JOE BOXER’s name is as good as money in the till when it comes to dealmaking. The popular brand of underwear, apparel, and home textiles changed owners in July with an asset-backed bond issue helping to finance the $80 million deal. Key elements included JOE BOXER’s prowess in pumping out cash, which allowed buyer Iconix Brand Group Inc. to float the issue at a reduced interest rate. Option for IP-focused buyers Asset-backed securities are rarities in M&A financing. But Robert W. D’Loren, President of UCC Capital Corp., which arranged the financing and advised Iconix on the acquisition, believes they will be used more often in the future to support purchases by “IP-centric companies.” IP, or intellectual property, is an umbrella for a raft of assets dependant on know-how, ranging from well-situated brand names like JOE BOXER to legally secured elements like trademarks, copyrights, and patents. If they can generate predictable flows of cash, the lender or investor is comfortable that it will be repaid and thus charges less for granting the credit. When asset-backed securities are sold in that environment, D’Loren says, “a sub-prime-rated company can issue investment grade-rated debt.” “It’s a sophisticated, highly structured form of cash flow lending that is specifically designed for IP-centric firms,” he says. “We turn a corporate security into an asset-backed credit and through the structure we get a rating boost of about five notches above the underlying credit.” Principal buyers include insurance companies that like the cash flow prospects in the deal. The last major asset-backed M&A deal was the sale of famed clothier Bill Blass Ltd., which D’Loren also helped engineer. Iconix, which used to be named Candies Inc., transformed itself from a footwear company into a brand management operation. It acquired JOE BOXER from Joe Boxer Co. LLC for $40 million cash, 4,350,000 shares, and assumption of $11 million in debt. UCC placed a $45 million tranche of asset-backed bonds, with a seven-year maturity, to pay for the cash portion. JOE BOXER is licensed exclusively to Kmart in the United States and to manufacturers in Canada and Europe. Besides JOE BOXER, Iconix owns Bongo jeans, Badgley Mischka fashion apparel, and the Candie’s brand of women’s apparel, footwear, and accessories. D’Loren says Iconix, in which he is a major shareholder, is on the hunt for more brands, including those that can be bought with funds from asset-backed securities. Among the most preferred are consumer branded products from a variety of sectors, such as apparel and sporting goods, he notes. “It’s any brand you can trust,” he adds, suggesting that confidence can be converted into cash flows. Another key target sector is franchising where “there is tremendous value in the trademarks.” Finally, the core includes brands in media and entertainment. With concentrated and focus management, the owner can expand a highly recognized brand into new products or services, widen distribution of existing items, and keep atop licensees to make sure they are holding up their end of the arrangement. The management company escapes manufacturing and marketing costs, much like the fabless model used by firms in such fields as technology, apparel, and toys. Beyond the consumer-based core, D’Loren sees prospects for replicating IP management in technology, life sciences, telecommunications, and other fields heavy on R&D. “There is much more dependency on patents and copyrights,” he notes, and asset-backed financing can be used to buy and manage strong intellectual properties. But since higher technologies lack the cash flow certainties of consumer goods, it’s necessary to move more slowly and make sure that a deal justifies the investment. “It requires great expertise to work in technology,” D’Loren says. “We have a Ph.D. on staff to help us. It’s very difficult to value. But there is an opportunity.” (c) 2005 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com

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