The next wave of M&A activity could come out of the East.
Sluggish growth and economic challenges facing U.S. and European buyers on the home front are opening the door for Asian firms to take the lead in merger and acquisitions deals. These companies are on the hunt for major Western labels as they shift from being simply manufacturers to brand owners — and they have the deep pockets to fulfill their global ambitions.
There are currently two types of Asian buyers — both of which want to better understand the American market. The first group seeks brand opportunities for growth in the U.S. with the goal of bringing those labels overseas. The second wants transactions that enhance sourcing, production and occasionally product category opportunities to help corner the market in a given sector.
While only a few deals have occurred so far, observers believe it’s only a matter of time before Asian firms become more aggressive as buyers. Part of that belief stems from the fact that Asian manufacturing companies face pressures of their own: Overcapacity and rising costs are forcing them to look to other avenues for growth.
While Chinese firms in the first half of 2010 spent more time eyeing the possibilities, there was an increase in activity by yearend. Last week Chinese men’s wear giant Trinity Ltd. inked a deal to acquire Parisian fashion house Cerruti in a cash deal capped at 53 million euros, or $69.6 million at current exchange. Trinity, part of Li & Fung, already holds the license to distribute Cerruti 1881 men’s wear in Greater China.
Earlier this month, China’s Bright Food Group was moving closer to a deal to acquire GNC Holdings, the operator of the vitamin chain GNC. Sources said the deal, if it went through, could be close to $3 billion. GNC, which in September filed for a $350 million initial public offering, is owned by private equity firm Ares Management and the Ontario Teacher’s Pension Plan Board.
Ajay Khaitan, chief executive officer at U.K.-based investment firm Emerisque Brands, is among those currently on the prowl for brand-oriented acquisitions both here and abroad.
“There’s value in both U.S.-originated brands and vertical retailers, as well as those originating in Europe for the pan-Asian, Russian and other emerging markets,” he said.
Khaitan noted that Asians eyeing the luxury or couture level are predisposed to European brands, while those focused on premium, better and moderate price points are more inclined toward American brands.
The rationale for the better and moderate markets, Khaitan explained, is that there are “tens of millions of new, aspirational middle-class Asian consumers entering the branded consumption economy for the first time in a meaningful way every year, and there is a race to create the retail distribution and supply chain to gain first-mover advantage to meet this new demand.” He added that there “are many aspects of the American lifestyle that have great appeal as America is generally perceived to be ‘cooler’ and more ‘hip’ than Europe.”
Some American brands already have “significant mind share with the emerging consumer even without selling a dollar’s worth of merchandise outside the U.S.” due to the Internet, Khaitan noted.
Nitin Kasliwal, vice chairman and managing director of India’s S. Kumars Nationwide Ltd., which joined forces last year with Emerisque to purchase the brand assets of bankrupt Hartmarx Corp., is also on the acquisition trail. His goal is for the SKNL Group to grow from $1 billion in annual volume in 2009 to $5 billion over a five-year time frame.
Kasliwal said well-known Indian brands are only of interest in the home market while “American brands are known all over.” Although there are lots of opportunities overseas, he said U.S. acquisitions are preferred. “Europe is sluggish right now. There’s growth in America, Asia and India, but I think the [brand] opportunity is in the U.S.,” he said.
SKNL is eyeing the men’s and women’s ready-to-wear category and Kasliwal is keen to do deals involving firms with annual volumes of between $50 million and $500 million that focus on the mid-to-upper end of the consumer market. “That’s where you have the sustainable markets,” he contended.
Frederick Schmitt, managing director at investment banking firm The Sage Group, said U.S. brands are of particular interest to Asian buyers. There’s “fairly slow growth in the Eurozone” and labor issues for European firms are harder to unwind, making their operations more difficult to restructure, he explained.
“The U.S. has the better brands [and] the most wealthy consumer state is still the U.S., even when there is a global recession. If firms want to ultimately reach the [U.S.] consumer, they have to come to the U.S. If they want brands that the U.S. consumer responds to, that means buying U.S. brands,” Schmitt said.
His firm has seen a lot of interest, “particularly from buyers from China and Japan.” Schmitt noted that factory owners with large production capacity are keen on building even greater volume through branded enterprises.
The Asian buyers have plenty of competition for the most desirable brands, however. Jay Galluzzo, former senior vice president for corporate development and general counsel at The Warnaco Group and now a partner at Tricera Partners, a boutique advisory and venture management firm, said, “I expect to see a pick-up in mergers and acquisitions in the branded apparel sector. Buying a brand is always important, probably now more than ever before.…Even Wal-Mart and Costco are focusing on brands.”
