NEW YORK — If 2005 was a blockbuster year for merger and acquisition deals, get ready for the sequel.

The global retail and apparel sectors had more than $200 billion in M&A deals last year, the bulk of them involving private equity money. And there’s just as much cash washing around in 2006 in hedge funds, private equity firms and institutional investors as well as strategic players.

The problem for all of them is the dwindling number of suitable companies to buy. As a result, financial sources predict the M&A scene could turn even more aggressive this year and valuations could go even higher. What makes the current market so intriguing is that all the players are looking at everybody — whether a company is officially for sale or not.

In the retail sector, private equity firms are likely to target retailers with low or manageable debt loads and sound management, as well as companies that are not mired in unsuccessful expansion efforts. Retailers that match those criteria include public and private firms such as Stage Stores, Belk and Bon-Ton Stores, all companies that have expanded their store bases via acquisitions.

Financial sources say rising interest rates later in the year may slow the pace of deals, but in the first three months of the year, the M&A market already has been on a wild ride. A list of some of the high-profile deals announced since late December includes:

This story first appeared in the March 20, 2006 issue of WWD. Subscribe Today.

  • Jil Sander to Change Capital Partners, a London private equity firm, for an undisclosed sum.
  • Tommy Hilfiger Corp. to Apax Partners for $1.6 billion.
  • Helmut Lang brand from Prada Group to Link Theory Holdings Co., Tokyo, for an undisclosed sum.
  • Saks Inc.’s Parisian unit is up for sale.
  • Burlington Coat Factory to Bain Capital Partners for $2.06 billion.
  • Federated Department Stores put Lord & Taylor on the block.
  • Sports Authority Inc. to an investor group affiliated with Leonard Green & Partners for $1.3 billion.
  • Body Shop International to L’Oréal for $1.14 billion.
  • Coles Myer Ltd.’s Myer business to a consortium led by Newbridge Capital, the Asian Pacific investment arm of Texas Pacific Group, for $1.02 billion.

  • Citizens of Humanity in a majority ownership deal with Berkshire Partners, a private equity firm, for about $300 million.
  • B.C. Moore & Sons to Stage Stores for $37 million.

    Industry sources said there are several acquisitions and divestitures in the works, including:

  • Jones Apparel Group possibly selling its Nine West unit.
  • The sale of Saks Fifth Avenue.
  • A&G Group’s possible sale of its luxury brands Asprey and Garrard to separate investors.
  • The sale of Laura Mercier and Kate Spade by the Neiman Marcus Group.

According to M&A trend tracker FactSet MergerStat LLC, there were $114 billion worth of announced global apparel and apparel-related deals last year, roughly $83 billion in the global retail sector.

Total global volume in the M&A market was about 38 percent higher in last year than in the prior year. Investment banker and advisory firm Financo Inc. estimates that 40 percent of the transactions in the U.S. involved private equity money.

Eighteen months ago, industry sources said there was about $120 billion in just private equity money on the sidelines, waiting to be invested. Sources estimate there is between $80 billion and $120 billion ready to be put into play. But will private equity investors continue to show interest in the retail and apparel sectors?

Paige Daly, partner at Apax Partners LP said 2005 was a big year for retail deals. “There were some high-profile deals like Neiman Marcus and Toys ‘R’ Us, but also a number of smaller and higher-growth companies that were snapped up.

“As long as consumers keep spending, leverage levels available to companies financing these acquisitions [remain constant] and valuations of public retailers remain at this level, it is not obvious to me why the trend shouldn’t continue,” Daly said.

Gil Harrison, chairman and founder of Financo, said recent M&A deals “will have a tremendous effect going forward.”

“The cornerstone deal of [2005] was Neiman Marcus, and I believe it’s going to be a burden as Neiman Marcus continues to grow its business,” said Harrison at a recent panel discussion at WWD. “In order to get returns, investors are going to need to build more stores and it will be a delicate balance to keep the Neiman Marcus facade the way it is and to keep the luxury sector the way it is.”

Deals involving financial players — such as Neiman’s, which was picked up by private equity firms Texas Pacific Group and Warburg Pincus LLC last October for $5.1 billion — often fetched premiums between seven and eight times pretax earnings.

Maggie Gilliam, analyst and retail consultant at Gilliam & Co., said the financial players have “sometimes been good for retail.”

“Sometimes the strategy is to strip the assets of the company, and that is not good for the retailer,” Gilliam explained. “A financial play can sometimes cut back on the expansion plans or do other things that are not good for the basic business. Sometimes the financial player can do things better than a strategic player. New York & Co. is one example where a financial player provided value to the retailer. Whether one is better than the other depends on the talent of the people involved and the priority of the buyers.”

What makes the financial plays risky is that just a handful of the investors have experience in the retail or apparel sectors. But they are quick learners, and, over the past five years, have bolstered their ranks by hiring retail executives. Still, there’s a learning curve, and the risks of delivering significant returns are high.

