VF Corporation, the owner of The North Face and many other outdoor, sports and jeans brands, has agreed to pay about $2 billion to acquire The Timberland Company, the American firm that owns the Timberland and SmartWool brands. The amount doesn't include extra cash at Timberland. If completed, the tie-up would form a group with annual sales of about $10 billion, more than half of them generated by outdoor and action sports brands. It will definitely become the powerhouse in the broad global outdoor market.

Strong synergies can be expected between Timberland and VF's outdoor brands in terms of economies of scale, management skills, product development and sourcing, and geographical coverage.

For example, VF's major outdoor brand, TNF, will benefit from Timberland's expertise and buying power in the shoe segment, which represents 72 percent of its revenues, covering 17 percent of the global fashion casual brown shoe market.

Instead, footwear represented only about 10 percent of sales for TNF's sales of $1.4 billion last year, according to our own estimates. This segment is experiencing an increased focus in terms of product development and marketing, according to TNF officials, resulting in improved sales.

Industry officials feel that TNF will definitely benefit from Timberland's platform in terms of product development, which has not been consistent in the last years. The design and product development teams have changed frequently at TNF, and mistakes have been made in the past.

TNF had already sought to acquire an expertise in the segment when it launched its first footwear line at the end of the 1990s by taking a 20 percent stake in La Sportiva of Italy, with an option on the balance of the shares. Due to different visions of the market, the relationship lasted for less than a year and the two firms subsequently split.

On the other hand, Timberland will benefit from VF's huge know-how and supply chain in apparel. Timberland can help TNF to be stronger in Japan and TNF can do the same for Timberland in China, where the latter is half of TNF's size.

Cost savings of $35 million are expected as of 2012, in addition to other benefits. In fact, VF's managers see substantial scope for improvement in the profitability of Timberland, which lags far behind that of the outdoor and action sports coalition at VF. Comprising TNF as well as Napapijri, Reef, Vans, Eagle Creek, JanSport, Eastpak, Kipling and Lucy, this unit has become the largest and the most profitable at VF, with an operating margin of 20 percent. Having proven its ability to do that with other previous acquisitions, VF feels confident about raising Timberland's operating margin from 9 percent to 15 percent or even 18 percent by 2015.

Some analysts described the agreed price of $43 per share as fantastic value for the buyer. The price is equivalent to about 1.3 times Timberland's expected revenues for 2011, and about 11.1 times the consensus estimate for its Ebitda this year. Still, VF says the deal will be immediately accretive to VF's profits, even if it is consummated around mid-September as planned. In the longer run, by 2015, the acquisition should help raise VF's earnings per share by as much as $2.00.

Shareholders affiliated with the Swartz family, which produced the first Timberland waterproof boots in 1973 and still own 18.5 million out of the 53 million outstanding shares in the company, have agreed to support the transaction, but Timberland has a right to terminate the agreement if a higher offer is tabled by July 26. Timberland and VF's shares both shot up in early trading after the announcement, but it seems hard to believe that relative outsiders like Nike or Adidas would want to make a pitch.

The deal was unanimously supported by the boards of both companies. Jeffrey Swartz, Timberland's 50-year-old chief executive, said that his agreement to the sale had been inspired by his approval of the fit and his confidence in VF's management. Timberland will continue to be run out of Stratham, New Hampshire, and he said that he would contribute to the integration of the company into the VF group.

The agreed price represents a premium of about 43 percent on the closing price for Timberland's shares last Friday, or about 18 percent above Timberland's 60-day average share price.

Timberland's share price increased more than five-fold in the last three years but it took a beating last month, losing nearly 26 percent on May 5, after the company released its first-quarter results. An investor filed a class action suit last week on behalf of those who bought Timberland shares from Feb. 17 to May 4 2011, alleging that Timberland had issued overly optimistic statements about its sales trends, cost discipline and inventory levels. Another legal challenge was launched after the merger agreement with VF, questioning whether Timberland's management had sufficiently shopped around for alternative takeover candidates.

