Mergers, Acquisitions and Reorganizations: Finance Leaders Take a Look at the Months Ahead
Recent apparel-industry headlines provide a study in contrasts. On one hand, an improving economy means there continues to be capital available for companies looking to merge or sell their businesses. On the other hand are the inherent risks involved in apparel business cycles, trends and ongoing competition.
We recently caught up with several finance-industry executives to talk about merger-and-acquisition opportunities and the challenges of balancing a business in the current economic environment.
Recently, Joe’s Jeans was acquired for $80 million and Quiksilver filed for Chapter 11 bankruptcy protection. What does the M&A landscape look like for apparel companies? And do you think we’ll continue to see more acquisitions—and more bankruptcy filings—before the end of the year?
Sydnee Breuer, Executive Vice President, Rosenthal & Rosenthal
The always-changing retail environment continues to be tough—for both retailers and manufacturers/wholesalers. Not only have spending habits changed, but more and more consumers are going online for their purchases, making the bricks-and-mortar retail environment even more challenging. There is also a lot of money out there for M&A activity. So, apparel companies that are hot and growing will garner interest from private-equity and strategic investors. The combination of a difficult retail landscape and more money chasing M&A activity will lead to both more acquisitions and more bankruptcies (although the acquisitions and bankruptcies are not necessarily related to one another).
Mitch Cohen, Western Regional Manager, CIT Trade Finance
We see a robust environment that would lead me to believe we will possibly see more activity in both M&A activity and bankruptcies as we head into the end of the year.
Eric Fisch, Senior Vice President and Regional Commercial Executive, HSBC Bank USA, N.A.
We have seen consistent uptick in M&A activity in recent months. We continue to see our clients looking for value in the market, as multiples have come down. There is also significant value for companies who are internationally minded, whether it is a value play focused on vertical integration or an expansion of a retail footprint. One international customer, who is very active, making multiple acquisitions during 1H 2015, has achieved improved control over its international supply chain, expansion of its brand profile and improved gross margins. With international M&A transactions, financing and monetizing overseas assets can present an additional challenge. HSBC, as a global banking partner, plays a key role in facilitating and financing these transactions for our customers.
Ronald Friedman, Partner, Marcum LLP
I think the apparel industry is facing some difficult times in the coming months. Retail has not been preforming well, and consumers are not spending dollars at the accelerated rate that the industry hoped. The economy is sluggish and inconsistent, which causes the business community to be cautious. Is there the potential for additional bankruptcies on the horizon? Of course, but that may give some troubled companies a chance to reorganize and be better prepared for the next bullish market.
The potential for additional M&A activity is strong. There is a great deal of money available to invest in good companies with the potential for real growth. The apparel industry continues to be dominated by larger and larger manufacturing companies that are ripe for taking on investors’ dollars. The investors are looking for branded companies that, with additional funding, could become the next Michael Kors.
Rob Greenspan, President and Chief Executive, Greenspan Consult Inc.
From what I hear from my clients and others in the M&A marketplace, there is still activity for the right companies. Strategic buyers and hedge funds are still seeking apparel companies that have strong brands. The companies that are properly managed, are still growing, and show strong profits and cash flow are able to find buyers. These companies will be able to get premium values. We should continue to see acquisitions for these types of companies during the next 12 months or so.
On the opposite side of the spectrum are the companies with financial problems. As the market gets even more competitive and with less retailers and specialty stores, unfortunately we will most likely see more companies in financial turmoil. I cannot predict what we will see by the end of 2015, but I think over the next 12 months it should not be a surprise to anyone to continue to see bankruptcy filings for large, middle-market or small apparel companies.
What we might continue to see is M&A activity of troubled companies, with or without bankruptcy filings. Without mentioning company names over the past few years, we have seen companies take over or absorb apparel manufacturers who have been unable to work their way out of financial difficulty, effectively buying these types of companies at bargain prices or just taking them over.
Another M&A trend to watch is to see companies that were previously bought by strategic buyers or hedge funds that have not performed to expectations. These companies are being put on the selling block at prices that can be significantly lower than what they were purchased for. There may be opportunities for the former owners or others to buy these brands and rebuild these companies.
