With $4.5 trillion in dry powder that needs an investment home, bankers expect to be busy helping to make deals happen.
And while these bankers can advise on a range of activity from initial public offerings to recapitalizations, the main game in town is still expected to be on the mergers and acquisitions front. That was one conclusion from a roundtable discussion on “The Deal Makers — Fashion M&A Today.” The panelists were: Kathy Elsesser, global co-head, consumer retail and healthcare, investment banking division, Goldman Sachs; Lisa G. Clyde, global head, consumer and retail investment banking, Bank of America Merrill Lynch, and Marc S. Cooper, vice chairman, Peter J. Solomon Co.
According to Elsesser, there are “big secular shifts at retail.” And despite the focus on e-commerce, only 7 percent of retail sales are done through the Internet, she said. Still, the secular shifts — social media, mobile, e-commerce — are all having an impact at retail. “You’ve got to be on mobile,” Elsesser told the retail and brand executives in attendance, noting that “75 percent of consumers use the Internet to form an opinion of a brand” before they buy. The Goldman Sachs banker concluded, “Some public companies can benefit from being a private company to focus on the [long-term] changes” going on, without having to deal with Wall Street’s short-term focus.
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Cooper added that retailers that have built out their store footprint have to figure out where else can they grow. And while they are likely still growing, it may not be at the same rate as before. Consolidators can pick up a nameplate or concept that has synergies with existing operations under the same umbrella. He cited Ascena Retail Group’s acquisition of Ann Inc. as one example, noting that the primary options for firms are either to sell to a consolidator or to go private.
Clyde noted that the current apparel malaise can make it hard to get credit investors excited about a transaction. She noted how private equity firm Apax Partners “struggled” to get its acquisition of Full Beauty Brands completed. “The reason you hear rumors on why [the deals for] Express and Chico’s couldn’t get done to go private is because financing was hard to get done.” The current “multiple range is in the 6x to 6.5x zip code,” Clyde said, noting that a company with a “strong cash-flow generating business could push the multiple slightly higher.”
Elsesser said the last time there was strong M&A activity back in 2006, there was about $4 trillion in dry powder. There’s $4.5 trillion today that needs to be put to work. Currently the multiples are high, but as they come down and organic growth slows, Elsesser said she expects to see more LBO activity on the M&A front.
With the exception of J. Crew, Claire’s and Toys R Us, most of the investors in the last round of leveraged buyout activity have exited their investments, Elsesser said. Some of those exits have been from repeated recapitalizations as the investors pulled out.
Cooper pointed out, “The magnitude of the dry powder is enormous, but only a small percentage is spent in fashion apparel.” Yet, that’s still more than what used to be invested in the sector. “Fifteen years ago when marketing apparel companies, only a handful of firms did anything with [any kind of] fashion risk. That has changed dramatically by the success stories,” Cooper said. Michael Kors is an example of a success story, and that brings investors back to the table, Cooper said. He also noted other players such as private equity firm Permira’s success with Hugo Boss and Valentino, which brings in more mainstream investors such as KKR and its investment in SMCP.
Further, investors such as Andrew Rosen with his stakes in Rag & Bone and Proenza Schouler have helped emerging and younger businesses sidestep the old fears of fashion risk and volatility that once stigmatized fashion investments.
Cooper also noted another investment model, this time involving distressed fashion, one that is evolving into a specialty for Stefan Kaluzny and Sycamore Partners.
Clyde added that Kaluzny is one of the first to privatize a company — Express — and then take it public, which he did while at Golden Gate Capital before cofounding Sycamore. “The key has been [his acquisition of sourcing firm] Mast Global, providing backend leverage. That makes a difference,” the banker said.
Clyde also noted that there’s value in breaking up firms. She cited Sycamore’s separation of the Hot Topic and Torrid nameplates into separate businesses, noting that there’s an “obvious exit strategy,” with Torrid showing a 20 percent growth rate. The banker also noted what Kaluzny did with its Jones Apparel Group acquisition — putting in $250 million in equity, while financing separately the Stuart Weitzman and Kurt Geiger components — as being really smart considering others who took a look at Jones and couldn’t get to the same value proposition. With Weitzman sold to Coach for $574 million, and Geiger on the block, Kaluzny has recapitalized the business and “made money already” from the deal, Clyde concluded.
One new frontier was addressed by Elsesser, and that involved the rise of activist investors.
“Activism is here to stay. Period. Full stop,” Elsesser stressed to the attendees. She explained that with volatility almost nonexistent, investors have had a hard time finding a decent rate of return. “Assets under management have grown twofold to $240 billion. These are real players,” she said, adding that many of these hedge funds are now on a broad scale part of many portfolios.
“If a company gets a call [from an activist], this is not a call you do not want to take seriously,” Elsesser stressed. She advised that management and boards look at their companies critically, and hire bankers to put their activist hats on to determine what are the top five things they need to do to curtail an activist’s threat.
The activists are only interested in the short-term, she cautioned, adding that they push to make the change they want and then look for their next target. In contrast, boards need to keep an eye on the long-term needs of the company, and the big question is how to balance the long-term goals with the short-term, Elsesser said.
That said, companies also need to make themselves less friendly to work with. Many have taken out the staggered board requirement, as well as the poison pill, strategies that make it easier for activists to exert more control over their target, Elsesser noted.