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The apparel industry can expect another busy year of mergers and acquisitions.
Following a record buying spree in 2006, industry experts expect even more activity this year, not only from the usual suspects — the giant vendors and private equity firms — but also from midsize, mid-market firms looking for a way to compete in a consolidated world.
Last year was the apparel world’s busiest M&A year in more than a decade. The total disclosed value of deals in the industry in the U.S. and abroad more than doubled from 2005. There were 67 deals in 2006, up from 46 the year before, and their value skyrocketed 218 percent, to $4.26 billion from $1.34 billion, according to Factset Mergerstat, a leading provider of U.S. and international M&A information to the investment banking and corporate markets.
Among the acquisitions:
- Liz Claiborne Inc. bought Kate Spade for $124 million from Neiman Marcus.
- Kellwood Co. made smaller niche buys with Vince and Hollywould.
- Jones Apparel Group didn’t make any deals; it did attempt to sell itself, but dropped the idea when it failed to generate high enough bids.
- In September Sara Lee spun off Hanesbrands Inc. as a separate publicly traded entity, creating one of the largest apparel companies in the world with sales of $4.5 billion.
So far this year, VF Corp. sold its $350 million intimate apparel division to Fruit of the Loom and is completing its late 2006 deal to buy Eagle Creek, an adventure travel brand.
“Acquisition of growing global lifestyle brands continues to be an important part of VF’s growth plan,” a VF spokeswoman said in a statement. “While we will continue to be disciplined in our approach, both strategically and financially, we will continue to add lifestyle brands to our portfolio through acquisitions. We have said that we generally are not constrained in terms of acquisition size — we will consider smaller acquisitions and larger acquisitions, although there are fewer of the latter that would meet our strategic and financial criteria. We will look at lifestyle brands that fit VF’s Outdoor and Sportswear coalitions, in particular, although we will consider acquisitions for our other coalitions, as well.”
The consolidating giants are not the only players in the game, of course. Private equity firms have stockpiled $200 billion in investment cash, and are looking to buy and sell brands, as demonstrated by Jimmy Choo’s changing of private equity hands earlier this week.
But a third sector of investors is also looming: the $100 million-plus, predominately moderate and better vendors who are competing with the Claibornes and Joneses of the world for space on the retail sales floor. These companies are buying their competition or buying brands that can expand either their channels of distribution or their saturation of existing retail accounts.
But with everyone seemingly on the hunt, and so much activity last year, observers wonder: What is left to buy?
“A lot of the low hanging fruit has already been picked,” said Allan Ellinger, senior managing director at Marketing Management Group. “A lot of the compelling companies have already been acquired. The obvious brands have been bought. Buyers have to wade through more stuff to find what they want. It’s harder work with different criteria. They may be willing to buy companies that need a bit of fixing or brands that need a bit of polishing up.”
Ellinger still thinks 2007 will be an active year of acquisitions. “Virtually every company in our industry is for sale,” he said. “They may not have a For Sale sign on it, but everyone is looking for a strategic solution. They are either buying or selling. No one is standing still right now.”
Financo Inc., which focuses on retail and apparel, has “one of the best backlogs we have ever had in history,” according to Gilbert Harrison, chairman and chief executive officer. A month into 2007, Financo has already closed four deals.
“There are a lot of big companies that have already been acted on, but there are a lot of smaller and medium-size companies with $100 million to $400 million in sales that need big brother companies to go to the next stage,” Harrison said. “There are still a ton of private companies that are below many people’s radar screen — we are trying to dig them out. Then you have the companies that have already been bought by private equity firms that are starting to divest.”
Harrison worked on Kellwood’s acquisition of Hollywould last fall. Although the tiny, high-end label is hardly a classical fit for the $1.9 billion giant, Harrison points to that deal as representative of thinking outside the box. The predominately moderate Kellwood’s interest in Hollywould and Vince also shows the hot spot in the market, Harrison said.
“Everybody wants contemporary,” Harrison said. “Designer is very good, but the question that people ask is, how do you grow designer unless you develop a diffusion brand?”
Robert C. Skinner Jr., chairman and ceo of Kellwood, said the company’s focus was on upscale brands, and global and direct-to-consumer channels are both major pluses. “In the future, for us, acquisitions are primarily about quality and not necessarily size. This philosophy is a departure for Kellwood as well as many of our competitors, in my mind. It’s really about the quality of the company and its brand properties.”
Luxury is the key for Marc Cooper, managing director at Peter J. Solomon & Co., a New York investment banking firm. For strategic buyers, he expects to see smaller purchases, “because it’s the stuff that will have the growth.”
“I still think there will be activity, but far more selective than in the past,” Cooper said. “It’s not about filling holes in the portfolios anymore; it’s about growth.”
Paul Altman, principal at The Sage Group LLC, a Los Angeles investment banking firm, said brands would be the focus of deals this year. Accessories, specialty retail and niche market segments would also continue to be areas of interest, he added.
“We expect to see meaningful activity from both the large strategic buyers and the most active financial buyers,” Altman said. “We expect to see financial buyers play an even larger role this year, as they did in 2006 — low interest rates, strong lending from banks. Financial buyers have been driving up valuations, and we expect this to continue. Strategic buyers continue to favor businesses of significant size that will make a financial impact on their business, but recognize that certain brand or market opportunities may require them to look at smaller-size transactions.”
Jones ceo Peter Boneparth, once famously quoted as placing a $100 million threshold on investments that could move the needle of the company’s sales and share price, today says he is open to smaller deals.
“There are realities of our size that make certain small deals impractical, but I wouldn’t draw a line about what the size must be,” Boneparth said. “If it is a $40 million business and we think it can be a $500 million business, we would buy it. It’s not so much the initial size as the growth potential.”
