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Stocks H / Hampshire Group, Limited


Subject:  Re: Anyone out there? Date:  10/17/2003  5:10 PM
Author:  howardroark Number:  6 of 17

The CEO's speeches are almost sleep inducing. Blah-blah, cash flow, blah-blah, share buyback, blah-blah debt retirement. Blah-blah growing equity per share. Ho hum. ;-)

Take a trip to Carolina and you'll see that his speeches tend more toward boisterious jokes colored in thick German accents than the buyback and cash flow variety. I think the ultimate value of the RE deal is still somewhat ambiguous, all things considered. Getting rid of the RE is certainly a move I strongly supported, but it's always difficult to assess the fairness of a conflicted transaction like this, fairness opinion or no fairness opinion. The price paid looked low at first glance, but because Hampshire all transferred $11m+ of debt associated with the RE as part of the deal, it's a bit more palatable. The stock consideration is also a question mark. On the one hand, I think repurchases at these prices continue to be good allocations of capital (though I'd rather have gotten my wish at lower prices) and I'm very happy to see what is essentially a 17.5% tender, but the terms of the deal essentially increase the magnitude of the conflicted by lowering Kuttner's (et al.) position in Hamp while also purchasing asset from shareholders. Still, Kuttner reteains a very significant position (~1m shares, over $30m) in Hampshire and this comes as no surprise. When management bought the flailing Hosiery business from shareholder several years ago, they actually overpaid for a terrible business. Overall, I do see it as a net positive -- and probably a significant positive -- that I've exchanged my stake in their far flung RE ventures for a bigger position in the core business (and attendant cash), but it's a good idea to stay pretty skeptical about these kinds of transactions.

A rapidly ballooning issue with Hampshire will now be capital allocation. The should end this year with a significant net cash position -- maybe as much as $70-$80m -- though some of that will depend on whether the summer margin squeeze has lightened with improved retail sell throughs. They have always maintained the inclination to keep a certain level of liquidity ready for potential apparel acquisitions, which they have evaluated regularly over the past 18-24 months. To their credit, they haven't jumped at some of the arguably questionable prices paid by people like VF, Kellwood and maybe JNY, and their one apparel acquisition in recent years (Item-Eyes) has been a substantial success. But they also haven't had such a significant cash position, and I would be disappointed if they didn't increase repurchase from current nominal levels (ignoring the RE deal) or institute a dividend if attractive purchases remain elusive. I especially hope they don't make a war chest-induced, as opposed to value-induced, acquisition, though they haven't given me any reason to think they will.

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