February 15, 2019

Breakingviews: Levi’s IPO fails the Marie Kondo test

by Breakingviews.

How would Japanese tidying guru Marie Kondo approach the initial public offering of Levi Strauss? She might take Wednesday’s IPO filing in her hands, like an old pair of jeans, hold it tight and ask: Does it spark joy? Decent growth would certainly push the happy feelings up. But a staggered board, super-voting stock, and its trend-dependent business would make her shoulders heavy.

A resurgence of denim love in Europe has helped Levi’s, which wants to return to the market after three decades in private hands. Sales were up 13 percent in its fiscal year, which ended in November, excluding the impact of currency, roughly the same as what analysts are expecting from Wrangler owner VF Corp this year. It has prudently managed debt too, with a ratio that has fallen recently to only 1.5 times its EBITDA. Its storied brand – which started after its founder moved to San Francisco in 1853 – may be enough to get investors’ stomachs tingling, Kondo-style.

The glow fades, though. Levi’s is subject to changing fashions, but it also lacks a fresh idea. The company says it will use the proceeds for “general corporate purposes” and perhaps some strategic investments. Beyond offering a partial exit for descendants of the founder, who own Levi’s today, it’s not clear why the company wants to return to the public market.

What spoils the good feeling is the governance that Levi’s is proposing. The family doesn’t have operational control and accounts for just three board members. But the clan will hold shares with 10 votes each – versus one for the regular kind of stock – which gives insiders voting control even if their collective stake falls over time. That’s unappealing, although common, in technology companies. It’s positively unflattering in a clothes maker.

Levi’s has another shareholder-unfriendly feature too: a staggered board, where directors are only up for election every three years, and never all at once – a classic way to deter activists or corporate raiders. All this can be adjusted for by pricing the shares at a discount. Or Levi’s could nix those features altogether. Without one of those concessions, Levi’s will struggle to pass the metaphorical Kondo test.

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