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Reformation, Frame Denim Face Tough M&A Market in Search for Right Investor

Eighteen months after being put up for sale, both Reformation and Frame Denim are still searching for the right investor.

That timeframe is considered long to be in the mergers and acquisitions process when good brands are involved, but perhaps not necessarily an anomaly when it comes to denim brands, according to some investment bankers who spoke on the condition of anonymity. Because both are good, buzzy brands, they are each expected to find an investor at some point in the process.

Reformation, founded by Yael Aflalo, has Goldman Sachs as its banker, while Frame, founded by Jens Grede and Erik Torstensson, has The Sage Group, these investment bankers said. Both companies are said to be in talks with potential investors at the moment. It couldn’t be immediately determined what the annual volume is for Reformation, but Frame is believed to have reached $130 million-plus in 2018, with retail volume more than double that, one individual said.

Representatives for both Reformation and Frame declined comment.

Apparel brands are finding it generally tough on the M&A front due to the shift in consumer spending patterns from retail to online. That shift means they’re not growing as fast, particularly those whose businesses relied more on volume from their wholesale accounts. Investors have also seen the impact on the women’s contemporary market, where over the last several years sales have shifted from these companies to younger, direct-to-consumer brands that are better at data collection and have the social media know-how to create an emotional connection with customers.

And if apparel is tough, the denim sub-sector is even tougher. That’s not to say there’s insufficient interest on the part of investors. That’s not the problem at all. Rather, the key question often raised once an interested buyer gets to do some in-depth due diligence, is more about how much more growth is considered realistic for a denim brand.

“There is always demand for premium denim brands. The key is being big enough to matter, but not too big to forego additional growth,” William Susman, investment banker and founder of boutique firm Threadstone Partners, said.

Another investment banker specializing in the apparel sector said last week, “A denim brand gets to $130 million. How does it grow to $200 million? And can the brand sustain that trajectory?”

And as one banker noted, “Investors get nervous when they think about both what the growth of the brand could be and what would then be the exit strategy. Many have gotten burnt before, and are going to think twice before doing another deal.”

A private equity firm that elected to go in another direction after extensive discussions is said to be Leonard Green & Partners. According to financial sources, Frame had been in talks with the private equity firm, which then decided against the investment. The speculation was that the private equity firm might have wanted to combine Frame with its Lucky Jeans platform, and that might not have resonated well with Frame’s founders, one banker said.

Leonard Green did not respond to a request for comment.

The owners of Reformation and Frame are said to be very specific about the investor profile they have in mind for their brands.

And that’s another example of what else can go wrong on the deal-making front. There may be interest from investors, but is there a meeting of the minds between buyer and seller? The successful deals are the ones where the two are partners, with creative direction residing with the seller and the buyer providing both business advice and the financials for expansion. Sellers also have become more discerning with who they take on as financial partners. One financial source spoke about how no one wants to be pushed into a faster rate of expansion just because the investor wants to see a quicker return on its investment.

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