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The Global M&A Scene: Steady Deal Flow Expected in 2012

Activity from Asia is expected to rise, particularly in China.

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So far so good: 2012 is shaping up to be an active year for global mergers and acquisitions.

This story first appeared in the March 13, 2012 issue of WWD.  Subscribe Today.

According to Dealogic, after a dramatic slowdown last year, global fashion M&A was making up some ground in early 2012. The combined value of deals made public so far this year in the apparel and footwear retail, textile and apparel manufacturing, and cosmetics and toiletries sectors is up 35.5 percent year over year to $2.66 billion, after a 44.3 percent decline last year to $13.49 billion from 2010 figures.

Should that rate continue, it will be an active year for M&A transactions.

On Monday, men’s accessories firm Swank Inc., which last month said it had a $57.5 million deal to sell its operations to Randa Accessories Leather Goods LLC, said it had another offer on the table. Swank had the option of pursuing alternative transactions during a “go-shop” period. The firm’s adviser, Financo Inc., found what looks to be a better offer, which Swank is evaluating.

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As for the overall M&A scene, Financo’s chairman Gilbert Harrison said, “I think there’s still tremendous opportunity for M&A activity. Everybody is looking toward Asia, especially China, as a huge growth market. One of the problems I see is that pricing seems much higher than what people are willing to pay, so that is making some deals more difficult to get done.”

Andreas Kurz, president and owner of fashion consultancy Akari Enterprises, sees continued interest from China and Korea, as well as some Indian conglomerates, all of which are interested in “buying European brands and expanding them in the emerging markets.”

E-Land Europe earlier this month finalized the acquisition of Italian accessories firm Coccinelle. The Korean E-Land fund last year took control of accessories brand Mandarina Duck, based in Cadriano, Italy.

Kurtz noted that Asian buyers are interested in accessories and footwear brands, since there are “no size and style issues as in apparel, and the margins are very high.”

For Richard Kestenbaum, partner at investment banking firm Triangle Capital LLC, activity will likely focus more on China than Europe. “When the environment is expanding, people are more willing to try new things like acquisitions. In areas where the environment is slowing down, people tend to focus on their existing businesses,” he said.

In addition to strategic firms with money and equity available for deals, financial players are expected to be fairly active. L Capital Management, the LVMH Moët Hennessy Louis Vuitton–backed investment vehicle eyeing European midmarket lifestyle and retail brands, earlier this month closed its third round of funding, with commitments in excess of 400 million euros, or $533 million at current exchange. In the U.S., The Gores Group, on the acquisition trail after taking investment stakes in J.Mendel, Big Strike Inc. and a joint-venture stake in the Mexx business from Liz Claiborne, closed its fourth fund, this one a $300 million fund targeting lower middle market businesses.

Following is the outlook for M&A activity by region.

UNITED STATES
Recent deals in the U.S. include Fossil Inc.’s acquisition of Skagen Designs Ltd. in a $236.8 million cash and stock deal, as well as TSG Consumer Partners’ stake in jewelry designer Alexis Bittar, creating a partnership that involves a 50-50 equity stake on both sides. Nixon, the watch, accessory and audio brand from Southern California, said Saturday it will become an independent company. Previously owned by Billabong, Nixon has an agreement with Trilantic Capital Partners and Billabong whereby each will own a 48.5 percent stake in the brand, with the balance of 3 percent held by Nixon management. The deal values Nixon at $464 million.

“The big auctions tend to be fewer and far between,” said Michael Dart, head of Kurt Salmon’s strategy and private equity practice. “The way the process is working now is much more selective, engagement with management teams or the board to try to create a much more tightly defined process, [so] the financial sponsor or strategic [acquirer] feels that they have a pretty high probability of getting something done.”

Marc Cooper, managing director and head of Peter J. Solomon Co.’s retail and apparel practice, said there’s a lot of pent-up demand among strategic acquirers looking to do deals.

“Coming out of the recession, a lot of the good players really cut expenses, rationalized their businesses,” Cooper said. “Many of these companies are now sitting on significant cash balances, they’ve identified acquisitions as part of their future growth strategy and now it’s just a function of finding them, which is not easy.”

One key issue on the horizon that could impact M&A activity concerns the availability of financing. Another is the upcoming presidential election, which is likely to have an impact on taxation matters.

According to Frederick Schmitt, managing director at The Sage Group, “There are still good reasons for acquisitions now as the debt rate is still low for the most part and both retailers and wholesalers have healthier balance sheets. Right now it is easier to get financing than it was a year ago.”

Schmitt also noted that regardless of which political candidate is elected president, “Our perspective is that tax rates are going up. Tax considerations could be a catalyst for M&A activity. It won’t be a major driving factor, but companies that are doing well might be more incentivized to do something now and benefit from an increased multiple. If they wait, that benefit could be negated by tax increases.”

Then there are the emotional factors that can be somewhat unpredictable: an owner wondering either about the value of a firm after eyeballing the stratospheric numbers garnered by Michael Kors when it went public or electing to go private because the individual believes the firm can do more when it is no longer under the public scrutiny of Wall Street analysts and investors.

John Howard, chief executive officer of Irving Place Capital, said a “Michael Kors effect” has taken hold, leaving at least some takeover targets expecting too much.

Kors went public in December and has seen the value of its stock nearly double. The luxe brand’s market capitalization went as high as $9.5 billion last week and slipped to $9.3 billion Monday, after the designer and other stockholders revealed plans to sell another 25 million shares of the company.

