When Smart Management Trumps Organic Growth: Steve Madden Takes Betsey Johnson **UPDATE**
**UPDATE**
Steve Madden is forgiving Betsey Johnson's $48.8 million loan in exchange for ownership of the brand's intellectual property. Johnson is to remain in charge of creative, albeit without her former partner, Chantal Bacon. Says Johnson, "It feels like the gold ole days, starting fresh and free. For everyone, it has been a rough couple of years. Now we can finally fly."
Betsey Johnson can flip catwalk cartwheels until the fashion cows come home, but the 68-year old iconic designer has to know the edge is near. Steve Madden (SHOO) has the potential to topple the quirky diva from the design throne she's held since the 1970s, as the trendy footwear magnate just took over a $48.8 million loan to Johnson's company, according to papers filed with the SEC. For Madden, on the other hand (err, foot), Johnson's default would mean a windfall that would beef up his growing brand portfolio.
Betsey Johnson was bent on staying independent since she scrimped to pull together a business thirty years ago. Staying true to her creative roots, Johnson built a successful brand that consistently mined the punky prom princess look she introduced. Of her longevity in a notoriously fickle industry, Johnson told Inc. in 2004, "We're not brilliant, big-boy garmento movers and groovers," she says, "but we've had a wonderful, enjoyable, panicked, crazy, happy time over the past 25 years--all because we own it."
But sell out she did -- in a way -- just three years later. Private-equity firm Castanea Partners (known for shopping bargains) took a controlling stake in the company for about $50 million in 2007 when Johnson's flagship brand and 12 licenses were generating about twice that in annual revenues. Johnson remained at the helm along with her original business partner Chantal Bacon.
Meanwhile, Steve Madden was circling nearby. He grabbed the license for handbags, small leather goods, belts and umbrellas under the Betsey Johnson and Betseyville brands when they came up for sale -- a savvy move given that many of his customers also appreciate Johnson's equally eclectic style.
Madden's also been forming strategic alliances with the likes of celebrity/designers Madonna and Mary-Kate and Ashley Olsen. Steve Madden shoes put the finishing touches on outfits in the Material Girl line for Macy's (M) and the Olsenboye junior collection for JCPenney (JCP).
He hasn't stopped there. Madden also purchased Big Buddah, a handbag brand, for $11 million, and put $5 million into Bakers Footwear Group (BKRS), which could lead to a one-fifth stake in the company he already supplies with shoes. The Bakers deal shows Madden's come a long way from the scheme that landed him a jail sentence for trying to manipulate 23 IPOs, including his own, in 1993.
Madden's aggressive management style is certainly working for shareholders. Net income in the second quarter increased 63 percent to $19.8 million and net sales were up 36 percent to $158.7 million. Share prices were up 71.2 percent from a year ago when adjusted for a 3-for-2 stock split in May.
Likewise, Madden worked smart language into Johnson's loan terms. If she can't pay by August 20, 2011, the collateral for the loan includes the company's intellectual property. In other words, Madden could acquire the labels it holds as licensee. But that's not all. For all her years in the business, Johnson made the grave mistake leaving her personal assets unprotected. At stake: "the borrower's personal property, accounts, deposit accounts and cash, equipment, fixtures, general intangibles, goods [and] inventory."
If Betsey Johnson can't scrape together the funds to get Madden off her books, she's likely to lose everything she's worked for over the past three decades. For now, Madden's just waiting for the other shoe to drop.
Image via secondcitystyle.com
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