By  on September 30, 2010

Forget the runway — the big changes in fashion this fall might come from the boardroom.

An unusual combination of economic forces is coming together, pushing buyers and sellers closer together even as the economy skids along and consumers suffer through nearly 10 percent unemployment. Private equity firms have big money in their pockets that they’re obliged to spend, stocks are cheap relative to earnings, companies are sitting on cash hoards and looking to reinvent, and financing is available. Further adding to the pressure to make deals, potential changes to tax laws could make it more expensive to sell next year.

Global M&A activity shot up to $599 billion in the third quarter, a rise of 35.6 percent from a year earlier, according to Thomson Reuters. It was the biggest August for wheeling and dealing in more than a decade.

Although promising deals can go south quickly and the economy can turn on a dime, much of fashion seems to be up for grabs right now. The latest is Destination Maternity Corp., which is being shopped around by investment firm Peter J. Solomon Co., according to sources. Both the company and the investment bank declined to comment Wednesday.

Destination Maternity could give somebody a big leg up in the moms-to-be market. The firm has an enterprise value of $225 million and 701 stores under the Motherhood Maternity, A Pea in the Pod and its namesake banners, as well as licensed businesses in Macy’s, Sears and Kmart.

Other specialty stores are drawing interest because they have cash on their books, little debt and low stock prices. American Eagle Outfitters Inc. was rumored to be a target last month. Investors are also watching Aéropostale Inc. and Finish Line Inc. as potential takeovers, though the companies have not been the subject of any specific chatter. A Finish Line spokeswoman declined to comment and Aéropostale officials could not be reached.

In the luxury realm, Jimmy Choo owner TowerBrook Capital Partners is exploring options for the brand, and Rodarte has held on-and-off talks with LVMH Moët Hennessy Louis Vuitton.

If the fashion and financial stars stay aligned, more than a few people filling the front rows at fashion weeks in New York, London, Milan and Paris could have new bosses, or find competitors under new ownership, by the time collections roll around again in February.

“There are very sweet deals right now,” said David Bassuk, managing director at AlixPartners’ retail practice. “The private equity players are absolutely swirling around and looking at everything.”

That means the leveraged buyout is back on the table, though tighterlending standards mean investors are less likely to pile on as much debtas they used to while taking over a company. Financial investors alsoare getting help from some experienced hands.

“We now have onthe LBO side a lot more seasoned executives out there who are workingwith private equity and hedge funds and are in place to take somethingover and run it,” Bassuk said. “There are literally dozens of thoseguys. You may think that they’re retired and are out there on theirboat, but they’re not.”

A number of big-name chief executiveofficers have gone on to work with private equity, including AllenQuestrom, who until this year served as nonexecutive chairman at DebShops Inc., owned by Lee Equity Partners, and Peter Boneparth, who ischairman at J Brand, controlled by Star Avenue Capital.

Paradoxically, it’s consumer weakness that has set the stage for thenext round of M&A.

“The uncertainty in the consumerenvironment has translated into valuations for branded businesses inapparel, and for retail in general, that are at historically low levels,and yet you have debt markets that are pretty robust,” said John F.Megrue Jr., ceo of Apax Partners U.S. “Private equity ought to have anactive 12 months,” he predicted.

Apax is one private equity firmto watch. The firm has a global presence and served up the sector’slast blockbuster deal in May, selling Tommy Hilfiger to Phillips-VanHeusen Corp. It also has investments in New Look Group, a Britishfashion retailer, and Spyder Active Sports Inc. Irving Place Capital,Advent International, Sun Capital Partners Inc. and scores of otherdeep-pocketed firms are also active in the fashion world.

“By our account, just south of $100 billion is sitting in private equity funds focused on retail,” said Chris Meyer, a director at McKinsey & Co.

Meyer said there were fewer opportunities to make money by simply buying a company and running it better than the previous owners. Buyers today have to have a more detailed plan to grow a company. “The questions have become much more strategic,” he said.

Some private equity firms that are holding onto retailers need to sell and clear the way to raise new money for future funds.

“They have fund-raising needs coming up in the next year or two and they’re focused on locking in gains,” said one investment banker, who asked not to be named. “I know of a couple of situations where the [financial] sponsor’s been in an asset for five years and it’s time to move on.”

“Things have picked up a ton,” said William M. Barnum Jr., partner at Brentwood Associates, a private equity firm. “We’re seeing a lot of interesting things for sale right now. The key to it all was that nobody had a very good track record for the last couple years, so it was very hard to sell a company on a couple of years of down results.”

The mere existence of billions of dollars in private equity coffers seemed to lend credence to a rumor last month that Saks Inc. was about to receive a $1.7 billion takeover offer. Investors pushed the stock up almost 20 percent, though the rumor has since petered out.

The lesson is that the markets expect this kind of takeover to happen, especially at Saks, where the lure of luxe has repeatedly drawn suitors — from Carlos Slim Helú to Diego Della Valle.

For now, fear of continued consumer malaise and a second dip in the economy appear to be the main limiting factors.

“The economy is quite uncertain and, as a result, most retail and apparel companies don’t know what the fourth quarter is going to be [like],” said Kenneth T. Berliner, president of Peter J. Solomon. “Many people, if they’re going to be cautious, are going to wait until after the holiday season.”

If the economy holds up, strategic acquirers are also expected to play the field.

“We’re seeing strategic entities that have a great deal of cash on their balance sheets,” Berliner said, noting that sets them up both as a potential target and a potential acquirer.

A number of companies have also filed S-1 forms with the Securities and Exchange Commission, starting off the official process toward an initial public offering.

But the pipeline is getting a bit jammed. A study this month from Renaissance Capital said that 161 firms are trying to raise over $56 billion through IPOs. The fashion players actively working on IPOs include accessories firm Vera Bradley Designs Inc. and specialty retailer Body Central Corp.

Neiman Marcus Inc. looms large, although bankers don’t expect the company to file for an IPO in the near future. Texas Pacific Group and Warburg Pincus took the luxe retailer private in 2005 in a $5.1 billion deal.

Not all of the companies vying to go public will complete the process.

“That’s a good way to test the water, file an S-1, then people know there’s going to be some sort of transaction and that gets strategics going,” said Bill Detwiler, senior managing director and co-group head of consumer, retail and health care investment banking at FBR Capital Markets. “The one thing you don’t want is to try to sell yourself and pull back because that damages your brand. If you’re big enough you can float the S-1.”

Many private equity owned firms could be bought by other financial investors thinking they can take the company to the next step and sell it again, as has happened with Jimmy Choo on two occasions.

“A lot of the private equity-owned retailers, especially the larger ones, are in better shape,” said Antony Karabus, ceo of Karabus Management. “When you have a lot of money looking for homes and a lot of companies in much better shape and needing to be sold, that is a good combination for a transaction.”

Another factor is that not all of the retailers in private equity portfolios are ready for the prime time of public markets, said Joe Pellegrini, managing director of Robert W. Baird & Co.’s consumer retail team.

“What investors value is growth, number one, but predictable growth is even more critical,” Pellegrini said. That puts a retailer with 100 stores, comparable-store sales growth and a chance to take advantage of the weak real estate market and open more doors at the top of many people’s lists.

So, could all this potential activity add up to a return of fashion M&A where prices go higher and higher?

“I don’t think so,” said Jeffry Aronsson, who cofounded Aronsson Group, which has stakes in Matthew Williamson and Ginny H. “What gets things out of hand is too much debt. When people are paying with their own money, their own equity, they’re going to buy dearer. The tendency would be to be more careful.”

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