Jones has not made a buy since it acquired Barneys New York in 2004 for almost $400 million. Boneparth said Jones’ infrastructure had been streamlined since then to be more capable of seamlessly incorporating an acquisition. He added that “the settling of the dust” on department store consolidation “gives us a better opportunity to focus on growth and acquisitions without worrying so much about what will happen on the retail level.”
Of course, Jones hasn’t given up the idea of selling itself, sources have said. The vendor is said to be mulling a possible break-up of its operations, or an initial public offering for the Barneys New York division. Boneparth said his success with Barneys had made him more interested in the contemporary market — an area where many of his competitors also are trawling for acquisitions.
“The bottom line with companies like us and Liz is, we look at everything — specialty, contemporary, international — that further diversifies us, either by product or distribution channel, with superior management that we believe will enhance long-term shareholder value,” he said. “There are always opportunities. Marrying our criteria with what is out there is the tricky part. We tend to be very conservative on valuation. We felt in the past year many of the deals didn’t make financial sense.”
Over at Liz Claiborne, the first full year under new ceo William L. McComb may not be as acquisition happy as the decade under his predecessor, Paul Charron.
“Deals will remain an important component of growth, but we do not want to rely too much on acquisitions,” McComb said. “We want more growth to come organically. When we do acquire, we are interested in companies that will deliver capabilities and/or platforms and presence that are leverageable across some of our other businesses. Brand power is a must.”
Robin Lewis, an industry consultant, noted, “The major publicly owned companies, like Liz Claiborne, VF Corp., Kellwood and others, will definitely continue to seek acquisition opportunities for two reasons: 1) To be able to deliver above-average growth to Wall Street and their shareholders, they must acquire, and 2) strategically, they need to continually find growth in new consumer markets, product categories and distribution channels, on the front end of their businesses and to leverage their huge operating platforms on the back end of their businesses.”
Lewis added that continued investments were necessary for these big companies to keep pressure off over-growing individual acquisitions.
“You can’t build a brand to the sky,” Lewis said. “Wearing the brand that’s available to anybody makes it uncool to everybody. So the smart companies like Liz and VF are looking for hot emerging lifestyle brands that are tightly focused on a precisely defined consumer niche, like The North Face or Juicy Couture. They will then lever their marketing, financial and operations assets to expand those brands, not to ubiquity, but within the limitations of the niche’s consumer base.”
For nongiants looking to compete with the consolidators that have long taken acquisition steroids, becoming a player in 2007’s M&A frenzy is on almost everyone’s radar. Big companies may be passing up “those pseudo-branded moderate vendors that are cash machines rather than growth engines,” said Solomon’s Cooper.
Consultant Emanuel Weintraub, who is hosting an April seminar entitled “M&A: Finding the Strategic Fit,” said he had a $40 million accessories client that bought another $40 million company, “their competitor, who they didn’t think was well managed,” according to Weintraub, who declined to disclose the parties in the deal. “You will have these kinds of smaller niche players who will acquire more poorly managed companies,” he added.
As the big guys are targeting luxury and contemporary branded opportunities, midsize, mid-market companies are targeting themselves as mergers or acquisitions, giving all these companies the potential to be both the acquirer and the acquired.
H.M.S. Productions Inc., which does more than $100 million in wholesale volume with its better brands Spenser Jeremy and Cable & Gauge, is one of those firms that is looking to buy and is being eyed as an acquisition, according to chairman Nubby Alpern. Alpern views both possibilities with an open mind, but also with caution. He would consider buying a better brand that does about $20 million in wholesale volume, and would only sell to a company that could benefit the company.
Tracy Evans Ltd., a $300 million predominately moderate vendor, is ready to make bigger leaps. Tracy Evans received the license for Harvé Benard last year, after Wellington Capital Partners acquired the better business, giving Tracy Evans an entree into the better market. Since then it has acquired Star City, a moderate junior brand, for between $6 million and $7 million. The New York firm is looking to expand its portfolio with companies that do at least $50 million in volume.
At the end of 2006, Rousso Apparel Group, a predominately moderate firm, partnered with a private investment arm of Li & Fung to acquire better-bridge brand GarfieldMarks. In 2007, the Rousso-LF team plans to make additional acquisitions, which will expand Rousso’s better-plus segment beyond the quarter it now contributes to the $200 million business. Michael Hsieh, president of LF USA Investments Inc., an investment arm of Li & Fung, said he and Rousso planned to make additional deals for brands that do $10 million to $50 million in revenue and cost $3 million to $10 million in transaction.
“We are looking for companies with strong marketing and product management who leverage off our operations and financial base,” Rousso said. “Our goal is to acquire companies that have owned brands and brand equity. We feel brands are the future and key to the survival in the industry. We are not limited to a specific market, but would focus on companies in the better, bridge and contemporary arena.”
Wellington Capital Group, which bought Harvé Benard Ltd. for $12 million in September, is open to buying “anything,” as long as it does at least $50 million in wholesale volume, according to ceo Joseph Gabbay. “We have the money to spend. It’s just a matter of finding the right deal,” he said.
Hilco Consumer Capital LLC is another firm that hopes to leverage the confidence it has gained from a recent deal into future acquisitions. After acquiring Apparel Holdings Group (which does in excess of $200 million), which it renamed CJ Apparel Group, at the beginning of this year, the Toronto company is “very eager” to buy two or three more companies this year, according to James Salter, Hilco’s ceo. “Revenues, or licensed revenues, must have a minimum of $250 million at retail,” Salter said, adding, “Most important for us, though, is brand.”