Europe appears to have caught the M&A fever again.
The last six months has been a lively period for European mergers and acquisitions activity, culminating in the blockbuster $6 billion-plus transaction by LVMH Moët Hennessy Louis Vuitton for Bulgari earlier this month that followed a rash of private equity deals. Overall, and boosted by the LVMH deal, M&A activity in Europe in the fashion and luxury space over the last six months has approached $10 billion — and all signs are the momentum will continue throughout the rest of the year.
“There’s been a pickup in activity over the last several months. It’s been very substantial. Right now luxury is back [and] banks are starting to lend again,” said Richard Kestenbaum, partner at Triangle Capital LLC. “There are signs that firms who have capital are waiting in the wings wanting to do something.”
In the Bulgari deal, LVMH was able to double its watch and jewelry division through a single acquisition. Observers believe the purchase could now spur competitors to do a few deals of their own to capture market share.
“It always does, to some extent,” said Gilbert Harrison, chairman of investment bank Financo Inc. He said firms are geographically agnostic, looking everywhere for the right opportunity.
“Companies are looking for both luxury and lifestyle brands, and brands that have the opportunity to go global are still very attractive. That’s where there will be a lot of upside,” he said.
Specialty chain Tiffany & Co. has garneredrepeated takeover speculation since 2007, as has Burberry, while other, smaller firms, mentioned include Jimmy Choo and the troubled AllSaints.
According to Triangle Capital’s Kestenbaum, “A deal involving Tiffany, because it is so big, would be a bigger transaction than Bulgari. While it is not at the same level as European luxury brands, Tiffany is a unique asset and therefore has a certain scarcity value. It is currently selling for 11x [earnings before interest, taxes, depreciation and amortization], and a deal would have to be done at a higher price than that. That is not a crazy price if a buyer thinks they can improve profitability. A buyer would have to pay a premium, but there’s not a lot of debt on the company right now, so there’s room for more debt on the balance sheet.”
Kestenbaum said the enterprise value for Tiffany would likely be more than $8 billion, including the assumption or repayment of outstanding debt.
LVMH was at one point rumored to be a suitor for Tiffany, while Swiss firms Compagnie Financière Richemont SA and Swatch Group are also considered possible buyers. Richemont, which last year bought Net-a-porter, is said to be sitting on at least $2 billion in cash, while Swatch supposedly cut its 2009 dividend to preserve cash to give it flexibility to acquire firms, market sources said.
Financial sources said French luxury conglomerate PPR has also kicked the tires. CreditSights analyst Simon Atkinson wrote in a research note: “PPR was pretty clear, though, that when the team did look, it would be at sport and ‘lifestyle’ assets rather than at luxury brands.” The report concluded that PPR would focus on “dramatically reducing leverage” and that “deal speculation will come once the balance sheet starts getting heavy with cash.”
As for AllSaints, the high-street apparel brand is owned in part by British retail entrepreneur Kevin Sanford but holding a majority stake is Iceland-based Kaupthing Bank, which has since collapsed. Accounting firm Ernst & Young recently put Kaupthing’s U.K. division into administration, the British equivalent of Chapter 11 bankruptcy. AllSaints reportedly has $532.2 million in loans from Kaupthing. On Friday, spokespeople for AllSaints and Ernst & Young declined to comment on AllSaints’ finances and its search for new investors.
An industry source said there is a short list of three potential investors, and that a solution is “relatively imminent” and likely to be announced this week. Private equity firm Advent, once touted as a buyer, is “unlikely” to step up to the plate, said a source.
While Kate Calvert, a retail analyst at Seymour Pierce in London, doesn’t expect significant M&A activity in the U.K. this year because of the hangover of the depressed economy, she said future targets could include the British high-street labels Coast, Oasis and Warehouse, all of which were formerly owned by the now defunct Icelandic investor Baugur Group.
Meanwhile, TowerBrook has retained Goldman Sachs and Morgan Stanley to explore long-term strategic options for Jimmy Choo. The review could result in yet another sale of Jimmy Choo — it’s already been bought and sold twice by private equity players — or lead to an initial public offering.
Jimmy Choo, who initially founded the brand as a bespoke shoemaker, has already retained a financial adviser to assess his options regarding a potential sale, and a slew of private equity firms and brands are said to have expressed preliminary interest.
As for Burberry, industry watchers are of two minds as to whether the sale of such a mature and well-oiled company would make sense. Some believe the brand’s 100 percent free-float makes it an attractive target, but others are more dubious.
“It is hard to imagine that a bidder could acquire Burberry and create enough value to justify the premium they’d have to pay,” said one analyst.
