Premium denim companies are definitely on the wish list on the mergers and acquisitions front — and it’s the smaller brands that might attract the most attention.
This story first appeared in the July 25, 2012 issue of WWD. Subscribe Today.
Think Mother, Current/Elliott, Big Star, Agave Denim, Genetic Denim and AG Adriano Goldschmied.
These are the brands that investors are watching, trying to figure out which ones have the greatest growth potential and can become lifestyle staples in the minds of consumers. Some firms are still considered small volume-wise, and it could take another year or two before investors can determine if they can really build the scale needed to make an investment worthwhile.
“Overall, the denim space has definitely seen an increase in interest from the investment community,” said Janki Lalani Gandhi, vice president of The Sage Group. “The sector has been doing fairly well, and many denim companies have seen significant year-over-year growth. The private equity groups are showing interest in the brands, whereas many of the strategic firms in the U.S. are focused more on their own internal strategies and getting their own house in order.”
Sage represented Paige Denim in the transaction last week in which TSG Consumer Partners took a majority stake in the brand.
RELATED STORY: TSG Invests in Paige Denim >>
But while there might be eager potential investors, not all brands would jump at the chance to get a fresh injection of capital.
AG Adriano Goldschmied, which market sources estimate does more than $120 million in annual volume, is well funded and supposedly doesn’t need new capital to expand. In contrast, sources believe Agave Denim is poised for expansion and could be open to entertaining discussions from an investor group, even though it isn’t on the market.
It used to be that brands looking for investment capital would put themselves out into the market and see what interest there was in the company. There are still plenty of brands taking that route.
Citizens of Humanity, with annual volume of more than $100 million, has been said to be looking for the right time to put itself up for sale. Berkshire Partners took a 63 percent stake in 2006 and paid $250 million, including debt. Financial sources said finding a buyer won’t be easy given the presumed hefty price tag.
Hudson Jeans, which has an annual volume in the $75 million range, was put up for sale in October by Fireman Capital Partners and Webster Capital. The two took a minority stake in the business in 2009 for $33 million. Lazard Ltd. was hired to conduct the sale, which was put on ice a few weeks ago, according to investment bankers.
Marla Sabo, partner at Fireman Capital Partners, said, “As we have stated, we are very confident in the company’s prospects for continuing strong growth, and so we regularly explore ways to help fuel its further expansion, including potentially bringing in new synergistic investors.”
J Brand, which has an estimated annual volume of more than $100 million, is one of the more established denim firms officially on the market. Buyout firm Star Avenue Capital, backed by Irving Place Capital and talent agency CAA, took a 60 percent stake in the denim brand in 2010 for an undisclosed amount, and has hired Morgan Stanley to explore strategic options that include a sale or an initial public offering.
The other brand on the market is Not Your Daughter’s Jeans, in which Falcon Head Capital took a 50 percent stake in 2008 for $100 million. Strategic buyers are said to have been pitched late last year. The amount of debt on the books reportedly makes it a tough sell for financial buyers though.
While these brands are taking the traditional route in seeking an investor, the new way of doing business is for investors to identify a firm they want to buy and go after them directly.
Paige Adams-Geller of Paige Denim told WWD that her firm had been approached by several financial investors and strategic firms in recent years. Paige Denim elected not to go the auction route after being approached by TSG, feeling that the timing was right and because of “TSG’s history of brand-building and the market research it does when helping companies strategize the next move in their development.”
According to TSG managing director Hadley Mullin, Paige Denim was an “attractive investment because the brand is more of a contemporary play, with an elevated take on the denim category.”
The tailwinds in the premium denim category also played a role in the investment decision. “The company is capitalizing well on some of the trends in the denim space. There’s both color and tailored denim [options]. The usage is more plentiful. Women can reach for [jeans] for a Saturday trip to the park with their kids, or the latest skinny jeans or colored denim for a night out on the town with friends,” Mullin said.
According to Andreas Kurz, president and owner of fashion consultancy Akari Enterprises: “There’s a big appetite for denim and rightfully so as denim as a category is not going away. It may not have the same growth trajectory in the current economic environment as five years ago, but the expansion opportunities for most brands into sportswear, retail and international are still mostly untapped.”
While denim brands may be fairly high up on wish lists today, not all investment bankers are ready to buy into the idea that these companies are a good investment. According to one banker, who requested anonymity, “The business has been driven by the color wave this year. We don’t know what next year’s trends will be.”
The banker noted there is increased competition from contemporary labels, such as Rag & Bone, that do just as good a job in their denim collections as a denim-only brand.
And in a cautionary note, the banker pointed out that not all the denim firms are able to expand their businesses to become lifestyle brands. “For the tops companies, the hardest thing to do is bottoms. For the bottoms firms, the hardest thing to do is tops. It’s not yet proven that these denim brands can branch into tops [and other categories],” the banker said.