NEW YORK -- Private placements and strategic mergers are capturing the spotlight on Wall Street, as the market for initial public offerings of fashion issues continues to stay decidedly cool.
Making news this summer was Goldman, Sachs & Co.'s equity investment in Polo Ralph Lauren as well as Donna Karan Corp.'s continuing search for private funding. Mergers continue to rock the retail world, with one of the biggest of them all -- Federated Department Stores and R.H. Macy -- now wending its way to completion.
Meanwhile, only eight fashion-related companies have gone public so far this year, versus 16 for all of 1993 and 24 in 1992.
Many of these new 1994 issues have faced pricing problems, with Kenneth Cole Productions, Jos. A. Banks Clothiers and Sirena Apparel all coming in below their targeted offering prices. Beach Patrol Inc., a swimwear manufacturer, and Majors Jewelers Inc., a jewelry retail chain, canceled IPOs in July.
Peter J. Solomon, who heads an investment banking firm bearing his name, said the scarcity of fashion issues reflects the difficult state of the apparel industry.
"There are very few fashion firms that are hot," he said.
Solomon noted the IPO market resembles "more of a normal market." "It's really not that hot or that cold," he said.
At the same time, the recent spate of mergers in many industries, including retailing, are being driven by the consolidations in these businesses, Solomon pointed out. Rather than being financial deals, many are aimed at achieving synergies to keep businesses lucrative.
In addition to the pending combination of Federated and Macy's, the Price Club/Costco merger of last year reflected the shrinking world of retailing. May Department Stores Co. has made several small acquisitions this year and is rumored to be talking merger with Mercantile Stores Inc. Mercantile has acknowledged it is talking to an unnamed suitor.
"There's not much growth in consumer demand, so we'll continue to see mergers to drive down costs," he said.
He also expects larger firms such as Liz Claiborne Inc., VF Corp., and Phillips Van Heusen Corp. to acquire companies to reach different distribution channels and add different lines.Elizabeth M. Eveillard, managing director of PaineWebber, also said she expects the mergers at retail to drive mergers in the apparel area.
"The more concentrated retailers are going to want to work with suppliers of increasing size and clout," she said. "These retailers can't afford to work with a lot of little people."
Market observers also expect to see more private equity deals get done, with less money going to IPOs and less venture capital-type deals, such as those that have backed concept stores. They also say venture capital firms won't be needed to participate in strategic mergers between well-heeled corporations.
The only fashion-related issue on the IPO horizon is The Sports Authority Inc., the sporting goods megastore being spun off from Kmart Corp. This deal does not reflect on the health of the new issue market, but on Kmart's need to raise cash to turn around its ailing core discount chain. Despite the weakness in the IPO market, half of the fashion IPOs that hit the market this year performed particularly well, trading significantly above their offerings prices. They are Norton McNaughton, a women's career wear maker, which reached the market in February; Jalate, a junior firm that came out in March; American Eagle Outfitters, the casual apparel chain, which bowed in April, and Kenneth Cole Productions, the footwear and accessories firm, with a June IPO.
All of these firms stalled coming out of the gate, but picked up steam as earnings came in strong (see accompanying chart).
Also pushing ahead are two more recent offerings, Marisa Christina, a women's knitwear and children's wear firm, and Sirena Apparel, swimwear maker. On the downside, Jos. A. Banks Clothiers, the men's and women's retail clothier, and L.A. T Sportswear, maker of T-shirts and activewear, are both off from their offering prices on earnings disappointments.
"Quality is a very important factor for institutions, the principal buyers of IPOs," said Eveillard, of PaineWebber, noting that investors are being more selective on new issues because of the poor pricing and after-market performances of many recent IPOs.
"The calendar is lighter than in the past, and it's a good opportunity for quality companies to get attention from institutions," she said.Eugene M. Matalene, director of private placement at PaineWebber, said the strength of the new issue market over the last three years lured many firms to go public to realize much greater returns than they could have gotten by completing a private equity deal.
As to the current weakened market, he said, "There's a lot of capital in the private equity market that could be tapped." "The private capital was always available. But as long as the public market is very strong, you don't see as many private deals," he said.
Nonetheless, he said private placement deals are difficult for apparel firms, because of trendiness and the cyclical nature of the business.
"The illiquidity is a major issue," Matalene said. "If you're public and you see things going bad, you can sell. In a private deal, you are in there; you can't sell."
"Apparel is very tough to do today, because of perception of it being very risky," he pointed out.
Most private deals, according to Matalene, target a five-year "liquidity event," at which time the company would go public or be sold so a private investor will realize his return.
He said Ralph Lauren's private sale of 28 percent of his company to Goldman, Sachs & Co. for $135 million was "somewhat of a special case." Factors that made it unusual include the size of Lauren's business, the breadth of his lines, including areas outside apparel, the longevity of his business and the fact that his lines tend to be less trendy than those of other fashion designers.
Donna Karan Corp. is also looking to complete a private placement deal after canceling its IPO last year. Solomon said he believed that apparel and retail firms would prefer to try a private deal if they needed money because they'd rather not report financial numbers on a regular basis to the world at large.
"Unless the equity market is very, very hot where the payoff was extraordinary, then a company would like to remain private," he said.
He also noted Calvin Klein Inc. and Guess Inc. have reduced risks associated with wholesale operations by setting up licensing deals for most of their lines."The wholesale business is very hard, and there's little financial risk to licensing," he said.
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