Kee H. Kim, President and Chief Executive Officer, Finance One Inc.
Since many apparel companies continue to struggle with declining sales and compressed margins, business owners and management are forced to think of dire ways of making their business float. Mergers and acquisitions are definitely on some of the owners’ agenda either to expand their top line or to exit the market before it gets worse. Many investment banks and private equity firms with ample cash are also actively looking for opportunities to invest. With those two attracting forces at work to find a right fit, the market is ripe for additional mergers and acquisitions for the rest of the year and 2016. I think the challenge will be to find profitable and sustainable businesses that can grow for the foreseeable future. Not all companies will be successful in finding a buyer. Some will have to downsize to survive, and others will be forced to close. In this process, we will unfortunately see bankruptcy filings by retailers, wholesalers and manufacturers this and next year.
Sunnie S. Kim, President and Chief Executive Officer, Hana Financial
The current economic landscape seems to lend itself to some opportunistic acquisitions by well-heeled companies with cash, looking for value-added entities and strong brands. We have seen some examples of this over the last year or so. Additionally, some of the interest is coming from overseas players. As with any acquisition, however, the downside is that sometimes it takes time for the synergies to blend when integrating different company cultures in order to realize the true financial benefits. At any given time the marketplace will allow support for only a certain number of participants. As the economics of the marketplace shift, so does the level of support with respect to the number of participants. We have seen this effect manifest itself recently with certain companies involuntarily exiting the marketplace via bankruptcy. As uncertainty continues, history suggests more companies will follow.
The M&A market for the well-executed apparel companies has been hot, and the valuations on these deals, especially the companies with clear brand strategies, continue to be impressive. In the startup scene, I am seeing more startups with innovative business models and execution strategies, and in the M&A market, there is more interest from overseas investors looking for M&A opportunities in the U.S. fashion brands.
Don Nunnari, Executive Vice President/Regional Manager, Merchant Factors Corp.
I’m no expert in the M&A market. Our average LA client is not a target in this area, especially during this highly competitive retail apparel environment. I’m sure there is plenty of capital to be invested if the deal makes sense. In Joe’s Jeans, you had a merger with Hudson, which unfortunately didn’t apparently attain the expected results. In the past, I’ve personally factored profitable, growing brands—such as C&C California, Ella Moss and True Religion—that were acquired based on their strong operating performance and potential to expand their brand. During different times, when premium denim was exploding, I’m sure this was the case for others, such as Paige, 7 For All Mankind and J Brand. In today’s market environment, we don’t see that level of M&A activity.
As far as Quiksilver [is concerned], they were the first Orange County surf company to go public. They were an innovative and iconic Southern California brand. Unfortunately, they recently filed Chapter 11, attributed to an acquisition and changing market conditions. Bankruptcies occur every year. Non-recourse factors have provided credit protection to apparel makers for centuries in the U.S. to protect them against nonpayment by their customers. Yes, we have been monitoring a number of companies today that could represent meaningful losses by year-end.
Kevin Sullivan, Executive Vice President, Wells Fargo Capital Finance
We’re still seeing a sizable amount of liquidity in the marketplace, leading to a fairly robust M&A landscape within the apparel industry. The general perception that the larger retailers only want to deal with larger vendors is causing many smaller companies to seek larger partners, while the larger vendors are seeking acquisitions to either become more important to existing customers or fill in gaps in product categories to enable them to sell a broader range of retailers. While the combination of market liquidity and a deal-oriented landscape can create significant opportunities on both sides, it’s important that a company considering a transaction decide whether they’d prefer a financial partner or a strategic partner. Transactions based purely on a desire to create a liquidity event for the founder of a company or simply for the purpose of a larger company becoming bigger don’t always work if the goals of the acquirer and the acquired aren’t aligned. What it underscores is the importance of having great financial advisers, whether in the form of investment bankers, accountants, attorneys or existing lenders.
