Frederick's considers offer to sell controlling stake.

The board of Frederick's of Hollywood Inc. is considering an offer for a controlling stake in the Los Angeles-based lingerie retailer, according to a source familial" with the discussions.

The identity' of the potential buyer was not disclosed, but the source said that the process had entered the due diligence stage, with both parties reviewing each other's books. The price for the controlling stake is pegged between $40 million and $50 million.

At that range, the purchase price would cover debts owed to the three financial institutions--French bank Credit Agricole SA, Mellon HBV Alternative Strategies LLC and ING Pilgrim Group Inc.--that took possession of Frederick's after it emerged from Chapter 11 bankruptcy in January 2003.

"It makes sense," said Mitchell S. Vance, co-founding partner of Newport Beach-based private equity firm TVG Partners, which tried to buy Frederick's in 2001. "I never saw the banks going long on this investment--it doesn't fit with what they do."

Frederick's President and Chief Executive Linda LoRe downplayed the significance of the bid, and said that the company routinely receives and investigates offers.

"We have received inquires," LoRe said. "We look at or talk about anything that comes our way. If there is an opportunity to grow the business, we look at all means to grow the business internally and externally."

Calls to Frederick's lenders were not returned.

Since emerging from Chapter 11, the company has undergone a series of changes that have returned it to profitability, LoRe said. Profits are up 60 percent, she said, though she declined to say what the margins are. In the company's first year out of bankruptcy, revenues rose more than 14 percent, to about $160 million.

The turnaround is bound to attract attention. according to Alan Stern, managing partner of Beverly Hills-based Imperial Capital LLC. Stem, hired two years ago to shop the company, said even when the business was in weaker financial shape there was no shortage of bidders.

Now that Frederick's has shown its business model is still strong and that it can compete in a U.S. lingerie market dominated by Limited Brands Inc.'s Victoria's Secret, Stern said the level of interest among potential buyers has gone up several notches.

"When people hear a company is doing well, if they liked it before they will like it even more now," he said. "I think it's a great opportunity. It's a large market and they have done a great job of turning the company around. I think they are going to do well."

Kurt Barnard, president of Upper Montclair, N.J.-based Retail Forecasting LLC, said Frederick's success stems from its efforts to make itself more attractive to consumers.

He said the company has attracted new customers by remodeling its stores and redesigning its Web site and catalog.

"I believe they lost their way a little bit in terms of merchandise selection and pricing," Barnard, said. "And that is what they are in the process of trying very hard and very successfully to remedy."

Bernard said Frederick's long-term success depends on how it differentiates itself from Victoria's Secret.

"It's not that Victoria's Secret is the one and only, there's room for competition," he said. "But Frederick's of Hollywood has to develop its own niche, and I think that is exactly what they are in the process of doing."

Among the steps the company has taken are redesigning its lingerie lines and adding new products and categories, including perfumes and household items.

The company redesigned its glossy lingerie catalogue and in January mailed out a 68-page catalogue called Infocus that concentrates less on underwear and more on pricier dresses, pants, jewelry, perfume and home furnishings.

So far, LoRe said, response to the catalogues has been strong. In the last 36 months, the company has seen a 30 percent increase in its mail order customers.

Frederick's finished March with a nearly 20 percent jump ill year-over-year same store sales--the largest increase in its 58-year history, she said.

LoRe, brought on in 1999, said the company isn't in need of more capital to support opening new stores or expanding other areas of business. She said the preliminary expansion plans rely upon current revenue streams.