Money, money, money/always sunny/in the rich man’s world” are lyrics from an Abba song that describes a working stiff’s dream of riches.
And suddenly in the world of fashion and retailing, there’s more money than ever. One estimate places the amount of private equity available at more than $100 billion. Hedge funds, investment banks and strategic players are all awash in cold hard cash — and they’re looking to spend it. Even better, it’s a buyers’ market and they can afford to be choosy about which properties they snap up.
This year alone has seen major deals to buy Mervyn’s, Marshall Field’s, Ocean Pacific, Mudd, Maidenform, Tumi and, just last week, Barneys New York. And there are plenty more companies looking for similar deals.
Industry giants such as Jones Apparel Group, Kellwood Co., Liz Claiborne, VF Corp. and Warnaco Group are always on the prowl for the right fit. But increasingly, these fashion suppliers are competing against financial players — mostly private equity firms — such as Apollo Management, Bain Capital, Kohlberg Kravis Roberts & Co., Sun Capital Partners and Vestar Capital Partners, to name a few.
While small fashion firms such as Jill Stuart and Nanette Lepore are exploring various avenues and opportunities, the deals more likely to get completed sooner rather than later are those that have an established brand presence and potential for growth.
Take Barneys: Last week, Jones added luxury to its holdings by inking a $400 million deal to buy the tony chain. Barneys was on the market for a mere four and a half months, but it has an established flagship business and an expanding Co-op concept. And, while there can be debate over how many more flagships, and Co-ops, the business can support, it does benefit from the tailwinds of a continuing boom in luxury goods.
A retailer such as Fortunoff faces the same question: How many Fortunoffs can the market support, and in which geographic locations? While Apollo Management had been a leading contender, its bid — financial firms can be notoriously cheap — isn’t likely to satisfy the $250 million the Fortunoff family is reportedly seeking.
This story first appeared in the November 15, 2004 issue of WWD. Subscribe Today.
Paul Altman, vice president at investment banking firm The Sage Group, observes: “The financial buyers won’t replace your strategic buyers, but they are getting more comfortable in purchasing retail and apparel firms. However, in general, you can almost always expect the strategic player to pay more because of synergies that are brought to the table.”
The problem for some sellers is that many of the strategic buyers these days are window shopping, walking away from opportunities for one reason or another. That should, one would think, leave the door wide open for financial players to move in for the buy.
Eddie Bauer, whose parent is bankrupt Spiegel Inc., has been on the auction block for several months now, with no signs of a buyer in view. Several financial firms — Apollo, Bain and Cerberus Capital Management — spent considerable time conducting due diligence, and bids were submitted in August, but a deal isn’t likely to happen anytime soon. Last week, Spiegel began telling potential bidders not to bother submitting offers because it was going to instead file a plan of reorganization for the retailer. That could change, but only if Spiegel gets an offer for substantially more than what’s been put on the table so far. Early in the sale process, analysts believed that Eddie Bauer could fetch the $1 billion that Spiegel wanted, but that was before all the would-be strategic buyers walked. With just financial players in the game, a bid in the $675 million range was far lower than what was hoped.
Casual Corner, newly listed, also might find itself in a waiting pattern for an undetermined period of time, despite a real estate portfolio of still-decent store sites. A source said apparel giants Liz Claiborne, Jones and Kellwood were given the book, or sales prospectus, as well as certain financial firms that would be able to utilize the retailer’s extensive real estate portfolio. So far, no one has submitted any bids, the source said.
And Donna Karan — which LVMH Moët Hennessy Louis Vuitton bought in 2000 for $645 million ($450 million for Gabrielle Studio, the privately held licensor of the Donna Karan trademarks, and $195 million for Donna Karan International, the publicly held company) — is one brand the French group reportedly might consider selling at the right price. The problem is that no one expects LVMH to recoup its purchase price, not even from the deep pockets of financial buyers.
Then, of course, there is the conundrum of a playing field comprising primarily financial buyers. The funds are sitting on more cash than opportunities and have the pressure of putting that jingle-jangle to work. Many times, the deep pockets stay closed, and often it’s because they don’t want to pay a lot for what they do buy.
A new player in town these days is the so-called hedge fund, a breed of investment firm that no longer really “hedges” in the true sense of the word, but takes a stake in a sector and holds onto the investment for an undetermined period of time. Think Edward Lampert of ESL Investments, which has stakes in Kmart, Sears, Auto Nation and Auto Zone.
