updated 6/22/2007 7:04:06 PM ET 2007-06-22T23:04:06

In a bid to make the company more profitable and to increase shareholder value, Jones Apparel Group Inc. said Friday it has entered into a definitive agreement to sell Barneys New York, synonymous with high New York fashion, to an affiliate of Dubai-based investment firm Istithmar for $825 million.

Jones is selling the chain for more than double what it paid in December 2004 in its first foray into the world of luxury. The deal is expected to close during the third quarter of 2007, Jones said.

“We are very pleased to enter into this transaction, which realizes significant value for our investment in Barneys and provides us with the opportunity to use the net proceeds to enhance shareholder value,” said Peter Boneparth, Barneys’ president and chief executive officer, in a statement.

Boneparth added that the proceeds will be used to invest more heavily into the company’s portfolio of brands, which include Nine West, Anne Klein and Evan-Picone.

Jones said it expects to report a net gain from the transaction of approximately $290 million. In light of available tax benefits, the company anticipates net cash proceeds after taxes and transaction expenses of about $770 million.

The acquisition is the latest buying spree for Istithmar, which since its inception three years ago has invested in more than 30 companies in three sectors — consumer, industrial and financial services — deploying in excess of $1.6 billion of capital, according to Istithmar’s Web site.

“This investment will further our continued focus on the retail sector. We believe that we will be able to accelerate the growth of Barneys’ business by leveraging our experience in the sector and other investments worldwide,” said David Jackson, CEO of Istithmar in a separate statement.

Boneparth told investors Friday in a conference call that the company didn’t buy Barneys with “the intent of selling.” At the time, Jones was attracted by the hot luxury market and was interested in diversifying its portfolio amid a number of mergers among department stores, he said. But Boneparth said that over time, the company realized that expanding Barneys would require more capital investment.

He also added, “We’re much more comfortable” with the retail environment for its wholesale business.

The deal is considered a win for Boneparth who unsuccessfully put Jones up for sale last year, but had to take it off the market when it didn’t attract the right price.

Still, plenty of challenges remain as the company struggles with a sluggish stock price and sluggish sales in its moderate-price businesses. Boneparth reiterated on Friday the company’s plans to sell some of its moderate-price apparel businesses, which have been squeezed by the consolidation of the department store industry.

For its last fiscal year, Jones Apparel reported a net loss of $144.1 million, or $1.30 per share, down from a loss of $274.3 million, or $2.30 per share, for 2005. Revenue for the year was $4.74 billion, down from $5.07 billion.

Shares of Jones rose 42 cents, or 1.50 percent, to $28.78 in regular trading Friday, before the announcement was made. Shares are at the low end of its 52-week range of $27.30 and $35.54.

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