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The subprime debacle of 2007 turned into the panic of 2008, leaving many merger candidates alone at the altar, and bankruptcy attorneys standing by with Chapter 11 petitions in hand.
The liquidity crunch has extended far longer than many financial prognosticators can remember. And few can say how much longer it will last.
Certain deals, like the sales of Ellen Tracy to Windsong Brands and home goods maker Waverly to Iconix Inc., took far longer than expected, either because earlier potential merger partners walked away or tougher financing requirements necessitated weeks of negotiation.
Among apparel and accessories retailers that filed were Mervyns, Steve & Barry’s, Goody’s Family Clothing, Boscov’s Department Stores, Harold’s Stores, Friedman’s Jewelers, Whitehall Jewelers, and B. Moss Clothing. Other retailers filing included Fortunoff, Linens-N-Things, Circuit City, Sharper Image, Red Envelope and National Wholesale Liquidators. Mervyns, Steve & Barry’s and Harold’s are liquidating. Goody’s has restructured and exited Chapter 11, while Fortunoff, Sharper Image and Boscov’s found buyers as their exit strategy. The fates of Circuit City and National Wholesale Liquidators were unclear at press time.
Whether vendor or supplier, much of their fate centers largely on consumer spending.
“The biggest issue is the consumers’ lack of confidence, resulting in an inability to go out and buy, because they think they can no longer afford to make discretionary purchases like apparel,” said Andrew Jassin, partner in the Jassin O’Rourke Group.
Jassin noted that for businesses, the credit crunch has meant an “inability to finance orders to build inventories.”
“Banks have cut off marginal retailers as they’ve become more reluctant to lend out money,” he said.
Stanley Officina, president of factoring firm Ultimate Financial Solutions, said, “We seem now to be in a just-in-time credit cycle, constantly adjusting to the swings from retailer to vendor. As they report numbers to Wall Street, one can see dramatic differences over a few weeks from what analysts expect…[from] updated guidance to actual reported results.”
Allan Ellinger, senior managing partner at Marketing Management Group, said the slowdown in mergers can be traced to two primary factors.
“As multiples have been substantially reduced, those companies that have been consistently profitable and may have considered selling will be sitting on the sidelines, as they have no pressure to sell. Additionally, companies that would have been premium payers are to a great extent also sitting on the sidelines due to the uncertainty of the market and limited credit availability to fund acquisitions,” he said.
Ellinger foresees some M&A activity from well-capitalized strategic buyers looking to acquire firms unable to sustain their businesses at the right price, as well a shift in focus from private equity players. “Financial buyers will be a lot more selective and much more risk-averse to deals in our industry because of their lack of expertise in fashion, the uncertainty of the market and the lack of credit to fund their deals. We are seeing a significant decline in private equity activity at the moment,” he said.
According to Stevan Buxbaum, executive vice president of Buxbaum Group, “There is still so much mass uncertainty that there is no idea how to plan for anything.”
How it all plays out for the fashion industry will largely depend on the consumer, he added: “We don’t see much lending, even though lenders say they are lending.…Everything is so tied to holiday sales, and there shouldn’t be a tremendous amount of marked-down merchandise after Christmas, since inventory was tight coming into the selling season.”