“These guys have more money than they know what to do with. Some are my clients, using my research to make decisions by looking at 100 to 150 data points. But many also don’t even bother to go into the malls, even though they really should get a look at the product if they’re going to make an investment in fashion. There’s a $200 billion hedge fund that made a $50 million investment in a footwear firm, and has another $100 million pouring in that it has to figure where to invest that new money,” says Dan Hess, a former retailing executive who founded Merchant Forecasts, a market research firm.
“The guys at the hedge funds, in particular, are terrified. The problem is that they don’t know where they can get an edge or where to go to get better [investment] ideas. And they’ve got all this money that keeps flowing into the funds. Their big problem is that they don’t know how to outperform the market,” notes Peter J. Solomon, of the investment banking firm that bears his name.
So where is all this money coming from? And how long will the trend continue?
According to David Mussafer, managing director at Advent International Corp., “The flow of capital into private equity and hedge funds will continue to be very robust. Many of the larger pension funds, foundations and endowments are targeting a bigger portion of their investments into higher-yielding categories. What is occurring is that those funds are being shifted toward private equity and hedge funds.”
Mussafer explains that a “dramatic decline in certain bond yields” and the lower overall expectations for public equity market returns are two of the reasons why money is flowing out of the traditional investment vehicles.
“Many of these funds, particularly pensions, have fixed obligations that are required to be paid each year. As managers put an asset allocation model together, what they try to do is figure out what type of asset mix is needed to reach an overall return goal of 8 or 9 percent. Because of the returns from traditional investments, they have been looking at increasing their exposure to private equity and hedge funds to reach those return thresholds to avoid being underfunded,” says Mussafer.
He also expects continued interest in retail and apparel, mostly because the sector is considered a “leading indicator for the economic cycle.” Consequently, as people believe that a rebound is occurring, they’ll target investments in the sector to take advantage of early economic strengths, he explains.
Of course, private equity firms always have been active in retail and apparel. For example, Vestar’s past and current investments include Avondale Mills, Sun Apparel Inc. and St. John Knits. Palladin Group has been active as a financial adviser to Jones with its acquisition of Nine West Group in 1999 and Sun Apparel in 1998, and later as investors in Spencer Gifts and Restoration Hardware Inc.
For Richard Baker, president of Ocean Pacific Apparel Co., there are times when a financial buyer can give a firm the “oomph” it needs to get to the next level and other times when a strategic player makes more sense.
Baker and his partners in the San Francisco-based investment group Doyle & Boissiere acquired OP from Berkeley Capital Corp. in 1988. Under his leadership, OP became a think tank for a portfolio of licensees, with OP working closely with them from conception to distribution. In the process, Baker repositioned the brand as a classic American one rooted in the California beach lifestyle. But to take it to the next level of growth also meant figuring out who would make the best lifetime partner. While both strategic and financial buyers looked at OP, in the end, it was Warnaco Group Inc. that presented both a better price and greater opportunities for growth.
“It completely depends on the situation involving both the acquirer and the acquiree. In a purely financial situation, there’s one set of boundaries. In our deal with Warnaco, it was both financial and strategic. It was a case where it was a win-win for both companies. A successful public company fit our strategy, and our company’s [business and operations] fit their plans,” explains Baker.
LF International Inc., the investment arm of Hong Kong-based global sourcing firm Li & Fung, invests in consumer products firms, but unlike the typical five- to seven-year exit strategy that many funds employ, LF tends to hold on to its purchases far longer. Investments include Wilke Rodriguez, Millwork Trading Co. and Danskin.
Michael Hsieh, president of LF International Inc., says that he’s not sure if financial players are positives for fashion and retail firms.
“I think that remains to be seen. Our investment focus is on buying the whole company, firms where we can bring our global sourcing capability to help the firm increase margin and operating profit. We feel that the synergy [we bring to the table is] our expertise in managing the supply chain,” Hsieh adds.
Richard Kestenbaum, partner at Triangle Capital, notes that there’s been an increased focus on retail and apparel firms because technological systems are now in place that allow for a certain comfort factor in the predictability of earnings.
“The systems now in place, which was not the case before, makes it harder to manage a business by one’s guts. The systems allow earnings to exist that are less likely to be one-time events. That makes the industry more attractive for a financial buyer than it used to be,” Kestenbaum points out.
He believes that financial owners can be good for fashion and retail firms, particularly since they can impose financial disciplines, such as strict inventory management, on which private owners are less inclined to focus. In addition, the banker notes, financial buyers sometimes will build other platforms, such as holding companies owning synergistic firms, that in time become strategic buyers.