LOS ANGELES — Call California’s garment entrepreneurs passionate or prickly, unorthodox or exasperating. Whichever, investment bank The Sage Group LLC has a soft spot for them.
The wealth of small- and mid-sized beauty and apparel companies based here — and the fact that new creative talents crop up each year — persuaded the two-year-old bank to take an untraditional route and plunk its headquarters on the Left Coast rather than on Wall Street.
Soon after arriving, the company stirred things up with the $86 million sale of Earl Jean to Nautica Enterprises, a deal that generated wide envy — at the time of sale, Earl’s revenues were under $40 million, according to Sage — and a ripple of smaller denim deals in its wake. Earl’s deal is potentially worth $86 million in a deal combining cash, stock and other compensation.
Sage now has multiple deals in progress, but executives would say only that they’ve issued an official sell memorandum — a hefty prospectus detailing a firm’s strengths and weaknesses — on two apparel companies and one beauty brand.
“We’re in the market now with those companies, speaking to potential buyers,” said Sage chief executive officer Mark Vidergauz. “There is always an active universe of buyers constantly looking for profitable acquisitions, so it’s an exciting sector for us.”
These current deals represent between $500 million and $600 million in volume, according to Vidergauz. Since inception, the aggregate volume of Sage’s apparel deals is $700 million.
The apparel companies for sale are rumored to be “sexy” brands, which have built their following in a manner similar to Earl Jean.
Vidergauz and cofounders Brien Rowe and Daniel Gardenswartz believe mergers and acquisitions — Sage’s specialty — is a vital step for rapidly growing, emerging companies.
“You’ve got these creative designers running the companies and they scramble to get it to a certain size,” Vidergauz said. “But at some point, they end up risking the business trying to take it to the next level.”
Certainly, California is littered with apparel’s version of one-hit wonders. But that kind of churn is exactly what attracts large conglomerate buyers in Europe or New York. New ideas have long bubbled out of California and been gulped up by corporate outfits elsewhere — case in point, Liz Claiborne’s acquisition of Lucky Brand and Laundry by Shelli Segal, as well as Estee Lauder’s consumption of Stila.
And Vidergauz doesn’t see the appetite for acquisitions diminishing any time soon.
“We’ve met with a lot of the senior executives of major apparel companies and they’re all saying that they need to make three to four acquisitions a year to meet Wall Street’s expectations,” he said. “I know they’ll continue to look at the West Coast for fresh ideas.”
With its focus squarely on apparel and personal care and a roster of former Wall Street bankers, Sage is one of the first companies on the West Coast to try to bring a specific, analytical discipline to the kind of deal-making that proliferates here. They release quarterly apparel briefs analyzing market valuations of publicly traded firms and examining the prices conglomerates like Jones Apparel Group, LVMH Moet Hennessy Louis Vuitton and Gucci Group paid to acquire companies.
By contrast, the industry here is a tangled web of investments and backer arrangements, with company owners holding private stakes in a diverse array of enterprises. Most of those deals are brokered by lawyers and accountants at the request of clients, with varying degrees of forethought and success.
“Apparel companies mostly have CPAs put these deals together,” noted Paul Herold, vice president of Capital Factors. “Sometimes, it gets too simplistic. They have one client with tons of money and another who needs backing.”
Ben Freiwald, who co-founded Earl Jean with his wife, Suzanne Costas-Freiwald, said Sage Group was “infinitely patient” in producing the 100-page sell memorandum for Earl Jean.
“It was Sage that really figured out Earl was a distinctly American company, that we should have an American parent,” he said. “We did talk to the traditional European buyers and went down the road with one particular company, but we never went as far as learning how to speak Italian.” He declined to disclose the name of Earl Jean’s Italian suitor.
“Earl was our baby, so it would be so easy in retrospect to be dissatisfied, but I can’t find anything I would change,” Freiwald added.
Bruce Berton, director of accounting consulting firm Stonefield Josephson, which arranged Claiborne’s purchases of Lucky and Laundry, said he thinks Sage will do “quite well” provided they take time to study the industry.
“It’s clear [Sage] can handle big deals, but they’re looking at companies in the $50 million to $100 million range, trying to duplicate the Earl-Nautica thing,” Berton reflected. “There are a lot of guys out there that this would work for, because large manufacturers like Liz use these deals to get additional real estate in the distribution they already have. That way they don’t cannibalize their own sales.”
Because it’s very expensive to start up a new division and often difficult to produce a vibrant brand from a boardroom, Berton noted that conglomerates are “paying top dollar for purchases like Earl Jean.”
And although accounting horrors would seem to have dimmed the average investor’s enthusiasm for mega-companies, Vidergauz predicts acquisition will remain a primary growth vehicle.
“I would bet on a large number of acquisitions before yearend,” he said. “I hope they involve our clients, but there will be these deals either way.”