WWD.com/business-news/legal/ma-forges-ahead-despite-uncertainty-3156458/
government-trade
government-trade

M&A Forges Ahead Despite Uncertainty

Global retail mergers and acquisitions are on the rebound, and Europe is the center of attention.

Forget the cranky consumer and schizophrenic investor. Global retail mergers and acquisitions are on the rebound — for now — and Europe is the center of attention.

This story first appeared in the June 28, 2010 issue of WWD.  Subscribe Today.

Dealmakers have been pulling billions from their coffers for the right companies, and the questionable U.S. recovery, the European debt meltdown and stock markets’ gyrations are being seen more as potholes than roadblocks. Deep-pocketed investment funds are trying to snatch up quickly growing brands on the cheap, and strategic acquirers are looking to transform and win the postrecession consumer.

Already this year, the value of global acquisitions of apparel manufacturers, as well as apparel and shoe, jewelry and department stores jumped 133 percent to $11.28 billion, according to Dealogic. And Europe led the way despite questions about the viability of the euro and sovereign finances.

Europe rang up $6.98 billion worth of deals in the four sectors this year, even excluding BCBG Max Azria Group and Nicolas Berggruen’s agreement to buy Karstadt Department Store Group, which is technically a holding company and not considered a retail transaction by Dealogic.

The global retail M&A dollar figure advanced despite a decline in the number of deals to 207 from 280 at this time last year, indicating companies are starting to take bigger bets as they consider combinations.

Still, the value of the acquisitions, including completed and announced deals, is well below the $29.09 billion seen at this point in 2007. Nobody expects to see that level of activity for some time, especially if the stock market’s wild shifts begin to cool the deal flow.

“Given that the M&A market tends to lag the stock market, we’re really in a place of uncertainty now and likely won’t know the greater impact of the volatility until some point probably later this summer,” said Andrew Crawford, principal at Advent International, a private equity firm that owns Charlotte Russe and has a track record of investing in retail.

“So far, so good,” said Allan Ellinger, senior managing partner at Marketing Management Group. “Nothing is slowing down, nothing is being impacted.” Private equity firms are still coming back to the market itching to spend, and strategic players can’t wait on the sidelines forever, he said.

“There are still plenty of buyers out there in all premium branded consumer categories, including beauty, watches and jewelry and spirits,” said Karen Walker, senior managing director of Michel Dyens & Co., an investment banking firm in Paris and New York specializing in luxury and beauty.

The market is being very selective and focusing on strong brands. “There is less appetite for weaker brands to turn around,” Walker said.

Still, it is harder to sell a company when investors’ views on what it’s worth swing drastically from day to day. In the U.S., the S&P Retail Index rose 0.6 percent to 407.72 Friday, 22.6 percent below the sector’s recent high on April 26.

“For public companies that are considering using their own equity as takeover currency, a fluctuating stock market is potentially chilling,” said Douglas Hand, partner at Hand Baldachin & Amburgey. “You can’t tell what you’ve got in your takeover offers.”

Despite the short-term ups and downs in stocks, the strategic rationale for expanding is unchanged and companies are still looking to widen their bases by tapping into new consumers or regions.

“It’s certainly made life more challenging,” said Kenneth T. Berliner, president of Peter J. Solomon Co. “But I don’t believe that people are stepping away from transactions. Money is still available for the right deal, and rates are historically low. If something really makes sense, people should pull the trigger.”

It might be midsize companies that get targeted as bigger deals face a particularly challenging environment given the economic uncertainty of the past few months, according to an outlook from PricewaterhouseCoopers.

“Going into the second half, record dry powder in the private equity space and unprecedented cash levels on the balance sheets of corporate America will combine with the desire of family-held businesses and private equity-backed management teams to sell prior to looming tax increases,” said Bob Filek, a partner at PricewaterhouseCoopers.

The outlook noted U.S. retailers facing a lackluster consumer would focus on acquiring businesses that help them tap into emerging markets as well as Europe, where prices on specialty firms have been depressed by the downturn.

“Values are good, but they’re not crazy: They’re exactly right for deals to happen,” said Pierre Mallevays, managing partner of Savigny Partners, a London-based boutique investment bank specializing in luxury goods.

Mallevays said investors were keen on luxury’s growth prospects given the rise of affluence in China. And he noted the emergence of a “new universe of investors,” mostly individuals and “family office” funds, such as Europe’s Bartel family, which holds minority stakes in Lanvin and Devi Kroell, and Vienna-based Labelux Group, whose brand stable includes Bally, Derek Lam, Solange Azagury-Partridge and Zagliani.

Strategic acquirers are also looking to fill out businesses they already have and to branch out into new markets.

Jones Apparel Group added to its footwear cred by acquiring a majority stake in shoe and accessories firm Stuart Weitzman Holdings for an initial payment of about $180 million. But the financing of that deal illustrates some of the perils of the market. On May 6, the company said it planned to sell $250 million in bonds to pay for Weitzman, but retracted the offer later that day following the infamous Flash Crash that pushed the Dow down 1,000 points. Jones eventually covered the cost of the deal with cash on hand.

By and large, though, there is money to be had, and for the first time in a long while, there appears to be more buyers than sellers in the market.

Private equity funds have billions on hand — nearly $850 billion, according to PricewaterhouseCoopers — and are facing growing pressure from their investors to spend it or give it back. The problem, observers say, is that there are two kinds of deals out there right now: brands so broken they aren’t worth fixing, or companies that are strong — and thus command a higher purchase price.

“Globalization and new areas of growth remain the main driving forces of the acquirers,” said Karine Ohana, partner at Ohana & Co., an investment bank based in Paris and New York. “New markets such as e-commerce are the new El Dorado of the luxury groups. There is also an acceleration of demand of Asian brands in the luxury and cosmetics markets.”

Ohana said there have been some “bold transactions” already this year, from Richemont’s acquisition of 100 percent of online retailer Net-a-porter and PVH’s purchase of Hilfiger to Shiseido Co. Ltd.’s buy of mineral makeup company Bare Escentuals Inc.

“Companies are ready to accept more reasonable prices and are beginning to put things on the market,” said Tugba Unkan, managing director of Fung Capital in London. Fung Capital is the private equity partnership of Victor and William Fung of Li & Fung Ltd.

“We do our deals in dollars and see this moment as one of opportunity,” Unkan explained. “Companies are seeing pressure on their margins because of the weakening euro and the stronger dollar, and suppliers are seeing pressure on their gross margins. Next year will be a tough year for all retailers because of the pressure on margins. I think a lot of foreign buyers are looking to Europe right now as retailers are in difficulty.”

After hitting a four-year low this month, the euro has rebounded some, but on Friday was still trading below $1.24, far from its 52-week high of $1.51.

While acquirers are eager to do deals, they won’t do them at any cost. The bar is being set much higher.

“We are looking at fundamentals in a slightly different way than we would have a few years ago — precrash,” said Chris Spira, founding partner of London-based New Spirit Group, which is looking to invest in companies with revenues of less than 20 million pounds, or $30 million at current exchange.

“In the old days, if a company had a great brand with great potential and no profits, we would have built it up with cash and looked for a three- to five-year return on the investment,” he said. “Today we are more cautious: We’re still looking at the brand, but also at top-line growth, and the company has to be profit-making or at least breaking even. It cannot be loss-making.”