Don’t expect a slowdown in M&A activity anytime soon, particularly after Foot Locker’s $1.2 billion tender offer Friday for all the outstanding shares of Genesco Inc.
On deck are the possible sales of Barneys, Gottschalks, Betsey Johnson, Nanette Lepore and Joseph Abboud, said financial sources.
This story first appeared in the April 23, 2007 issue of WWD. Subscribe Today.
For now, though, players in the M&A market were digesting Foot Locker’s bid for Genesco. As first reported in WWD last month, Foot Locker’s $46-per-share bid Friday was in the works for some time. The retailer disclosed an April 6 letter to Genesco’s management that stated the dance between the two was ongoing for several months. A follow-up letter was sent Thursday stating the retailer’s intent to go public about the bid on Friday. Those months certainly gave Genesco, which it is believed does not want to be owned by Foot Locker, time to find a so-called white knight. Sources said Genesco had been meeting with private equity firms. Speculation on Wall Street is that Foot Locker’s next step is a proxy fight to unseat Genesco’s current board.
One investment banker expects the M&A market to maintain a heady pace. “I think for the next six months there’ll be a lot of activity. It’s not like all the money is spent. There are estimates of up to half a trillion, or at least a couple of hundred billion, that’s still available for investment,” said Frederick Schmitt, an investment banker at the Sage Group, a firm that advises apparel companies and catalogue-retail operators that are looking for a buyer.
The banker said some investors were paying closer attention to the credit markets to see if the banks were still willing to finance deals. They were also assessing the overall health of the economy, including consumer spending. Even if the economy slows somewhat, Schmitt doesn’t expect M&A activity to stop.
“The strategics don’t need debt financing, but the financial groups do. If banks are less willing to finance deals [meaning they will still lend, but lower amounts], the financial buyer will have to decide whether the deal is worth putting more equity into the transaction,” Schmitt said.
He said he thought there was still sufficient interest in retail, as evidenced by the recent acquisition of Claire’s Stores Inc. by Apollo Management for $3.1 billion. As for apparel brands, the banker expects more deals in that sector, too.
“This is still a seller’s market. And even though many deals have been done, you’ll still see more. The money is still out there and, at a price, everybody’s a seller,” Schmitt said.
There were 67 deals in the retail and apparel sectors in 2006, up from 46 the year before, and their value jumped 218 percent, to $4.26 billion from $1.34 billion, according to Factset Mergerstat.
“The appetite for good companies with strong growth prospects at fair prices remains very high. The capital remains available to finance transactions and the economy is still good. Right now, many public companies either have been priced in the market above fair value or may not have strong enough growth prospects to meet the criteria. The market has reached a point of efficiency,” said William Susman, president and chief operating officer at investment banking firm Financo Inc.
Brands sold in recent months include Hollywould and Vince, both to Kellwood; Bill Blass, to NexCen; Danskin and Rocawear, both to Iconix; Jimmy Choo, to TowerBrook Capital Partners, and Bruno Magli SpA, to Fortelus Capital.
Among the retailers recently sold were Claire’s and Dollar General, bought last month by Kohlberg Kravis Roberts for $7.3 billion, plus $380 million of net debt.
Waiting in the wings are expected deals for Barneys New York from a Middle Eastern bidder; a Kohlberg Kravis Roberts/Stefano Pessina bid for U.K. drugstore chain and pharmaceuticals wholesaler Alliance Boots plc that might be topped by British buyout group Terra Firma, and a decision on Value City within the next few months. There is also an expectation in the market that The Limited will soon shed its apparel divisions.
Bankers and private equity sources said Bain Capital, which bought Burlington Coat Factory in 2006 and later that year walked away from a deal for Jones Apparel Group, was seriously interested in Value City earlier this year, but has since dropped out of the bidding. Sources said the entities still interested in Value City were all financial players.
Susman, whose firm represents Value City, would only say that the sale process is “proceeding.”
Retailing chain Gottschalks is said to be on the auction block, and Istithmar, which is based in Dubai and already owns Loehmann’s, supposedly is taking a look. Bankers have said Gottschalks is a chain that could be an interesting sale since its stores are not uniform in size.
In the men’s and women’s wear segments, Betsey Johnson, Nanette Lepore and Joseph Abboud are in play, according to sources.
Sage Group is said to be financial adviser to Johnson and Lepore. Schmitt declined comment. The women’s wear firms are believed to be profitable, and are considered well-recognized brands, according to industry executives.
J.W. Childs Associates L.P. bought men’s wear brand Joseph Abboud in 2004 for $73 million, less debt. Investment bankers said the private equity firm was initially seeking $200 million for the company. An apparel executive, who has been eyeing the brand, said the price had been lowered to the $150 million range. The executive, who requested anonymity, said his company was not bidding since the price was still high, even at the reduced amount.
Li & Fung also is believed to have taken a look at Abboud, but supposedly walked away. Two brand management firms, NexCen and Iconix Group, are said to be circling the brand. Executives at NexCen and Iconix declined comment.
NexCen, which owns Bill Blass and The Athlete’s Foot as well as the home brand Waverly, is looking at Kahala Corp., a privately held corporation focused on the franchising of quick-service restaurants, according to investment bankers. The Kahala umbrella includes Blimpie, Samurai Sams and TacoTime. NexCen recently bought Maggie Moo’s, an ice cream franchise chain.
Iconix, meanwhile, is digesting its Rocawear acquisition, and has recently incorporated brand purchases Op and Danskin. It has under its umbrella Badgley Mischka, Bongo, Candie’s, Joe Boxer, London Fog, Mossimo and Mudd. Sources in the home sector said it also, on and off, had made overtures to buy Pillowtex.
So what makes a company, particularly a brand, salable?
“If you have a good brand, with a strong growth profile, you’ll attract both financial and strategic interest. The key is growth. Profitability is important. Everyone wants a popular brand with stability, but the most attractive feature in terms of its future is the ability to grow the brand,” said Sage’s Schmitt.
Robin Lewis, a consultant with his own firm, predicted that strategic acquirers would continue searching for the next hot brand, or at least one they could grow. “To grow a business organically when you are public and get the 10 percent to 15 percent growth rate Wall Street wants isn’t going to happen. The only option is through acquisitions in order to deliver that kind of growth.”
There are other challenges for strategic players. With the Genesco deal, Standard & Poor’s Ratings Services said it would keep Foot Locker on “CreditWatch with negative implications.”
“Because Standard & Poor’s expects that a significant portion of the $1.2 billion acquisition price could be funded with debt,” said Standard & Poor’s credit analyst David Kuntz, “this would result in a deterioration of Foot Locker’s credit metrics and a likely downgrade.”
The ratings firm said in a statement that it placed the ratings for Genesco on CreditWatch with “developing implications.”
“If any downgrade to Foot Locker is limited to two notches,” said Kuntz, “we would raise the rating on Genesco to the Foot Locker level if the transaction is completed.”