Robert D’Loren, chairman, president and chief executive officer of UCC Capital, observed, “There’s a tremendous amount of liquidity in the marketplace today. I don’t see that changing any time soon. The capital looking for deals is in all sectors, whether retail or apparel. Even other industries not traditionally targeted by the private equity groups are now getting some attention.”

D’Loren said the private equity investors “have to put the money to work, so they’re also putting the time in to understand risk in sectors they haven’t had experience with in the past.”

The pool of funds continues to swell, and the competition among financial players may intensify this year as a result. Larry Hamelsky, managing partner of Berkshire Partners, a private equity firm, observed, “It’s hard to say how much has been raised, but there’s still a lot of money out there to be raised. The firms are becoming very competitive. In order for these firms to succeed, they have to add value to their investment post-deal, and be nimble in terms of how to find the right investments.”

Retail and apparel are among many sectors that Berkshire Partners considers. Still, Hamelsky believes there’s “still a lot of attractive retail and apparel opportunities today.”

But what makes a suitable target?

Apax’s Daly said that, over the decades of investing in retail, Apax Partners consistently focuses “on companies led by great management teams and distinguished by outstanding unit economics. Those criteria will continue to be very relevant as we evaluate opportunities in 2006.”

Paul Altman, an investment banker at Sage, said, “The pace of activity continues in the retail and apparel sector. We see that the financial buyers are very active, and they are interested in looking at all properties. Before, many were overly concerned about fashion risk. But now they are finding ways to understand it better, understand the opportunities and the value that can be created.”

Altman said this is “a good time in the marketplace for merger and acquisition activity.”

From the viewpoint of the strategic player, the flurry of M&A deals by the private equity firms accelerates the pressure they feel from Wall Street to grow their business.

Peter J. Solomon, founding chairman of Peter J. Solomon, said the combination of retail consolidation, a low-interest rate environment and a market flush with cash is driving a lot of deals. He explained that, as companies grow and mature, shareholders and lenders wonder what their next act is.

Solomon said it is often difficult for companies to grow a significant amount of sales organically, which is what drives them to look at acquisitions. “These are the strategic plays that we’ve seen,” he said.

A consolidating sector where strategic acquisitions occur, such as last year’s megamerger of Federated and May Department Stores, puts competitive pressure on smaller companies that remain in the market.

There are also retailers that Solomon describes as “companies who may not be in a growth mode,” and that are not the prime targets of the strategic players. They end up as targets in a leveraged buyout, Solomon said, “where they get loaded up with debt.”

In addition to strategic players, private equity firms and hedge funds looking to make deals in retail and apparel, the industry may see investments this year from other sources.

A private equity investor observed: “There’s a ton of institutional money with nowhere for it to go. When people look at the stock market, they don’t see significant returns coming into that. Hedge funds were the panacea and they’re still getting enormous capital, which can’t go on forever. In addition, the returns are down at these hedge funds, so investors are now going to private equity. And returns at private equity over time have done better than those at hedge funds.”

2005: Year of the Deal
Top 10 announced M&A deals in the international and U.S. apparel and retail sectors

Price Tag (in $ millions)
Unit Sold
$3,520.5 Adidas-Salomon AG Reebok International Ltd.
$1,873.0 Harbor Holdings Beta Co. Ltd. World Co. Ltd.
$1,543.9 Apax Partners Worldwide LLP Tommy Hilfiger Corp.
$495.0 Safety Products Holdings Inc. Norcross Safety Products LLC
$382.5 Fenway Partners Inc. Apax Partners Worldwide LLP Targus Group International Inc.
$335.5 Harbor Holdings Beta Co. Ltd. World Co. Ltd.
$307.1 Carter’s Inc. OshKosh B’Gosh Inc.
$300.0 Coach Inc. Sumitomo Corp. Coach Japan Inc.
$282.9 Warnaco Group Inc. Fingen SpA Fingen SpA/wholesale and retail businesses of Calvin Klein
$174.0 Quiksilver Inc. Skis Rossignol SA
$11,609.5 Federated Department Stores Inc. The May Department Stores Co.
$5,925.1 Toys ‘R’ Us Inc. /private equity group Toys ‘R’ Us Inc.
$4,894.4 Texas Pacific Group LLC / Warburg Pincus & Co. Neiman Marcus Group Inc.
$2,430.0 Dunkin Brands Inc. /private equity group Pernod Ricard SA Dunkin’ Brands Inc.
$1,966.6 Woolworths Ltd. Foodland Associated Ltd. Foodland Associated Ltd./New Zealand and Australian store operations
$1,913.7 Violet Acquisitions Ltd. Somerfield plc
$1,795.1 MEP Retail Espana Cortefiel SA
$1,622.7 Société Dexploitation Des Magasins Société Anonyme des Galeries Lafayette SAGL
$1,582.5 GameStop Corp. Electronics Boutique Holdings Corp.
$1,386.2 Metro Inc. Great Atlantic & Pacific Tea Co. Inc. A&P Canada
Source: FactSet Mergerstat LLC. These are transactions with prices that were announced. The federated deal excludes debt.
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