The deal would make Phillips-Van Heusen one of the largest suppliers of menswear to U.S. department stores, and will keep Hilfiger founder Tommy Hilfiger in his role as principal designer for the clothing line.
It also will add yet another high-profile name to PVH's lineup, home to Izod and Calvin Klein. PVH also distributes menswear under labels such as Kenneth Cole New York, Michael Kors, Donald Trump and DKNY.
News of the deal boosted Phillips-Van Heusen's shares about 10 percent, although both Moody's Investors Service and Standard & Poor's said they may cut their ratings on the company, citing the debt it will take on to fund the deal.
The deal would mark an end to London-based private equity firm Apax's plans for an initial public offering for the iconic brand which it had bought in 2006 for $1.6 billion.
Private equity firms have been increasingly able to exit investments as the economy and markets have stabilized. Taking companies public has been more problematic.
Apax made 4.5 times its investment on the deal and will hold about 7 percent of the stock in PVH after the deal, a source familiar with the situation said.
The deal certainly makes sense and that can be seen from PVH's share price. A lot of people out there see that although it is quite a costly acquisition, they are still getting it at quite a low price, IBISWorld analyst Toon van Beeck said.
At an estimated valuation of 8 times trailing earnings before interest, taxes, depreciation and amortization, the price seems reasonable and the deal makes strategic sense to us, Morningstar said in a research note for investors.
Tommy Hilfiger has spent the last few years trying to undo the damage from shifting its focus to a more mainstream group of buyers. It suffered years of sales declines after its logo-heavy designs helped make it a staple of urban streetwear, but alienated more affluent customers. Now, the company is expanding more quickly abroad than in the United States.
It's an opportunity to really revamp Tommy Hilfiger, which was such an iconic brand in the 90s and has somewhat died, van Beeck said.
I don't think Apax Partners did enough with the brand, but Van Heusen is more familiar with menswear, said Donna Reamy, associate professor at the department of fashion design and merchandising at Virginia Commonwealth University in Richmond.
Hilfiger CEO Fred Gehring said the PVH deal makes sense despite Apax's earlier plans to take Hilfiger public.
When you have a strategic sale, the norm often is you also lose a little bit of your identity in the process. PVH on the other hand in the transaction with Calvin Klein seven years ago has demonstrated how it can be done differently, Gehring told Reuters in an interview.
Gehring will remain as chief executive, join the PVH board and take on international operations for PVH.
PVH expects the deal to boost earnings by 20 cents to 25 cents a share, excluding items, in the current fiscal year.
It also said the deal would add 75 cents a share to $1 a share in the next fiscal year, ending January 29, 2012.
Private investment firm Blue Harbour Group, which owns about 1.5 million Phillips-Van Heusen shares, said it was very supportive of the deal.
There is potential for the stock to move further up from the move we've seen today, said Michael James, a senior trader at Wedbush Morgan in Los Angeles.
Phillips-Van Heusen will pay $2.6 billion in cash and $380 million in common stock for Tommy Hilfiger.
Phillips-Van Heusen expects to use $3.05 billion in debt, $385 million in cash, $200 million in preferred stock and $200 million from a common stock offering to finance the deal and refinance other debt.
The company is paying a very fair price for such a powerful brand, PVH Chief Executive Emanuel Chirico told Reuters in an interview. It expects $300 million in annual cash flow, and plans to pay off $200 million in debt in 2011.
The deal would not alter PVH's relationships with its other brands and licenses, he said.
The company sees annual cost savings of $40 million from the deal and expects to close it in the second quarter.
Peter J. Solomon Co is the lead financial adviser to PVH. Barclays Capital, Deutsche Bank, Bank of America Merrill Lynch, and RBC Capital Markets also acted as financial advisers and will arrange financing for the deal.
Credit Suisse acted as lead financial adviser to the Tommy Hilfiger Group and as sole adviser to Apax Partners.
(Reporting by Dhanya Skariachan; Additional reporting by Simon Meads in London, Megan Davies and Angela Moon in New York and Nivedita Bhattacharjee in Bangalore; Editing by Derek Caney, Dave Zimmerman, Robert MacMillan and Gunna Dickson)