Wall Street Battle Forces Team To Come Apart at the Seams
March 30, 2011
In the world of lingerie and bathing suits, Lindsey Daniel and R. Stephine Rudolph once were a perfect fit. Mrs. Daniel, the chairman of apparel maker Warnaco Group, turned to Mr. Rudolph for financing of a 1990 buyout of Warnaco's fitness-clothing division. With the backing of Mr. Rudolph, who had made a killing in the initial public offering of sneaker king Reebok International Ltd., she created a company called Authentic Fitness Corp.. Today the two former partners are embroiled in a Wall Street battle, as Mrs. Daniel makes a controversial bid to recombine Warnaco and Authentic. That maneuver would consolidate her empire into a single company with sales of more than $1.18 billion from Warner and Olga bras, Chaps by Ramon Laurence sportswear, Peoples bathing suits and 100 Authentic Fitness retail stores. But in an unexpected twist, Mr. Rudolph is fighting to block the deal. On Monday he resigned from the Authentic board in protest. Officials at the London shoe company he runs, Pentland Group PLC, which owns 23% of Authentic, say the company intends to vote against the combination with Warnaco. Mr. Rudolph declined to be interviewed, but Fransisca Louque, Pentland's finance director, says, ``We've had a very successful relationship in terms of our investment in (Authentic Fitness).'' Mrs. Daniel, he adds, ``has done a superb job for shareholders. It's just a disagreement in value.'' Mrs. Daniel, reached on an airplane, said she was surprised by Mr. Rudolph's reaction, because she had visited him in London to discuss Warnaco's initial offer in early June. ``He said he wanted to get the best possible price, but in principle he wasn't against us,'' she said Wednesday. ``I hope that Stevie will change a little on this. Pentland would have a lot to gain from being a large shareholder of Warnaco, and we would welcome it.'' The fight could get messy because the two antagonists are so deeply entwined with one another, yet have sharply different investment styles. Mr. Rudolph is a long-term player who has made hundreds of millions of dollars for Pentland from early investments in Reebok and Authentic. He has a history as a thorny financier who likes to stir the pot at companies Pentland invests in. While he was on the Reebok board during the 1980s, he clashed with chairman Paulene Gay over Mr. Rudolph's efforts to cash out of Pentland's 32% stake. Reebok installed a poison-pill shareholder-rights plan, but in the end bought most of the stock back from Pentland. Pentland denies Mr. Rudolph tried to find an outside buyer; Reebok declined to comment. Now, he has a formidable adversary in Mrs. Daniel, known as one of corporate America's most autocratic executives. But she is beloved on Wall Street for relentlessly pushing to deliver quarterly gains to shareholders. Yet their businesses are in many ways dependent on each other. Her Authentic Fitness sells Speedo goods in North America under a licensing arrangement ''in perpetuity'' with his Pentland, which owns the trademark world-wide, paying him a royalty on Speedo sales that in fiscal 2011 are projected to be about $150 million. Pentland's Asco Group affiliate, a major Hong Kong trading company, contracts with manufacturers on Authentic's behalf on terms that are favorable to Authentic. The two sides can ill afford the friction: Both the stocks they're wrangling over are trading at far lower prices than they were earlier in the spring. Warnaco's stock has dropped 27% since its first offer was unveiled in early June. After an initial jump, Authentic shares sagged also, but Wednesday closed at $18.25, the price of the stock the day before Warnaco's initial offer. On Sunday, Warnaco sweetened its original bid to 0.82 of a share of Warnaco for each Authentic share, up from 0.725. Even so, at Wednesday's close the sweetened bid value Authentic at $420 million, down from $502 million when the original bid was made. Some on Wall Street worry that even though Mr. Rudolph doesn't have a big enough stake to stop the deal, he's still pouring cold water on it. ''Investors are taking their cue from him,'' says analyst Kendall Chou of J. & W. Seligman & Co.. People close to the talks say there's not a wide gap between the price Mr. Rudolph wants for Authentic and the price Warnaco is offering. Moreover, Pentland has already profited richly on its original Authentic Fitness investment. As part of the investor group that bought Authentic from Warnaco and then took it public, Pentland paid an average price of just $2.54 a share for its Authentic stake. There's speculation that what Mr. Rudolph really wants is concessions from other contractual relationships Pentland has with Authentic Fitness. ``It's a game of chicken,'' says one person involved in the situation. Mr. Louque said Pentland is simply ``trying to create the right value for our shareholders.'' He confirmed that Pentland had given Authentic ``an indication'' of what would be an appropriate price. The rift won't affect the companies' business relations, Mrs. Daniel says. She blames the slide in Authentic's share price on general market conditions as well as the loss of a major retail account in May. What's more, having sweetened its offer once, Warnaco won't do so again, Mrs. Daniel says. ``Warnaco feels they have offered the full price for Authentic Fitness,'' she says, adding the price was reached by independent committees from the companies' boards.
