Delta (DELT) controlling shareholder yesterday Dov Lautman completely rejected speculation that the company was negotiating a merger with Wall Street-listed Tefron (TFR). At the end of last week, Tefron announced that its controlling shareholder, Macpell, had received several offers to purchase some of its shares, and that it was examining them.
Capital market sources claimed that Delta was a leading candidate for taking control of Tefron. The sources said negotiations between the companies' owners had been continuing for some time.
On the surface, a merger between the two largest and most successful Israel textile companies has a great deal of logic. A merger would create a world leader in the manufacture of women's seamless underwear, with a 40% market share and the ability to dictate prices in the sector. However, it appears that Delta finds Tefron too expensive at its current price of an historic profit p/e ratio of 25.
The figure stands out against the backdrop of the deal two weeks ago in which Delta acquired US textile company Wundies Industries in a share swap. Wundies, which manufactures and markets women and girls underwear, ended 1999 with $2.5 million net profit. The acquisition price of $30 million reflects a p/e ratio of less than 12.
Delta chairman Dov Lautman described the acquisition of Wundies as achieving four strategic goals: doubling the proportion of US sales, which are expected to increase to 40% of the company's revenues; expanding the women's underwear field; entering into the mass market in the US; and creating a management base. A merger with Tefron could certainly be a vital contribution in achieving these goals. It is all a question of price.
Investment houses Warburg Dillon Read and Lehman Brothers have both recently published "Buy" recommendations for the Delta share. Acquisition of Delta shares, Warburg claims, exposes investors to a rapidly growing market of seamless underwear, in which Delta is expected to increase its share to $55 million in 2000, compared with $20 million in 1999.
Lehman Brothers, which sets a target price of $25 for the Delta share (compared to the $22 market price), notes that the acquisition of Wundies will increase the company's exposure to the giant US market, while not adversely affecting profits in 2001.
Tefron, as stated above, announced at the end of last week that control of the company was up for sale. Major shareholder in Tefron, Macpell, announced it had hired the services of investment bank Credit Suisse First Boston to examine the offers to purchase control of the company and submit the findings to the Macpell board of directors. The board of directors will explore all options for maximizing value for shareholders.
The announcement to the US stock exchange boosted the Tefron share at the end of the week, and the company is trading at a value of $230 million. The controlling shareholders are reported to be asking a price tens of percentages higher than the market price.
Tefron is already a world leader in seamless underwear manufacture. The activity is high-tech, using advanced automation (the company owns 750 manufacturing machines). Among its customers are Marks & Spencer, Wal-Mart, Calvin Klein, Victoria's Secret, Gap, and JC Penny. One of these customers is reported to have submitted an offer to purchase the company.
Last year, Tefron made an important strategic acquisition. It paid $85 million in cash for US company Alba-Waldensian, which operates 200 machines for making seamless underwear. Acquisition of Alba helped Tefron achieve growth in the first quarter. Tefron ended Q1 with $60 million sales and $5.9 million operating profit.
Tefron is currently controlled by Macpell (35%). Macpell is controlled by Arie Wolfson (27%), Zigi Rabinovitz and Avi Roeumi (about 25% each).
The main reason behind the sale of Tefron appears to be Wolfson's desire to "change down a gear". According to the stock exchange announcement, he is expected to resign from Tefron in August and devote himself to Macpell, which he took over two years ago.
Published by Israel's Business Arena on 26 June, 2000