On December 11, 2013, Stuart Pfeifer writes in the Los Angeles Times:
Los Angeles private-equity firm Leonard Green & Partners has agreed to pay $225 million to acquire Lucky from New York fashion company Fifth & Pacific Cos.
The acquisition means that Lucky, founded in Vernon in 1990 and moved last year to a 1940s Art Deco building in downtown Los Angeles, will be locally owned once again.
Denim veterans and Lucky co-founders Gene Montesano and Barry Perlman used clever marketing — including the “Lucky You” label stitched into the fly — to create one of the country’s most popular mid-level denim jeans.
The company was sold in 1999 to Liz Claiborne Inc. in New York, which changed its name last year to Fifth & Pacific after selling the Claiborne brand to J.C. Penney Co.
Executives at Leonard Green did not respond to requests for comment. The firm, which has raised more than $15 billion in equity capital, holds stakes in such well-known names as J. Crew, Jo-Ann Stores, Container Store, Del Taco, Petco and Sports Authority.
Lucky has posted strong growth in recent years. Fifth & Pacific said Lucky’s net sales rose to $461 million last year from $418 million the previous year and $387 million in 2010. Sales are expected to increase 14% this year, said Corrina Freedman, an analyst with Wedbush Securities Inc.
Leonard Green is buying the company with $140 million in cash and a three-year loan for $85 million from Fifth & Pacific. The deal is expected to close by the end of March.
Fifth & Pacific shares fell 21 cents to $32.91. Its stock is up more than 160% this year.
This is yet another lost opportunity for the employees of a profitable company to acquire their company using pre-tax dollars funneled through an Employee Stock Ownership Plan (ESOP) trust, and incentivize and empower the company’s employees to participate in a growing business.
Binary economist Louis Kelso was the architect and pioneer of the ESOP, which Kelso invented to enable working people without savings to buy stock in their employer company and pay for it out of its future dividend yield––on the promise of the capital investment’s future income.
The ESOP provides access by employees to capital credit to buy company stock and pay for it in pre-tax dollars out of what the assets underneath that stock yield. Bank loans are made to the ESOP trust that represents employees, instead of to the company (current owners). The trust gives the lender a note and with the borrowed monies makes the investment in the company stock. The company then issues stock to the ESOP trust. The company now has the money, which otherwise could have been borrowed directly without the ESOP (benefiting current owners), to make the planned investment and repay the loan from pre-tax forecasted future capital earnings. The company promises the bank to make pre-tax full-dividend payments to the ESOP trust to enable the trust to replay the lender. Assuming that it would take five years for that capital investment to pay for itself, at the end of five years the employees now own the full stock value in the expanded company.
Companies can use the ESOP as the credit mechanism to create employee ownership in ratios up to a 100 percent leverage buyout. Nothing has been taken away from the existing owners unless the existing owners want to sell their share holdings. In the case of Lucky the ESOP would orchestrate a 100 percent leverage buyout.
Should the owners want to hold onto their current share ownership, the ESOP would be used to finance future growth. As such when using the ESOP mechanism, the existing owners will surrender the exclusive right to acquire more ownership in the company and have a smaller percentage of ownership in the total company, but they have not been prevented from making a fair rate of return on their thus-far accumulated ownership shares because the company earns a rate of return throughout the process. After the loan has been paid off with pre-tax earnings, the employees will have more earnings from capital and they will have more consumer power to purchase products and services. Multiply this by tens of thousands of employee-owned companies and the economy revs up to grow dramatically.
Of course, in this case the ESOP would replace the private-equity firm. When the employees are owners, dependent on their income from the company’s bottom line rather than through ordinary labor wages and benefits, the workers’ economic interests are more invested to see that their company succeeds. In this way, each person in the company is empowered as a labor worker and as a capital worker (owner) and inspired to work together as a team to make better operational decisions to serve and maximize value to their customers.
ESOPs work as designed when the workers receive the full property rights as owners, including full voting rights, not simply treated as beneficial owners with power concentrated at the top of the company, without any accountability or transparency.
Under our current financial system, the security (collateral) necessary to secure an ESOP loan must come from the company, and therein the current owners are providing the security to broaden employee capital ownership with the benefit that expanded capital ownership drives expanded consumer power to purchase products and services. Of course, in this case Fifth & Pacific Cos. would provide the security for the loan payments during the time required for the future earnings to pay off the capital credit loan and any loans provided by Fifth & Pacific Cos.
Under this scenario the Fifth & Pacific Cos. owners are “insuring” the risk and would receive government tax forgiveness benefits, which are written into the Internal Revenue Code.
With the ESOP, employees can acquire capital ownership with the earnings of capital.
See http://cesj.org/homestead/creditvehicles/cha-esop.htm.
http://www.latimes.com/business/la-fi-lucky-jeans-sale-20131211,0,7105493.story#axzz2nPQypq5i
