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Fashion M&A Activity Down, No Quick Turnaround Seen

MILAN — The consumer slowdown has company ? the investor slowdown.

MILAN — The consumer slowdown has company — the investor slowdown.

This story first appeared in the July 17, 2008 issue of WWD.  Subscribe Today.

As economies struggle, global merger and acquisition activity in the fashion sector fell 22 percent in the first half of 2008, compared with the same period a year ago, according to a study released Wednesday.

Sixty-six deals were made in the period versus 85 in the first six months of 2007, the Pambianco consultancy said in its biannual fashion M&A report. These included: LVMH Moët Hennessy Louis Vuitton’s controlling stake in Hublot, the Swiss company known for the Big Bang timepieces, in April; Labelux Group’s acquisition of Swiss fashion company Bally International AG in May, and PPR’s 23 percent share of Sowind Group, the Swiss holding company that owns luxury timepiece manufacturers Girard-Perregaux and JeanRichard, in June.

The downward trend isn’t likely to end soon.

“We expect [the number of deals] to continue to fall in the second half of 2008, and 2009 won’t be brilliant,” Pambianco consultant Alessio Candi said in an interview. “We’ll have to wait until the financial crisis ends. The market has yet to bottom out.”

When that will happen remains uncertain, Candi said. Consumer and investor confidence may bounce after the U.S. elections, but until the perfect storm of credit crisis, euro-dollar imbalance and soaring raw material costs ease, the markets likely will remain depressed and M&A activity sluggish.

“The retail sector at large is suffering,” he said. “Consumers are reining in their spending and this is creating pressure, particularly in the U.S. and Europe. There is hesitancy to invest in this sector.”

Such reticence is particularly true of the banking community, which, some 12 to 18 months ago, was financing deals structured with 70 to 80 percent debt.

“The financial institutions are not prepared to take that kind of risk anymore, Candi said. “On top of that, the cost of debt is higher, which makes leveraging deals extremely difficult for private equity and industrial players.”

Overall in the U.S., however, “We’re wondering where the PE money is flowing,” said Howard Tang, head of American research and hedge-fund products at Mergermarket Ltd. “These guys have raised tremendous amounts of cash, and we haven’t seen any PE deals in quite a while. Going abroad isn’t that logical because of what’s happened to the dollar, unless they raise their money overseas, but most of those funds have been raised here. Where will the private equity guys go next?”

Inevitably, the lack of cheap leverage and the deflated stock market has led to more conservative bidding — hence Roberto Cavalli, for example, calling off the auction for his company last week after valuations of his business fell short of the 1.4 billion euro, or $2.2 billion at current exchange, asking price.

It has also changed the odds in favor of investors with ready access to funds, particularly family funds. For example, the acquisition of Bally by Labelux — the holding company created by the Benckiser family — was one of the few times a family fund was able to outbid private equity competitors, precisely because it was not hamstrung by the arid debt market.

In the current climate, family funds with resources like Labelux “could find many dossiers open,” Candi said.

“It’s a big opportunity [for them],” he added.

With luxury consumption growing fast in emerging markets, investors from China, India, Russia and the Middle East are also looking to make acquisitions, Candi said.

On the basis of current market valuations of fashion and luxury companies, investors with deep pockets could have rich pickings of the sector and even change to spare. But as Candi cautioned, deals will depend on an individual target’s predicament.

“Even in a crisis, the best companies have lower values,” Candi said.

LVMH, PPR and Compagnie Financière Richemont are all rumored to be courting Bulgari, for example, which has lost almost half its value on the Milan Bourse in the last 12 months. But the Italian jeweler wants to remain independent, is confident it will ride out the economic storm and has the management and resources to do so, Candi said.

“The current [economic] situation is less important [for Bulgari]. That is not the case for other companies, which are in difficulty. They may have to open their capital to those with bigger shoulders,” Candi said.