Price compression is forcing factory owners everywhere to consider their options, observed Haresh Tharani, ceo of Tharanco Group.
“What’s driving this is the world is flat. Consumers in China and India now all know fashion the minute it starts because of the Internet. In buying American brands, they are using design capability here and then marketing it to the world. That is perfect globalization,” Tharani explained.
Investment banker Richard Kestenbaum, partner at Triangle Capital LLC, noted that many manufacturers’ margins are in the range of just 1 percent to 3 percent of sales. “We think the manufacturing business has a number of elements that are forcing the factories to consider acquisitions here in the U.S.,” he said. “There’s too much production capacity in the world and intense competition cuts into margins and profitability. The weakest part of the business is the one that’s farthest away from the consumer. Factory owners need to have something proprietary to create a competitive advantage. That’s where buying a U.S. business makes the most sense, because that gives them access to customers with boots on the ground in the U.S.”
Kestenbaum’s firm, in partnership with the Chinese government, in October hosted the first-ever conference in Mainland China on acquisitions of U.S. apparel wholesalers and brands. The event was oversubscribed and more conferences are being planned, according to Kestenbaum.
The banker noted that there are two primary types of financing, one for state-owned firms and the other impacting privately owned firms.
“The state-owned firms are encouraged by the government to make acquisitions so there’s no problem for them to get capital. Those that are private can turn to the public markets for capital, but that means first meeting the requisites for getting listed in their home countries and making sure operating results are what they should be for public firms. I think next year we’ll see some activity among firms trying to go public,” Kestenbaum said.
Bankers working with Chinese firms confirmed factory owners have the requisite capital to do deals even as they expressed some surprise that there have been few transactions to date.
J. Michael Stanley, executive vice president at factoring firm Rosenthal & Rosenthal, said, “I see more Asian buyers.…The Asian firms can pick it up on the other side and effectively become vertical. They have the money, they want the brands and we have the consumers. They buy the companies here and go vertical, and then boom, when the economy develops further, they’ve now got their home market as well.”
The factoring executive said the process has been slow because Asian firms tend to be committee driven. “There’s also a cultural difference. They are great at manufacturing, but then when they jump to the other side and own a brand, they need to learn how to anchor themselves. They’re still learning the Western culture and how we operate,” Stanley concluded.
Andreas Kurz, former head of Diesel USA and Seven For All Mankind, who used to live in Japan and now is president and owner of fashion consultancy Akari Enterprises LLC, explained that some firms follow the Japanese concept of “nemawashi,” where departmental groups conduct “time-consuming research and hold multiple discussions to see if there’s consensus about buying a brand before approaching the ceo for final approval. In contrast is South Korea, which follows the Western top-down style where the ceo sits down with the owner-seller and then has to sell the idea to his board.”
Of course, sometimes it really is just about money.
Noah J. Leichtling, an attorney at the law firm Loeb & Loeb, explained that Asian conglomerates tend to buy with certain price targets in mind, but sometimes the seller pulls the deal off the table because it’s not getting either the purchase price or the terms that it had expected.
“The advantages of working with Asian buyers is that they generally are using their own resources to do cash or cash-and-equity deals so outside financing is not a contingency for completion of the deal,” said Leichtling, who doesn’t expect acquisition interest from Asian firms to abate anytime soon even as he noted that some deals that he’d worked on never got completed.
One banker, who requested anonymity, remarked: “These are careful investors, and they don’t want to take a huge step before they understand the whole picture.”
That’s exactly the modus operandi of Hong Kong-based sourcing giant Li & Fung Ltd.
The U.S. subsidiary LF USA initially added to its sourcing capability, working with domestic firms to understand the direct-to-consumer process in the U.S., before it dipped its toe in the water and began acquiring U.S. brands. It bought footwear marketer Jimlar in August to add to its existing Fashion Accessories Group, which already housed its Cipriani, Kathy Van Zeeland and Rosetti acquisitions.
Rick Darling, president of LF USA, said the Li & Fung global trading approach has featured two types of acquisitions, one that strengthens its core sourcing operations around the world and the other on strategic purchases for its onshore businesses in the U.S. and Europe.
Darling explained, “In the sourcing transaction, Li & Fung, which made over 40 sourcing-directed deals around the world over the last 10 years, will pursue an acquisition in a particular product category or geographic location that it wants to strengthen. If the acquired firm is in the U.S., it will be put under the LF USA umbrella. In the strategic onshore acquisitions, LF USA has bought 15 companies in the U.S. in the last five years. We look for companies with established design capabilities.”
Even with a war chest totaling $900 million to draw on, Darling said the company’s “filter system is pretty clear in what we will do or won’t do. We get serious about very few, and when we do get serious about an acquisition, we try to close on it quickly.
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