Private Equity (PE) is getting increasingly interested in fashion apparel, accessories and footwear, from smaller funds to the very largest PE firms. As a result, PE is helping redefine the terms of fashion industry mergers and acquisitions (M&A).
At the same time, strategics are under tremendous pressure to grow, with few opportunities to do so organically. The result has been an increase in M&A activity and valuations overall, but in particular, for potential acquirees that can show significant brand equity. This highlights the need for companies to focus intensely on strengthening the image of their brand(s).
For PE, given that fashion industry operates very differently from other industries, there’s no escaping the steep learning curve they face. And, if deals are to pay off, there’s no substitute for in-depth knowledge of the industry and its players, before entering the fray.
The current M&A scene in the fashion industry is a shifting landscape because of the increase in deal activity and the quality and size of the deals taking place. Fashion M&A is currently fashionable, and there’s a marked increase in the volume of deals, as well as a change in the nature of these deals. For example, presently, the focus has moved from value-oriented deals post recession, to identifying companies and/or brands that can exhibit sustainable growth, a critical factor for PE funds, given the limited time of ownership and the need for return on investment come the time to exit.
Another key change is that brand equity is being valued as currency, with a number of IP buyers entering the marketplace. Good examples of this is Authentic Brands, a brand development and licensing firm backed by Leonard Green, that has actively been bulking up by buying companies such as HMX, Spyder Judith Leiber and, most recently, Juicy Couture. Both private equity and strategic buyers have been stepping up their IP acquisitions of late. However, the pace at which private equity deals are growing in the fashion sector is outstripping that of strategics.
What’s driving M&A activity in Fashion today?
It’s a perfect time and set of circumstances for a blizzard of M&A deals.
To understand how deal flow is shaping up, let’s take a look at the main drivers for strategic M&A. The retail landscape continues to consolidate. Where previously there were many big players, now there are fewer with each passing year–and who can predict whether Sears, Kmart or J.C. Penney will further fade, leaving even less?
That’s a scary proposition for companies relying on a handful of major outlets for distribution. Fewer retailers demanding lower pricing, combined with escalating production costs, is creating tremendous margin pressure and fueling the need for brand ownership as well as multi-tiered distribution. All of this sets up the need for operating leverage–the ability to put as much volume through a company with as little overhead as possible. However, organic or traditional growth is very difficult to attain in today’s consolidated and saturated marketplace. Often, the best, or sometimes only, remaining option to grow is through strategic acquisitions.
Private Equity firms have tended to go after prevailing trends, be it pharma, consumer product or high tech. Now, acquisitions in the fashion industry have rapidly gained momentum as a trend for PE funds. Part of this is the “Michael Kors Effect”–that is, PE is seeing how a privately held company with a high profile fashion brand can successfully launch an IPO and make colossal returns for its owners. Private equity coffers are full–there’s a lot of money out there–and these firms are looking for good opportunities. Consequently, over the last two years, multiples that private equity funds are paying have increased, driven by strong acquisition demand and the resulting competition, the availability of cheap financing, and public markets that are at all-time peak levels. Deals such as Bain Capital’s acquisition of a majority stake in Canada Goose, or Brentwood’s investment in classic American shoemaker, Allen Edmonds, illustrate this trend. With many more deals such as these taking place, private equity firms investing their dollars in the fashion industry is apparently not just a temporary blip on the radar.
Are The Newly Minted M&A Deals Sustainable?
How successful will these transactions be over the long term? Our extensive experience in the industry has taught us that the quicker companies go up, the quicker they go down. We favor companies with long-term sustainability and some visibility into a company’s long-term trajectory. Ultimately, in the fashion industry, it’s all about the people on the front lines, their ability to create a sustainable product with a point of view, and their relationships in the retail marketplace. It’s these qualities, along with the ability to focus on the customer’s wants, needs and aspirations, that ensure long-term success.
Next time, we’ll talk about the types of companies that are in demand and why, with a special focus on IP and scalable brands.
About the Author
Allan Ellinger is MMG’s co-founder and senior managing partner. In addition to his involvement in M&A, restructuring and crisis management, he serves as a strategic advisor to many fashion and consumer product CEOs. He can be reached at A.Ellinger@mmgus.com.
Now in its 25th anniversary year, MMG provides investment banking, strategic and financial advisory services to clients in the retail, fashion, textile, home, jewelry and beauty sectors. The firm guides owners of both privately and publicly owned businesses through mergers and acquisitions, management buyouts, divestitures, strategic alliances, operational restructurings, valuations and business model analysis.