Timberland reported sales of $1,429.5 million last year, up by 11.2 percent, and it is expected to record similar growth this year, reaching a turnover of about $1.6 billion. By region, about 45 percent of Timberland's turnover is generated in North America, against 42 percent in Europe and 13 percent in Asia.

VF said that it wanted to lift Timberland's sales by about 10 percent per year for the next five years, building up to incremental sales of about $900 million a year, with two-thirds of that represented by footwear. VF expects growth from Timberland's Earthkeepers and Mountain Athletics ranges, as well as its higher-end boots and its Timberland Pro boots. The remaining $300 million in extra sales should come from apparel, as VF expects to expand Timberland's range and the scope of its distribution, and to widen SmartWool's wool-based accessories business.

Timberland will also leverage the VF group's strong international platforms in Asia, Europe and Latin America, as well as its direct-to-consumer expertise. VF intends to expand Timberland's apparel offering, which will be made easier by the termination of the brand's three-year-old apparel licensing deal with Phillips van Heusen for the North American market from the end of 2011 – while Mediterranea, an Italian company, still has a license for women's apparel sold in Europe under the Timberland brand. Women are a target for aggressive expansion by Timberland under VF's ownership, for both footwear and apparel.

International markets should contribute the bulk of Timberland's budgeted annual $900 million sales hike, with $550 million coming from them compared with $350 million for North America. For the time being, the largest European market for Timberland is the U.K., followed by Italy, Germany and France. At TNF, Germany follows the U.K. as the largest European market. Through the acquisition, sales outside the U.S. will represent 35 percent of VF's total revenues, and the ratio should soon grow to 40 percent.

VF managers said in a conference call with financial analysts that the deal would literally “transform” their company, enabling it to move much closer to the targets it had set itself for 2015. VF had previously told analysts that it wanted its outdoor and action sports coalition to represent 50 percent of its revenues by then. As this goal has already been attained with Timberland's takeover, VF's management has raised the bar to 60 percent. Other acquisitions are not excluded.

Executives of VF rejected a suggestion that TNF and Timberland may cannibalize each other to some extent. VF intends to reinforce the positioning of Timberland as a rugged New England outdoor lifestyle brand, with a more casual and less adrenaline-driven bias, but it will also expand its more technical lines and help it to gain shelf space in outdoor specialty shops. VF's managers said that Timberland and TNF were complementary brands – with a contrasting focus on outdoor activities “below the tree line” for Timberland and above the tree line for TNF.

Timberland and VF will also help each other in growing their respective retail networks. Timberland's wholesale revenues are expected to rise by $630 million a year, while the company's direct-to-consumer sales are budgeted to expand by $270 million. VF wants to swiftly raise the number of full-price stores for Timberland.

Described as a merger, the acquisition is to be paid at $500 million in cash, $700 million in commercial paper, and the remaining $800 million through debt, only half of which would be long-term debt. Thanks to VF's strong cash generation and its high financial resources, VF's debt-equity ratio should stand at a comfortable level of only about 25 percent after the transaction.

The takeover of Timberland should boost VF's revenues by about $700 million this year. Including the cost of the transaction and related expenses, it should add about $0.25 to VF's earnings per share in the second half of this year and $0.75 in 2012. Excluding the cost of the transaction, the accretion to VF's earnings per share would amount to about $0.45 for this year and $0.90 for 2012.

Most of the improvement in Timberland's profitability should come from a reduction in Timberland's SG&A expenses, which stood at about 39 percent of the group's sales last year, compared with 33 percent for VF's outdoor and action sports coalition. Furthermore, while VF enjoys a tax rate of only 25 percent, Timberland pays 31 percent tax in spite of the fact that its European operations pay tax in Switzerland. VF expects to substantially lift the profitability of Timberland's stores in North America, which is only about half the level of VF's stores for its action sports and outdoor brands.

VF's management told investors said that it had been studying acquisitions for some time. Timberland had been on their radar screen for about ten years. They looked at about 50 targets, then narrowed the field to a handful of suitable companies, but Timberland was at the top of the list. The buy is larger than what analysts had expected, but well within VF's expanded financial capabilities.