Given the significant shifts that have taken place within the retail and e-commerce markets, we do see some potential for additional bankruptcy filings in the coming months. Companies that are too beholden to a specific category can be vulnerable as well as companies that have expanded too rapidly without having appropriate financing in place. We also see manufacturers/importers who have expanded into retail seeking to pare back on retail in an effort to right-size operations.
Lou Sulpizio, Marketing Manager, Capital Business Credit
From CBC’s standpoint, the M&A opportunities are abundant. There is a substantial amount of excess cash in the marketplace, attested to by the Joe’s Jeans acquisition. We feel that the M&A market will remain strong as buyers stay active on both sides of the spectrum through the end of 2015 and into 2016. Due to the stock market losing its luster, hedge funds and investment bankers are looking to acquire or put their money to use in other ways.
Business has been difficult the past couple of years, and brand recognition has been a focal point for success. We expect that atmosphere and strategy to continue in the foreseeable future. Buyers are actively paying premiums for hot opportunities and offering discounts for distressed opportunities. Revenue, returns on investments and production capabilities are also driving the acquisition markets. Additionally, companies that are undercapitalized need the services of a factor but are also are looking to raise equity, which opens up another door of opportunity for investment.
The retail environment has also been conducive to M&A as there have been several key retailers merging operations in 2014 and 2015. This trend will likely continue through 2016 as sales and margins erode. This is a challenging climate that has everyone looking for the next hot label or product.
There will always be bankruptcies, and there are undoubtedly several retailers and wholesalers struggling today. These businesses could be ripe for an acquisition or, worst case, bankruptcy.
Kenneth L. Wengrod, President/Cofounder, FTC Commercial Corp.
The M&A activity for the apparel sector will continue to remain strong. Because macro-economic data—including per-capita disposable income, confidence levels and unemployment rate—are improving, the emphasis will most likely stay on high-end contemporary and luxury categories. Brands that offer great value and have strong brand recognition will survive purely based on their strong, willing buyers. Others won’t.
In addition, there is plenty of capital to support other M&A. However, the players will change. We will see strategic buyers who are well-informed and knowledgeable build smarter and more agile enterprises. These strategic players with strong cash reserves will take advantage of great M&A opportunities, which will allow them to acquire new products and gain additional market share. Although the Fed has announced that the interest rate will increase, it hasn’t happened yet. Therefore, I don’t believe that the Fed increasing rates will have a material impact on M&A activity because these smart buyers still have ample time to adjust accordingly.
I do foresee a consolidation in our industry by the end of this year among those larger retail players that are working on small margins with high debt and losing market share. These large players and manufacturers with high sales concentrations could either self-liquidate or file for bankruptcy because they have been merely surviving on a prayer. They were hoping that the interest rates do not rise and this unprecedented period of easy monetary policy did not end because it gave them the ability to borrow and meet their cash needs, but fundamentally they did not borrow to create a stronger brand. That was their mistake. The leadership within these enterprises is driven by short-term goals versus building a brand with a strong financial base. Hence, as the era of easy money comes to an end, these enterprises will also follow.
This turmoil will create tremendous opportunities for growing companies that have carved out a niche for themselves with new merchandise and new channels of distribution such as the foreign markets. Those who target the larger players and seize the opportunities of market penetration will continue to create a further consolidation in our sector.
Paul Zaffaroni, Managing Director, Roth Capital Partners
M&A activity in the apparel industry has been busy in 2015 and should continue this pace into 2016. The apparel industry is experiencing dislocation caused by the Internet and how consumers now shop for apparel and other consumer products. Millennials prefer interacting with brands through digital channels, including e-commerce and social media, and are doing more research on the authenticity of brands and what they stand for. Apparel brands that are the most attractive from an investment standpoint have a differentiated product in terms of fashion or function but also have established a direct-to-consumer relationship through the Internet, catalogs or company-owned stores. Apparel brands that are unable to establish this direct-to-consumer relationship and become more dependent on department stores are often being acquired by larger wholesale apparel companies or brand-management firms such as Iconix, Sequential Brands, Authentic Brands or Cherokee Global Brands that have more leverage with the department stores because of the size of their brand portfolios.