to the table."
Movie Star designs lingerie and sleepwear. It has been a supplier to Frederick's for more than 10 years. The company, which trades on the American Stock Exchange, employs about 300 workers and generated $51 million in revenue in the fiscal year that ended June 30. It lost about $1 million during the period.
The combined companies would refinance an undisclosed amount of debt that Frederick's brought out of its reorganization. Knigin said the debt was not a concern for Movie Star because Frederick's had great potential for growth.
It's a thriving area: Sales of intimate apparel are expected to reach $9.3 billion by 2008, up from $8.2 billion in 2003, according to Chicago-based market research firm Mintel.
"There certainly is a lot more consumer interest" in intimate apparel, said Christine Chen, a retail analyst with Pacific Growth Equities in San Francisco. This interest has led retailers such as American Eagle and Gap to launch intimate apparel lines, Chen said, giving Frederick's some tough competition.
Under the deal, Frederick's shareholders would receive 23.7 million shares in the new company. Frederick's of Hollywood Group Inc. would trade under Movie Star's ticker, MSI.
The deal has been approved by the boards of both companies and would be finalized pending regulatory approval. Movie Star shares rose 18 cents, or 14%, to close at $1.46 on Tuesday.