MORE MERGER ACTIVITY, BUT AT LOWER PRICES, FORECAST BY ANALYSTS

Byline: Valerie Seckler

NEW YORK--Excess store space, sluggish sales and weak stock performances will keep the mergers and acquisitions action among retailers and apparel makers going at a steady pace--and keep a lid on the prices of those deals, as well.
That's the word from financial executives and analysts as they view an industry already dramatically reshaped by consolidations over the past decade.
"I look for a moderate level of activity this year, but the inexorable need to consolidate and cut costs as margins erode will keep the M&A engine going," forecast Peter Solomon, chief executive officer, Peter J. Solomon Co., a New York investment banker.
While the "overabundance of retail stores is driving M&A prices lower, it also is creating a need for retail consolidation," noted Alan Lafer, partner in Lafer Management Corp., a private investment firm in New York.
"The climate for acquisitions is generally fantastic now, but not for apparel specialty stores" on the selling block, Lafer added, speaking of the supply-and-demand dynamic that is creating a buyer's market.
Evidence of the trend has emerged in recent weeks as Neiman's sold its struggling, 239-unit Contempo chain to Wet Seal for just $1 million in stock.
In addition, financial analysts now expect U.S. Shoe's 1,300 women's apparel stores, anchored by Casual Corner, to fetch a far lower price than the $100 million or more the company reportedly had sought for the troubled $1.1 billion business.
Having reported a deeper-than-expected operating loss of $59 million in 1994, the main attraction of U.S. Shoe's apparel chains, which also include Petite Sophisticate and Casual & Co., is their real estate, analysts said.
However, an arbitrageur who tracks the industry noted, "Real estate values are horrible now, which is one reason M&A prices for apparel retailers are lagging. Real estate has a longer cycle than the stock market and hasn't come back from the crash after the overbuilding in the Eighties."
The arb pegged Carson Pirie Scott's reluctance to raise its $175 million bid for Younkers, in part, to real estate considerations.
"Given the competitiveness of the market, Younkers will have a hard time getting [Carson's] to pay up because of its leases," he said.
While the plethora of retail space has women's apparel merchants "semi-terrified" in the face of soft consumer demand, according to Solomon, sources noted that the excess, among other things, will drive the deals that do get done.
In fact, despite the dampening forces, analysts and investment bankers cited several reasons they expect a number of retail and apparel M&As through yearend. They include:
Sluggish apparel sales, compelling the weak suppliers to merge with the strong to survive.
Retailers' need to build productivity and cut costs, spurring further consolidation among merchants.
Attractive real estate values for buyers.
Banks looking to lend money at a time when interest rates are low.
The weak dollar, which could spark interest among foreign buyers.
Richard Hastings, credit analyst at Solo Credit Corp., Charlotte, N.C., observed that while there weren't a lot of mergers and acquisitions in the first quarter, he expects billions to be spent on future retail acquisitions.
In the first quarter, Carson's upped its unfriendly bid for Younkers to $19 per share from $17 and Italian eyewear maker Luxottica SpA made a hostile play for U.S. Shoe, with a focus on its Lenscrafters chain. In addition, Woodward & Lothrop said it was seeking a partner for a possible sale or merger, and Stuarts Department Stores, a 13-unit discount chain based in Franklin, Mass., stepped up efforts to attract a purchaser. Earlier this month, Neiman's sold Contempo.
On the supplier side, Leslie Fay shopped its Sassco, Leslie Fay Dress, Leslie Fay Sportswear, Nipon, Outlander, Castleberry and retail operations. Meanwhile, Heckler Manufacturing & Investment Group was bought by an investment group for $6.5 million, and the proposed sale of Eddie Haggar Limited, reportedly to Donnkenny Apparel, collapsed. Earlier this month, Signal Apparel ended talks to acquire Ocean Pacific Apparel.
Going forward, analysts and dealmakers foresee a steadily evolving landscape on which retailers continue to consolidate and suppliers ultimately follow suit.
"Since the overall retail climate is fair, interest rates haven't exploded and banks are looking to lend, strong retailers who wish to expand will have the wherewithal to do it," predicted Jeffrey Branman, managing director, Financo Inc., a New York investment bank.
"What makes this a better M&A environment than a few years ago is that the IPO market isn't hot now, so good small-to-medium firms that might have gone public may be sold," he noted.
"The urge to merge in America is being fueled by the need to grow earnings," said Lafer. "Well-managed companies generating cash are allocating funds to acquisitions."
Further, Lafer noted, "It is becoming more acceptable to do hostile takeovers if it makes good sense. In the past, white-shoe boardrooms felt hostile deals were bad for their image."
