By and  on May 21, 2007

NEW YORK — The pace of mergers and acquisitions is not slowing down anytime soon, according to investment bankers and analysts.

And while brands will continue to be the main focus of acquirers, particularly in certain sectors such as beauty, some categories such as teen retailers will do better to grow organically, sources said.

"This is an industry that's in play. There isn't a company today in our industry that isn't looking for a strategic solution. They are either looking to be bought or be acquired," explained Allan Ellinger, a senior managing partner at New York-based MMG, an investment banking and strategic advisory practice firm.

"What we see in terms of consolidation in the U.S. is not unique here. Asian wholesalers have similar issues. The second and third generations are owning factories and asking themselves whether they still want to do that. Back then many of these firms made money on quotas and now there are no quotas. They do know that they want to acquire brands and distribution companies," Ellinger said.

According to Alexander Panos, managing director at TSG Consumer Products, "Starting a new brand is very risky. The large firms for the most part are looking and waiting to see what shakes out to find out who the winners are, and then buy those companies. There is a fair amount of competition for the winner."

Panos' firm prefers to invest in companies that have annual volume of over $50 million, with the potential to grow. Earlier this month his firm sold PureOlogy Research to L'Oréal. And while his firm is looking for opportunities in apparel and retail and luxury goods, he has also seen increased activity in the beauty and personal care sector.

"Certain cosmetic companies have had opportunities to buy some of these [up-and-coming] businesses but didn't because they didn't believe in the growth prospects. Now, I compete with some of them all the time for the same businesses. The larger beauty companies are favoring acquisitions with volume north of $100 million. They need the volume to have an impact on earnings. Many have existing businesses that have flat or no growth, or limited growth."For investment banker William Susman, chief operating officer at Financo Inc., "The attraction in the beauty area is very much centered around the fundamental attractive value proposition that a successful beauty company offers. The business can be high growth, high margin and high value, but realizing that vision is always based on management and execution. The beauty sector has a tremendous number of growth companies, many of whom may reach enough scale to be long-term successful firms. Examples include Burt's Bees, Philosophy and Laura Mercier."

Cathy Leonhardt and Robert Phillips, bankers at Peter J. Solomon Co., noted changing demographics — along with a desire by Baby Boomers to age gracefully — as reasons why beauty, health and wellness brands are in vogue.

Phillips, a former chief executive at Unilever, said, "People are living longer. They have access to money and access to aspirational looks via film, video and the Internet."

For Leonhardt, the technology used in beauty products is getting more sophisticated. "People are looking at antiaging treatments as an alternative to plastic surgery or Botox. And a lot of the newer brands are smaller so the financial players can put in more experienced teams to grow the brands, which then become more attractive to the strategic buyer."

On the apparel and retail side, many apparel brands share the same issues facing beauty firms, such as the need for capital to grow the business. However, many nameplates aren't considered "growth" retailers for those looking to buy the next hot chain. The teen retail market seems to be defying conventional wisdom, as growing organically appears to be the more successful vehicle for expansion.

"In specialty, those who launch concepts organically have the most success, especially when the new concept is an offshoot of what they already know and do well," said Christine Chen, specialty retail analyst, Needham & Company LLC.

Abercrombie & Fitch's Hollister, Ruehl and abercrombie kids divisions have allowed the company to avoid overexposure.

"Abercrombie & Fitch is the model example of new concept rollout," Chen said. "Every few years they introduce one and let the existing fund it. Core Abercrombie & Fitch may be close to being saturated in the United States, but Hollister is their growth now, and once Hollister reaches that, Ruehl will be ready for rollout."The key is taking on brands or starting new concepts that fit with the company's image and expertise. Chen cited American Eagle Outfitters Inc.'s aerie subbrand, focused on intimates, as a logical next step to company growth since it is a continuation of their core teen business. American Eagle, however, was not as lucky with their Martin + Osa concept. Targeting 25- to 40-year-old women and men, Martin + Osa is experiencing some trouble gaining traction.

"Currently, the discrepancy is between price point, quality and fashion trends. It's not that the merchandise is poor quality, it's that price points are too high. There are also some fit issues," Chen said.

Since it takes about two to three years before a new concept breaks even, retailers should start to look to their next concept about five years before their core business runs out of square footage growth, the analyst said.

"It seems the trend is that new concepts are slanted to teens," Chen said. "Teens are more receptive to new brands, while the Baby Boomers are more resistant to change."

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