Another London-based analyst said, “You have to wonder about a private equity buyer: It’s not like private equity has had a brilliant track record buying and managing luxury companies.”
A mixed track record or not, cash-rich private equity firms have been busy scoping out deals, as well as selling some of their investments. Maxeda BV, a Dutch retail group that is equity backed by a consortium led by Kohlberg Kravis Roberts, has sold its Dutch fashion retail holdings V&D, Hunkemöller and de Bijenkorf.
An affiliate of Sun European Partners, the European adviser to Boca Raton, Fla.-based Sun Capital Partners, acquired Dutch retailer V&D and the La Place restaurants — the equivalent of McDonald’s in the U.S. — for an undisclosed amount last fall.
Michael Kalb, senior managing director at Sun Capital, said, “V&D’s got a terrific market position, as it is the only midmarket branded department store.”
For Sun, that means growth potential within the home country, as well as the possibility of rolling out the concept to neighboring countries down the road.
Sun Capital is looking at various other retail transactions in a number of countries. “Whether it is Scandinavia, France, the Benelux region or the U.K., we are constantly looking at retailers throughout Europe,” Kalb said.
Other European deals include the acquisition by PAI Partners, a European private equity firm that counts Spanish apparel retailer Cortefiel and Italian department store chain Gruppo Coin among its holdings, of lingerie firm Hunkemöller in January. In a transaction expected to close in a few weeks, London-based Apax Partners acquired German apparel discounter Takko Holding GmbH from Boston-based leveraged buyout firm Advent International Corp. in a transaction valued at $1.7 billion.
Strategic buyers have also been busy. At the end of 2010, Selfridges acquired the 12-unit Dutch upscale department store de Bijenkorf. Earlier this month, Spain’s private sales club Privalia acquired German online retailer Dress for Less.
In play is Italian department store chain La Rinascente, owned by the Borletti Group, a European investment group that includes as a co-equity partner the Borletti family. Maurizio Borletti, has until the end of the month to access information on the retailer. LVMH and Tamburi Investment Partners SpA are said to be involved in backing a bid by Borletti. Also interested in the chain is Thailand’s Central Retailing Corp.
PAI’s Gruppo Coin, currently valued at around $1.4 billion, is also on the block. Private equity firm BC Partners has taken a serious look, but so far no offer has been made. Borletti Group, which owns French department store Printemps, has eyed the chain before and could take a second look, financial sources said.
And don’t rule out Asian buyers. Hong Kong-listed YGM Trading is among the many Asian firms said to be on the hunt for acquisitions, according to market sources.
Emanuele Pedrotti, director at AlixPartners in Milan, believes that more cross-border deals — firms eyeing acquisitions of companies based outside their home turfs — will take place. “Cross-border deals will get done provided the transaction helps the buyer expand in a particular market, whether its a particular sales category to grow market share or expand one’s presence into an emerging market country,” he said.
One firm that went outside its borders to do a deal, and to obtain financing, is Privalia.
Lucas Carné, co-founder and ceo of Barcelona-based Privalia, said he found it difficult to raise funds when he was launching the firm in 2006. “We had to finance the company with our own funds, and it was only after we had been in business three months that we were able to close an agreement with one angel investor and one venture capital fund.”
That’s due, in part, to Europeans being more risk averse than U.S. investors, Carné said. He noted that, in Spain, there are few entrepreneurs, and private equity investments for companies seeking more than $7 million are almost nonexistent. He had to head to the U.K. and the U.S. in search of investors.
Privalia was able to obtain a $95 million financing deal last year from General Atlantic, Index Ventures and Highland Capital Partners in exchange for some equity in the business. The same three, plus Insight Venture Partners, also helped Privalia fund its purchase of Dress for Less.
“We did the acquisition for two big reasons. Geographically, in Western Europe, our space is becoming European, and not just a local game,” Carné said. “Fifty percent of our revenue is from global brands, and [Privalia] is now a formal [selling channel] for fashion brands. It’s not enough just to be leaders in Spain and Italy. We need to be a big player in Europe to be the partner of choice.
“Both Germany and France are now the biggest markets for off-price. Dress for Less is one of the leading players for fashion brands in Germany.…It operates a different model in the open-shop space, whereas in private sales, we decide what we sell and push those products at an attractive price via viral marketing. Dress for Less also owns two full-price fashion shops and provides an opportunity for us to sell full-price collections,” the ceo said.
He said he’s eyeing other acquisition candidates, and would like to do a transaction involving a French-based firm.
“There’s a 50 percent possibility that, in the next 12 months, we’ll do another M&A deal,” Carné predicted.
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