The brand-licensing model has emerged as the “new black” in fashion, attracting some devout believers with very deep pockets.
William Sweedler’s Differential Brands Group pulled off a major coup Wednesday, inking a $1.38 billion agreement to buy a big chunk of Global Brands Group’s North American licensing business.
Behind the deal was debt financing from Ares Management, HPS Investment Partners and GSO Capital Partners. Global Brands’ existing management will also be making an equity investment. Ares is the private equity firm that co-owns the Neiman Marcus Group.
The deal between Differential and GBG is expected to close in the third quarter at which point Differential will have in excess of $2.3 billion in pro forma annual revenue in men’s, women’s and children’s apparel and accessories.
The deal amounted to rocket fuel for Differential’s stock, which shot up $4.55, or just over 500 percent, to $5.45. Nearly 30.4 million shares of the company traded hands on Wall Street, a blockbuster day for a stock that sees an average volume of closer to 17,000.
In Hong Kong, shares of Global Brands Group fell 6.2 percent to 0.31 Hong Kong dollars.
This move marks the latest capital inflow into the brand management business model. Authentic Brands Group, another brand licensing firm, counts among its investors three private equity firms: Leonard Green & Partners, Lion Capital, and General Atlantic. The latter was its most recent addition, having taken a “strategic investment” in October 2017. At the time of the investment, Andrew Crawford, global head of retail and consumer at General Atlantic, pointed to the “significant potential for growth in the brand licensing category, largely as the traditional retail model gets disrupted and consumers are interacting directly with brands.”
The rise of brand management firms also helped Marquee Brands find its financial sponsor through Neuberger Berman, the private, employee-owned investment manager. Neuberger Berman in February 2016 closed on a $462 million fund dedicated to Marquee for the acquisition of IP assets in the consumer products sector, including fashion. The original fund-raising target was $400 million, but was quickly oversubscribed. It counts as part of its global investor base more than 20 institutions, including public and private pensions, insurance firms and foundations from North America, Europe, Japan and the Middle East. Having a dedicated fund allows Marquee to enter deals with funding in place when the right opportunity presents itself.
According to sources, the businesses that GBG sold were the most profitable and will be “a cash cow” for Differential going forward. GBG in turn is planning to focus its efforts on the “less established brands” that it is retaining and that it believes have “strong growth potential.”
Under the terms of the deal, Differential will acquire the kids businesses, which include Fishman & Tobin and Kids Headquarters, the “core” brands, which are BCBG, Bebe, Buffalo and Joe’s, and all the accessories businesses with the exception of footwear. Key management and the teams at each brand will also move over to Differential, Sweedler said.
GBG will keep its men’s and women’s fashion brands, which include Spyder, Jones New York, Frye, Tahari and Juicy Couture, along with its European and Asian businesses. It will be a markedly smaller operation going forward. The sale includes about $2.2 billion of its $4 billion in 2018 revenue. The move allows the company to reduce financial debt and pay a special cash dividend up to 0.325 Hong Kong dollars per share. It is unclear at this point what role Dow Peter Famulak, president of GBG USA, will play going forward.
The brands owned by ABG are also being retained by GBG. “The existing GBG board of directors were focused on selling certain divisions that had stable and growing cash flow to maximize value for their shareholders,” said Sweedler, chairman of Differential and managing partner of Tengram Capital Partners LP, which played a pivotal role in bringing the parties together. “While we had interest in taking on more Authentic Brands Group owned brands, the specific verticals were not for sale. Jamie [Salter, ceo of ABG] and I have known each other since being co-chairman of a similar business and I think Jamie has assembled a successful brand management platform.”
Sweedler added that he was “thrilled that we were able to structure a transaction with the Fung family [which controls Li & Fung, GBG’s parent company] to acquire one of the leading branded consumer soft goods companies in North America with a world-class management team led by Jason Rabin.”
Sweedler said Rabin and his team “plan to invest significant capital into this transaction, which will transform Differential into a large-scale North American branded platform.” He added that the deal “has strong strategic value to provide future leverage for new brands and opportunities.”
Rabin, president of GBG North America, said the Differential team will be “reaching out to all of our existing licensors to solidify and explain the strategic value of this new platform and why I believe we will quickly be identified as the number-one platform for the branded consumer space.”
Sweedler said that when starting the initial conversations with Rabin about joining forces, the goal was “to create a dynamic, nimble and diversified platform of owned and licensed brands. The diversification was critical to mitigate cyclical and category risk.”
Rabin added: “Historically, the divisions that we have acquired have been growing organically over the past several years while generating double-digit EBITDA, or earnings before interest, taxes, depreciation and amortization, margins. We will continue to search out licensing opportunities and brand or company acquisitions that are both accretive and de-levering for this business.”
He said the goal for the combined business is “to maintain a robust top and bottom line compounded annual growth rate over the next five years and optimize free cash flow to de-lever this business in 36 months to three times or less.”
Sweedler pointed to Rabin’s “proven track record of successfully growing numerous world-class brands since inception. We are confident this transaction will create tremendous value for our stockholders, as well as provide enhanced opportunities in North America for our brands and business partners.”
Commenting on the transaction, Bruce Rockowitz, chief executive officer and vice chairman of GBG, said: “We conducted a strategic review of the group to determine the best way to improve shareholder value. We concluded that divesting the portion of our business that has a high present-day value was the way to move forward. With this transaction, the group will be able to improve our balance sheet significantly and simplify our organization, while focusing on the less established lines of business where we see high growth potential going forward.”
Subject to shareholders’ approval of the transaction, Global Brands Group will take on a substantially new profile, becoming simpler, flatter and more nimble, following a trend set by its parent company, Li & Fung.
The Differential/GBG deal is complicated and has resulted in several unanswered questions.
A former fashion executive who works as a consultant for several strategic buyers and private equity firm, said of the deal, “This is confusing. It appears to be a verticalization of the brands owned by Differential and the manufacturing side. That is the benefit of this deal to Differential.
“[But] there is a premium that is being paid for the deal. The brands where the intellectual property is owned by someone else means there is still a royalty fee that has to be paid to the brand owner. The company now needs to make margins above the royalty that is being paid to someone else for the deal to justify the purchase price, and whether that can be done is what’s unclear,” the source said.
Also on Wednesday, GBG released its yearly earnings results. It described the year ended March 31 as one of “significant challenge amidst an evolving industry landscape.” The Hong Kong-based group recorded a net loss attributable to shareholders of $903 million compared to a profit of $90 million the year before. Revenue grew 3.4 percent to $4.02 billion.
As warned in March, the company was affected by the loss of the Coach footwear license when it expired in June 2017 due to Tapestry Inc. taking the production in-house. Although the firm said it was working to replace the business volume, it noted that it is highly unusual to see such a large single license in the footwear sector. It was also affected to a lesser extent by the discontinuation of the Quiksilver kids’ fashion license stemming from the company’s bankruptcy.
“While the strategic divestment discussed above will substantially reduce our brick-and-mortar locations, our highly selective investments in direct-to-consumer channels will inevitably attribute to higher operating costs in the short-term,” Rockowitz said. “We believe men’s and women’s fashion will continue to be a fast-growth business for the group and deliver attractive margin profiles in the long run.”