LVMH has offloaded Donna Karan International for $650m

LVMH has offloaded Donna Karan International for $650m

Branded apparel and accessories maker G-III Apparel Group is to buy Donna Karan International, parent of the Donna Karan and DKNY brands, from luxury goods group LVHM for US$650m.

The deal, which is expected to close in late 2016 or early 2017, is designed to "broaden the brand's distribution and take it to its next level of success" according to the French conglomerate.

"Donna Karan International has a deep heritage, global recognition, and renewed energy," says Toni Belloni, group managing director of LVMH. "We believe the DKNY brand has a dynamic position in the market, and when G-III approached us about acquiring the brand, we concluded that the time was right and that G-III was the right steward going forward.

"We are pleased to have reached an agreement with G-III, a company that has the expertise and capabilities to broaden the brand's distribution and take it to its next level of success."

On Friday (22 July), the news broke that LVMH was targeting a single specific American buyer as opposed to opening a bidding war.

LVMH targeting buyer for DKNY?

Now, G-III plans to finance the deal through a combination of new loans, as well as issuing $75m in common stock stock to LVMH and a $75m, six-and-a-half year seller note.

"Donna Karan brings increased scale and diversification, while providing incremental growth on top of our portfolio of some of the best fashion brands in the world," says Morris Goldfarb, chairman, CEO and president of G-III. "We believe we are well positioned to create and sustain additional value for our shareholders, partners, and customers."

The company expects the acquisition to be dilutive in the fiscal year ending 31 January 2018, and accretive thereafter.

G-III owned brands include Vilebrequin, Andrew Marc, Marc New York and Bass and the company also holds fashion licenses for the Ivanka Trump, Calvin Klein, Karl Lagerfeld and Tommy Hilfiger brands among others.

Plans for the sale come a year after Donna Karan stepped down as chief designer at her namesake company after 31 years. LMVH acquired the company in 2001 for US$243m.

Donna Karan steps down as chief designer

Analysts, however, believe both the purchase price and execution risk are too high.

"In our view the price paid is too high relative to the brand's potential, execution risk and the returns on capital from the acquisition," notes John Kernan at Cowen & Co.

He points out that while G-III management sees multiple opportunities to expand the brand, its business is currently focused on US growth, where contemporary brands are struggling.

"The Donna Karan brand, which is currently losing money, generates approximately $300m in sales with one-third from its retail business, which has 50 predominantly US based stores. Management believes the brand's largest growth opportunity is in its wholesale business.

"However the brand has struggled due to increased competition and weaker sales in the key department store channel and its estimated FY16 sales of $300m are less than half of the $663m the company generated in 2000.

"LVMH tried to simplify the brand last year, when Donna Karan stepped down as chief designer, by suspending collections from the Donna Karan line to focus on its more mass-market DKNY brand, but ultimately decided upon a sale to G-III."

Kernan also points out that the sale of Donna Karan International marks LVMH's first major brand divestiture since 2005.