VF Corporation agreed Monday to acquire The Timberland Company in a deal that would combine two of the largest publicly-traded companies in the outdoor space and double the size of VFCs already rapidly growing Outdoor and Action Sports Coalition.

 

When completed, the deal would push the coalitions revenues to 50 percent of VF Corp.s total, or $5 billion, this year and 60 percent of projected VFC revenues by 2015.
Timberland is expected to join VFs Outdoor & Action Sports coalition and will remain headquartered in Stratham, NH.


The two companies have identified about $35 million in costs they can cut in 2012, but VFC will derive even more value by helping Timberland accelerate its higher margin apparel business and sharing best practices from its direct-to-consumer businesses. Timberland will become VFCs fifth billion-dollar brand alongside The North Face, Wrangler, Vans, and Lee and boost VFCs international presence.

VFC will pay Timberland shareholders $43 per share, representing a total enterprise value of approximately $2 billion net of cash acquired. The price represents a premium of 43 percent over Friday’s close price, an 18 percent premium to the 60-day average and is 5 percent below the last 60-day high. The merger agreement was unanimously approved by both companies boards of directors and will now go before shareholders and regulators. Closing is expected to occur in mid-September.


This acquisition more than just moves the needle for V.F., said Eric Wiseman, Chairman and CEO of VF Corporation. It knits together two powerful companies into a new global player in the outdoor and action sports space.


Timberland is forecasting its revenues will grow 12 percent to $1.6 billion in 2011 with more than half of that coming from international markets.
“We believe the unique rugged outdoor positioning of the Timberland brand will perfectly complement the premium, technical positioning of The North Face brand, while the Smartwool brand will provide us with a leadership position in a new category, said Wiseman. This will be a winning combination, leveraging VF’s international and direct-to-consumer platforms to drive growth in the Timberland and Smartwool brands globally.


Wiseman said VF will benefit from Timberland’s rugged outdoor footwear expertise, international penetration in markets such as Japan, and leadership position in sustainability.


The merger will be complementary on several levels. First, Timberland earns 72 percent of its revenues from footwear. Secondly, it will boost VFCs international revenues from 30 to 35 percent. Lastly, it caters to a less active customer.


One way to think about it is kind of below the tree line and above the tree line, said Wiseman.  Another way to think about it is the activities. The activities that the Timberland brand users normally participate in are — I call them lower heart rate activities versus the adrenaline rush of some of The North Face equipment priorities.


VF Corp.s commitment to sustainable business practices and track record of buying and growing other outdoor brands appealed to Timberland President and CEO Jeffrey Swartz. 


Timberland is proud of its rich heritage, its track record of success and its reputation as a responsible and environmentally-conscious global citizen, all of which will be preserved and enhanced by becoming part of the VF family of brands, said Swartz. VF is known for its ability to acquire and grow authentic outdoor brands, while protecting a brand’s unique culture and DNA.


VFC expects Timberland revenues to grow by $900 million in the next five years, including $600 million in footwear and $300 million in apparel and accessories, said Steve Rendle, president of VFCs Outdoor and Action Sports Coalition, which manages The North Face, Vans, JanSport, Reef, lucy, Eastpak, Napapijri and Eagle Creek brands. The bulk of that growth, or about 62 percent, will come from international.


We have great respect and admiration for the current management team’s wholesale distribution plans and will look to support the growth plans in the specialty outdoor and specialty footwear dealer base while building on their historical success with the better department store channel, Rendle said of Timberlands wholesale business. Well also seek to drive growth by placing larger assortments of the successful Earthkeepers and Mountain Lifestyle collections and continue the careful management of the Classics collection across all channels of distribution, while also growing the doors and dollars per door of the Timberland Boot Company collection in better specialty dealers across the globe.


The deal comes as Timberland prepares to take back control of its North American apparel business at year-end, when a licensing deal with Phillips-Van Heusen Corp. expires.  VFC expects to grow that business at a compounded annual growth rate of 14 percent, primarily by focusing on its Mountain Lifestyle and Smartwool offering, particularly to women in emerging European markets where those collections are already building momentum.


VFC also expects to leverage its direct-to-consumer platform, which includes more than 475 outdoor and action sports retail stores worldwide and a rapidly growing e-commerce business, to more than double the number of full-price Timberland stores globally.


Finally, VFC expects to improve TBL operating margins to 15 percent by 2015, which would be an increase of 600 basis points from last year by better managing expenses.  VFs  Outdoor and Action Sports Coalition is now running at about 20 percent thanks to lower SG&A ratios and tax rates and higher store profitability, said VFC CFO Bob Shearer.


 Timberland’s gross margin is strong, it was just below 50 percent in 2010, and that says a lot about the brand’s strengths, said Shearer. So we expect that most of the operating margin improvement — not all but most — will come from the SG&A side.  For example, one area of improvement were targeting is in the four wall profitability of Timberland’s North American retail stores, which is 16 percent compared with 30 percent for our outdoor and action sports retail stores. Enhancing the brand’s apparel offerings, especially in its U.S. stores, will be a key driver of future improvement here.


Wiseman said TBL floated to the top of a list of 50 outdoor company targets VFC began analyzing more than a year ago. The acquisition should add approximately $700 million to VFs 2011 revenues. It is also expected to be accretive to VF’s earnings per share, by 25 cents in 2011 and by 75 cents in 2012, inclusive of deal costs and other acquisition related expenses in both periods. Excluding these expenses, EPS accretion would be approximately 45 cents in 2011 and 90 cents in 2012.


The transaction is subject to customary stockholder approval and regulatory clearance. VF plans to finance the transaction through $500 million in cash on hand, $700 million in commercial paper and $800 million in term debt. Thanks to its $1 billion in annual free cash flow, VFC will be able to keep its debt ratio at a very manageable 25 percent in 2012. 


Stockholders affiliated with the Swartz family have agreed to act by written consent to approve the transaction on July 26, 2011 if the merger agreement has not been terminated by then. The deal provides Timberland with a customary right, after complying with certain notice and other conditions, to terminate the merger agreement to accept a superior proposal prior to receipt of stockholder approval on July 26, 2011.