Is Liz Claiborne Going Private At $20 A Share?

| About: Kate Spade (KATE)

The WSJ reported around noon on Friday that Liz Claiborne (LIZ) has been in talks with private equity firms over a potential deal around $20 a share. Currently, it doesn't appear that any of the firms, such as KKR & Co (KKR), Permira or Warburg Pincus LLC, find that price appealing. Not to mention that the Liz management has denied any interest in selling the company.

The news was enough to send the stock soaring. It closed at $13.36, up nearly 13% at a new 52-week high. At $20, Liz would have a value around $2B. Is that an appealing price for long investors?

First, lets look back to the recent transformation of the company. Back in October, I wrote an article about the transformation of the company. Just prior to that article, an investor could've bought Liz's stock in the $4s. Now the stock has tripled and a deal around $20 would've given an investor a 300% gain in less than six months.

The key has been the transformation from a large mesh of brands into a focused company on just three brands: Kate Spade, Juicy Couture and Lucky. The transformation also involved selling the namesake Liz Claiborne brand to JC Penny (JCP) and several other small brands.

The remaining step is to complete the rebranding to Fifth & Pacific Companies (FNP) around May 15. Will the stock still be public for this switch?

Combined with giving the management team a more streamlined operation focused on the top three brands, it has also allowed Wall Street to focus on the better brands, leading to a much higher stock prices. Less complexity almost always leads to higher stock prices.

Even at $2B, the valuation appears compelling if top brand Kate Spade can keep expanding. Remember that the company has had limited budgets for expansion with the massive losses and huge debt it rang up over the last 3-4 years.

Analysts expect revenue of $1.5B in 2012, leaving the stock trading at less than 1x revenue. Other leading brands such as Coach (COH), Ralph Lauren (RL), and Vera Bradley (VRA) trade at much higher multiples of sales. Could that be the future of Liz? Well, apparently private equity thinks the possibility exists.

Revenue Multiples - Leading Brands

Stock '12 Revenue Multiple
Liz Claiborne 0.9
Coach 4.6
Ralph Lauren 2.3
Vera Bradley 2.2

While not perfect, the advantage of focusing on the revenue multiple is that it normalized the margins of a transforming company. With the new focus, it will take time and growing the businesses in order to achieve maximize margins and hence profits.

With even Vera Bradley trading for over 2x revenue, one can quickly see why private equity would want to snap up Liz for less than that. Time will tell, but the current valuation remains very attractive.

Disclosure: I am long LIZ.

Additional disclosure: Please consult your financial advisor before making any investment decisions.