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Europe’s Takeover Scene Heats Up

Investors are still hungry for brand names, and that means fashion and retail acquisitions in Europe are heating up once again.

PARIS — Investors are still hungry for brand names, and that means fashion and retail acquisitions in Europe are heating up once again.

But the luxury titans, still groggy from their pre-9/11 spending gluts, won’t headline this round of buying. They’re likely to be on the selling end, as was signaled this month when LVMH Moët Hennessy Louis Vuitton divested its money-losing Christian Lacroix couture business to Falic Group, a U.S. duty-free operator.

In their place a new cast of characters is emerging. Tommy Hilfiger last month purchased the Karl Lagerfeld brand with a view to develop it internationally. Other American houses, including Ralph Lauren and Liz Claiborne, are said to be on the hunt in Europe, according to sources. Claiborne already owns the European fashion retailer Mexx, which it is taking to the U.S.

Chinese investors also have started to prowl. Hong Kong investor Li Ka-shing just bought France’s largest perfumery chain, Marrionaud, and YGM Trading Ltd., a publicly traded Hong Kong firm, recently purchased Guy Laroche.

Yet it’s Europe’s private equity firms, which are flush with cash and eager to get their share of the high-margin luxury pie, that may prove the most acquisitive.

“Private equity funds have definitely become big players,” said Karine Ohana, managing partner at Ohana & Co., a Paris mergers and acquisitions firm. “They have a strong appetite for major brands and they are aware of the existing leverages offered by the luxury sector.”

But don’t expect a case of go-for-broke déjà vu. 

Whereas luxury groups often bought merely to secure a brand’s historical cachet — hibernating it while developing cash cow stars — private investors are after quicker profit-making potential.

Unprofitable brands — and there are many said to be on the block — may prove difficult, if not impossible to sell, especially since groups will probably insist on getting prices high enough to cover the multiples they paid.

“What’s changed from pre-Sept. 11, when all of the luxury groups made so many acquisitions, is that there is much more caution,” explained Robert Bensoussan, president of London’s Jimmy Choo, the luxury accessories footwear firm.

“It’s not just about paying any amount of cash anymore,” he continued. “Financial players are very sophisticated and they are looking for growth. Today if you don’t have profits, it’s extremely difficult to sell.”

Bensoussan, who has also worked in private equity, last November brokered the sale of a majority stake in Choo to Hicks Muse, the European private equity investment firm. The deal valued Choo at 101 million pounds, or about $190 million, a multiple of roughly three times sales.

“We generated the multiples because Choo has been profitable and has room to grow,” Bensoussan said.

Luc Vandevelde, the former Marks & Spencer chairman who is a partner at Change Capital Partners, the London firm that invests in fashion and retail, said, “Companies with a market-leading product and/or a strongly differentiated customer that offer platforms for growth [are the best investment opportunities].

“Companies that have embraced multichannel strategies and made them work, with robust distribution and fulfillment infrastructures, will rightly be seen by investors as attractive,” continued Vandevelde. “[We] are looking for companies where we can take controlling positions and can identify and create platforms for consolidation and growth.”

David Burns, partner at Phoenix Equity Partners, another investment firm active in retail and fashion, said: “Multiples are at one of their highest levels in recent years. But people are willing to pay premium prices for a brand that is growing aggressively.

“Investors are looking for brands with untapped potential,” he added. “But they also want a brand that has a track record of growth. Premium prices will only be paid for brands that are growing aggressively.” 

Luxury is hardly the only target. Vandevelde identified “niche companies offering functional items and sports brands” as other investment opportunities.

Philippe Violet Vianello, who heads up mergers and acquisitions at Sterling, a Paris consulting firm, said financial players often shop around for short to medium returns on their money.

“Luxury is a longer-term investment, hence the interest in retail and bridge brands, which are seen to provide quicker capital returns,” he said.

Indeed, buyouts in retail have been rampant, especially in the United Kingdom. And on the Continent, several midlevel fashion brands and sports companies have shifted hands, including the French fast-fashion chain Camaieu, which Axa Private Equity acquired this month in a deal that valued the retailer at 515 million euros, or $669.5 million at current exchange.

Ohana said “technical” categories from skiwear to lingerie are hot takeover targets because they have a growing niche on the market. To wit, Quiksilver has recently confirmed it’s in talks to acquire France’s Rossignol skiwear company.

Meanwhile, in the U.K., investment firm 3i last November purchased Hobbs in a deal that valued the women’s fashion retailer at 111 million pounds, or about $210 million. And Baugur, the Icelandic investment group, has made a splash in Britain by buying High Street retailers Karen Millen and Whistles.

Joseph, one of Britain’s leading designer-label retailers, is on the block, as is LK Bennett, the upscale shoe retailer with 50 stores. British retailers Matalan and JJB are also attracting attention.

Derek Lovelock, chief executive of Oasis Stores, one of the fashion retailers controlled by Baugur, said private equity’s buying of public firms and taking them private is likely to continue. Lovelock was on a team that took Oasis, which has 350 stores and 164 million pounds ($305 million) in sales, private as part of a management buyout in 2001 and later sold it to Baugur.

 “[Private] investors are interested in retail because they can concentrate on generating cash,” said Lovelock. “A publicly traded outfit is measured on top-line and like-for-like sales growth. But investors can come in and create cash by improving synergies, controlling inventory and cutting costs. Retail has different measures of success.”