Analysts anticipate more department store acquisitions among larger and smaller players, with Federated Department Stores and May Department Stores Co. the chief hunters. Dillard Department Stores continues to bottom-fish the market, while Sears, Roebuck and J.C. Penney Co. are aggressively pursuing clusters of stores, analysts reported.
"Federated told a group of analysts last Monday that the Macy's acquisition doesn't mean they're not looking for other properties," said Steven Kernkraut, analyst at Bear Stearns.
Solomon noted, "Both Federated and May will continue to buy chains to build market share."
The hunted department stores, said analysts, include distressed retailers like Woodward & Lothrop and Broadway Stores, as well as smaller, regional operations like Bon-Ton and Proffitt's/McRae.
"I wouldn't be surprised to see something happening with Broadway in the third or fourth quarter," said Dillon Read analyst Peter Schaeffer. "They could close the Southern California stores, which are the big drain, and sell or continue to run the stores in northern California and the Southwest."
"[David Dworkin, Broadway chief executive officer] could put together a deal to keep northern California himself," the analyst added.
Sources said May Co. would be interested in the northern California stores, should they become available, while Dillard's would be a player for the Southern California units.
Among other large department stores, Schaeffer looks for the sale of Macy's Atlanta and the sale of Dayton Hudson's department stores--despite DH's insistence the division isn't for sale--this year or next.
"There still is lots of action left in the department store sector," said Financo chairman Gilbert Harrison. "I think we'll see more independents merging into larger entities."
Moreover, noted Branman, "In B malls, there's lots of empty space so retailers don't need acquisitions to get in. In A malls, a retailer has to take somebody out to get space. That's why there's so much interest in department stores."
Also ripe for consolidation are the discount chains, said analysts, though much of the action is still to come.
Solo Credit's Hastings said discounters need to consolidate to prop up falling gross margins: "For a company like Ames to have over 300 stores really creates volatility. There's too much dilution of gross margins."
According to Solomon, "There are seven or eight discounters--Bradlees, Hills, Jamesway, Caldor, Ames, Venture, Target--that should combine somehow, but it hasn't gotten done."
Assessing the discount segment, Schaeffer said, "I don't think Jamesway, Hills or Ames mean much anymore in the scheme of things. In the next few years, I believe they'll be gone, one way or another."
The analyst predicted that among discounters, "the next big moves probably are the acquisitions of Caldor and Bradlees by Target or Kmart. That will be the beginning of the end of regional discounters."
Some observers said Target's aim to expand aggressively will be hindered by the large size of its stores, limiting potential acquisitions. However, Schaeffer said, "At some point, Target has to realize it makes sense to acquire X number of stores and use Y amount of space, versus not making acquisitions," since it's faster and cheaper than building stores.
On other fronts, analysts foresee consolidation coming among off-price retailers like Marshalls, Loehmann's, TJX, Ross Stores and Burlington Coat Factory.
They also expect moderate apparel retailers in strip centers and B malls such as Dress Barn, Charming Shoppes and Cato to combine with other operations.
Further, analysts look for more mergers and acquisitions among suppliers as ever-larger retailers do most of their business with bigger resources.
"It's hard for May to deal with a $30-million dress company and get the uniformity they're looking for," observed Financo's Branman. "Also, suppliers can't afford EDI and other crucial technology if they're too small."
"There are lots of companies with sales of $100 million-$300 million that are looking to grow," Branman said, noting that some want to add lines to offer more complete packages to department stores, while others want to strike deals with retailers to integrate vertically.
Potential acquirers of apparel companies include VF Corp. and Phillips-Van Heusen, said Solomon, who doesn't anticipate a "surge of M&A activity in the soft goods area."
"There aren't many potential buyers," he added. "Branded companies will be acquired by major brands, like the Crystal/P-VH deal."
Also dampening deals among suppliers, said Financo's Harrison, are the "problems at Leslie Fay and London Fog, which have put a bit of a distaste in some people's mouths."
Nevertheless, Harrison said new companies that avoid a me-too approach are "still very attractive" takeover targets as are niche specialty retailers with growth prospects and good management.
"The A companies will still be sold at very high prices, but the Bs and Cs almost can't be given away," Harrison projected.--Fairchild News Service

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