“Everybody just shakes their head at Michael Kors and says, ‘If Michael Kors is worth that, I’m worth this,’” Howard said. “It’s like everybody’s a little crazy. Everybody sees what’s possible in this world when you have a brand and somehow [they] think they have a brand, but there are very few [like] Michael Kors.”

The flip of an initial public offering is taking a company private.

Kenneth Cole last month offered to buy the shares of Kenneth Cole Products Inc. that he doesn’t already own for a current offer price of $15 each, valuing the company at $280 million. Likewise, overseas, the Benetton family said it wants to take the firm private and launched a tender offer to buy the remaining 25.15 percent of its stock for 4.60 euros, or $6.07.

EUROPE
A few months ago, in his speech at the SuperInvestor private equity conference in Paris, Guy Hands used three words to describe the current climate for deals in Europe.

“These are ‘the wilderness years’ for the private equity industry in Europe,” said the British founder and chairman of Terra Firma Capital Partners, one of Europe’s largest private equity firms.

“We look set to continue to endure harsh economic conditions and volatile and illiquid capital markets. The opportunities for creative financing and reducing the cost of capital have gone for the foreseeable future. How very different from ‘the Woodstock years,’ that period from 2002 to 2006 when credit was booming.”

For many parts of Europe, credit is tight and lenders’ demands are increasingly onerous.

“The climate is tough, and there is tremendous uncertainty in private equity and M&A. The markets are in limbo right now, and the political decision to kick the can on Greece is frustrating,” said Steven Petrow, a managing director at Change Capital Partners in London.

A senior banker at Rothschild in London observed, “If you look across all sectors, M&A activity has slowed down.”

This banker added that many of the large groups in Europe are looking at smaller, bolt-on acquisitions. “They have the cash, they have the momentum, and they want to buy,” he added.

Pierre Mallevays, managing partner of Savigny Partners, a London-based boutique investment bank, said the number of transactions in the luxury sector in 2011 was double that of the previous year.

“There is a lot of appetite for deals, particularly from China, but often with a very narrow scope and specific requirements,” he said. “As a result, I believe that M&A activity will be sustained, with valuations going up, but not necessarily the volume of deals increasing.”

Credit remains a sticking point. “There are lower levels of leverage out there, and they come with high fees, high interest rates, tighter financial covenants. Yes, it’s still cheaper than equity, but the terms today are onerous,” said Petrow of Change Capital.

 

He said that people with money are spending it, so companies at the high end are holding up pretty well. “It’s the middle market that’s suffering — and that’s not going away anytime soon. But watch this space on luxury — if there is an uncontrolled exit by Greece from the Euro then that spending may dry up too,” Petrow said.

CHINA
The most high-profile deal in China recently was a transaction last month in which L Capital said it and other investors had invested $200 million in Trendy, a Chinese contemporary clothing company based in the southern Chinese city of Guangzhou.

Also last month, Fung Brands Ltd., a subsidiary of Fung Capital Ltd., the investment arm of the families of Hong Kong-based Victor Fung and William Fung, said it had finalized a deal to acquire 80 percent of the French fashion brand Sonia Rykiel.

“Taking part of a share of a Chinese company will be a preferred way,” said Gao Zhen, a managing partner with the Shanghai-based Mandarin Capital Partners. “Strategic relationships will benefit both sides. We see many European brands that would like to enter the Chinese market and who want to have a Chinese company as a partner.”

There is equal interest from Mainland companies interested in investing in or acquiring Western brands via Chinese and foreign-backed funds.

“There are a lot of challenges — cultural barriers, the way of doing business, the way of treating talented people, the communication,” she said, noting that many firms in China need a certain amount of education in preparation to do deals.

Gao said interest on the Mainland in overseas brands is coming from companies not directly involved in the fashion sector but rather industries such as consumer goods or textiles. Such companies are looking to start their own brands in China and are seeking to partner with a foreign brand largely for educational purposes.

“It is a learning process,” said Jeacy Yan, partner in charge of consumer, retail and service sectors with IDG-Accel Capital, a Chinese investment fund eyeing overseas transactions. “We have become more confident and we know how to deal with Europeans and how to structure our deals. China funds, they are more cautious, but we think it is good timing. The market is still down and probably will stay down for a while in Europe. Many European brands need money and have financial difficulties.”

Last year, IDG-Accel invested in Moncler, as well as entered into a China joint venture with the global brand owner of Evisu, the Japanese denim company.

JAPAN
Although the yen is strong, giving Japanese companies a serious advantage when it comes to shopping, there seems to be little M&A activity taking place in the fashion and retail sectors.

One recent exception was the acquisition by Pola Orbis Holdings of Australia’s Jurlique International Pty. Ltd. in late November. Another was J. Front Retailing, operator of the Daimaru and Matsuzakaya chains of department stores, which last month said it would purchase a 33.2 percent stake in Parco, a chain of mall-like fashion emporiums.

“We aren’t seeing a lot of M&A from Japanese companies toward foreign entities, but there is some domestic M&A activity between Japanese companies,” said Toshikazu Nishimura, a retail analyst at Daiwa SB Investments in Tokyo. “While this might pick up in the future, many [Japanese] companies are deciding to focus on strengthening their own businesses, rather than looking overseas and at M&A.”

Both Uniqlo’s corporate parent, Fast Retailing, and Japanese beauty giant Shiseido are looking to expand internationally and have said they are open to acquisitions if the right opportunity comes along.

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