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Fruit of the Loom, Inc.
200 W. Madison
Suite 2700
Chicago, Illinois 60606
Fruit of the Loom, Inc. is a leading international, vertically integrated apparel company with 32 subsidiaries. It is the market leader in men's and boys underwear by virtue of its brand name Fruit of the Loom® and is one of the top producers in the market of activewear for screenprint T-shirts and fleece, women's and girls underwear, casualwear, and childrenswear. In the past, vertical integration in manufacturing allowed Fruit of the Loom to perform most of its own yarn spinning, knitting, cloth finishing, and cutting operations, while affiliated or offshore companies performed the sewing and packaging work. The intangible attributes of the company are its excellent brand name recognition (associated with value by consumers), its ability to deliver large volumes of quality basic apparel at low cost, and its strong relationships with major discount chains and mass merchandisers.
Despite the company's sound brand name and product placement, Fruit of the Loom was forced to file for bankruptcy at the end of 1999. It is believed the circumstances causing the bankruptcy had little or nothing to do with Fruit of the Loom's core business, rather a convergence of: poor acquisition decisions into noncore areas of business, a change in the competitive environment of the apparel manufacturing industry due to the North American Free Trade Agreement, expenses related to nonoperating items and excess inventory leading to the loss of trained workers.
Subsequently, Berkshire Hathaway, Warren Buffett's diversified property-casualty company, announced its decision to purchase Fruit of the Loom for $835 million. What value did Mr. Buffett see in a company that was bankrupt due to a combination of poor acquisition decisions and market forces?
Certainly an industry that is struggling due to changes in its operating environment was not the attraction. Fruit of the Loom, with a book value per share of -$5.07 and its own recent bad experience in the acquisition of apparel companies, does not appear to be of great value to the likes of Warren Buffett, known for his savvy investment decisions, and who normally purchases companies with stable past earnings and the ability to grow, coupled with a strong management team. However, a closer look at Fruit of the Loom indicates the attraction from his point of view. "We've agreed to buy Fruit of the Loom for two major reasons: the strength of the brand and the managerial talent of John Holland," was the short statement made by Buffett regarding the transaction. The "John Holland" to whom Buffett refers, was brought out of retirement, is the Chief Operating Officer of Fruit of the Loom and has been part of the Company's Reorganization under Chapter 11.
Management and brand names are not good indications of value; Fruit of the Loom had an operating loss of $203 million in 2000 and a first quarter loss in 2001 of $2.2 million. The only other way to justify the purchase is based on other underlying factors. Fruit of the Loom, under Chapter 11 Reorganization, was forced to shed subsidiary operations that were unsuccessful as acquisitions, and a drag on income. The path back to profitability is not complete, but Mr. Buffett apparently sees long term profitability from the assets once the core business of Fruit of the Loom is all that remains. Berkshire Hathaway is paying $835 million for net assets of $1.7 billion. After deducting Goodwill of $594,300,000 the total assets, Berkshire will pay $835 million for assets of $1.1 billion. After adjusting for certain debt that Berkshire will not buy in the transaction, the value for which Berkshire Hathaway is paying when it buys Fruit of the Loom's core business apparel operations will be fairly close to book value, despite its being in bankruptcy. Mr. Buffett sees value to the assets and concludes that they will generate a return on his investment to his liking. To find value, business appraisers must be able to peel away the layers to get to business value. In the case of Fruit of the Loom the sum of its parts is of less value than just one part, the core business.
