2013 was a crazy year for mergers and acquisitions (M&A) in the apparel, accessories and footwear sector. Despite record stock prices and huge piles of cash, large apparel and footwear companies reined in their acquisition activity dramatically, mostly due to concern over the uncertain economic outlook.
Deals announced by strategic buyers fell 34 percent to their lowest point in at least nine years. Strategic buyers made only 93 acquisitions globally* in 2013, compared to 140 deals in 2011 and 151 in 2012. There also was a dearth of deals in 2013 by historically acquisitive companies such as VF Corporation, PVH, Perry Ellis, Deckers Outdoor, Wolverine World Wide and Steve Madden.
In stark contrast, acquisition and investment activity by private equity groups and other financial sponsors increased 50 percent to their highest point since 2008, driven by large amounts of unspent and expiring capital. Financial buyers announced 51 acquisitions globally in 2013*, up from 34 in 2012. Prominent deals include the announced acquisition of the Jones Group by Sycamore Partners, TowerBrook Capital's agreement to purchase True Religion and the acquisition of Allen Edmonds by Brentwood Associates.
Last year marked the first time in at least nine years that financial sponsor M&A activity has diverged from strategic buyer activity (i.e. sponsor activity grew while strategic activity decreased). Not only did activity diverge, it did so dramatically, with financial sponsors representing 35 percent of announced M&A deals in 2013, compared to 20-25 percent in the prior four years.
Another interesting shift in 2013 was in strategic buyers' rationale for acquisitions. Whereas in 2012, acquisitions of U.S. apparel and footwear companies by strategic buyers were often characterized by the desire to gain market share in an existing market, acquisitions in 2013 were more often for the purpose of adding a growth vehicle to the buyer's portfolio.
A good example of the market share consolidation trend in 2012 was the acquisition of Hartmann by Samsonite, two mature players in the luggage category. Conversely, the acquisition of the Salt Life brand in 2013 by Delta Apparel is a good example of a buyer looking to add a rapidly growing brand to its platform. Salt Life is a lifestyle sportswear brand catering to watermen and ocean enthusiasts, based in Florida.
The trend towards acquiring for growth reflects the fact that many public companies now need growth to increase stock valuations. In prior years, these companies were able to increase shareholder value by hunkering down and cutting expenses, driving increasing profits as revenue bounced back from the depths of the recession. Now that the economy appears to be in a relatively stable, slow growth mode, companies are seeking ways to grow beyond what can be achieved organically. The answer is going to be acquisitions.
One constant, however, has been the leading rationale for strategic buyer acquisitions: the desire to add a product to the acquirer's portfolio that does not cannibalize existing products, and can be sold in existing or new channels of distribution. This rationale was stated as a key motivating factor in 52 percent of announced acquisitions of U.S. companies in 2013, up from 40 percent in 2012. Kering's investment in women's fashion brand Altuzarra is a good example. Kering has a portfolio of fashion apparel brands, including Saint Laurent, Alexander McQueen, Brioni, Stella McCartney and many others. Altuzarra adds another brand to the company's portfolio, and allows Kering to leverage its existing relationships in the fashion boutique and department store channels.
Predictions for 2014
After a down year in 2013, expect strategic buyers to come back in force in 2014. Over the past 30 years, stock prices have been highly correlated with transaction activity. High stock prices generally lead to activity because strategic buyers' highly-valued stock can be used as acquisition currency.
In the coming year, strategic acquirers will likely continue to focus on acquiring companies that add new products to their portfolios, and in particular on acquisitions that add growth vehicles to their brand mix. Brands that are growing rapidly, or are well positioned to grow, will be particularly coveted by strategic buyers in 2014.
Meanwhile, expect financial sponsors to continue to be very active. Private equity groups are still sitting on more than $300 billion of unspent capital, despite $100 million being set to expire in 2013. The combination of unspent capital and a currently favorable lending environment will drive activity, and we can expect the private equity community to continue bidding aggressively for the best performing companies in 2014.
Overall, after declining 17 percent in 2013, global M&A volume in the apparel, accessories and footwear sector will jump in 2014. We expect 2014 and 2015 to be banner years for M&A activity in this sector.
* (North America and developed Europe and Asia)
Geoffrey Haydon is a vice president with Moss Adams Capital.