Mergers and acquisitions in the retail sector – WWD

Consolidation continues in fashion and beauty.

Victoria’s Secret recently acquired lingerie start-up Adore Me as well as a minority stake in Frankies Bikinis. Estée Lauder Cos. Inc. took over Tom Ford; Authentic Brands acquired Ted Baker; Oxford Industries – the parent of Tommy Bahama and Lilly Pulitzer brands among others – now owns the bohemian-inspired womenswear brand Johnny Was. Last year, Levi’s bought Beyond Yoga. The Calida Group bought Cosabella. And the list is long. Other companies have said they are looking – or have suggested adding to their portfolios – to see if it fits well.

At least part of the transaction can be attributed to the macro environment. With high interest rates and a near-stagnant IPO market, the era of overvaluation is coming to an end and access to cash is more expensive than ever. This means that many smaller brands are struggling to raise investor capital. Selling all or part of a smaller brand to an older company is one of the fastest ways to scale up.

Bigger companies benefit too. They gain expertise, such as digital skills, as well as existing online and following communities, and can often expand into new geographies.

But will the pace of mergers and acquisitions in the industry continue until 2023?

“This is the most important question for the next two to three years,” Brooke Kiley, co-founder of VMG Catalyst, the venture capital arm of VMG Partners, told WWD. “Instinctively, it tells me that in the next two to three years, this will be an acquisition market, especially since there are a lot of later-stage private companies with fairly solid balance sheets that have grown opportunistically in 2021 as valuations have been high and capital is cheap. . . They have large balance sheets and will be a good soft landing for some interesting early stage companies that may not have sustainable business models. In some of these businesses, they can find their home.”

The scenario creates a buyer’s market for companies with cash. They have the resources to decide which brands they want to work with or add to their portfolio.

David Shiffman, co-chair of the global consumer retail group at investment bank Solomon Partners, said consolidation with smaller direct-to-consumer brands is likely. However, he pointed out that with valuations declining over the past year, some brands are reluctant to sell at current market asking prices.

“You need willing sellers to create a buyer’s market,” he said. “Usually these [brands] the ones that accept big VC checks are the ones that run the companies [aren’t profitable] and ultimately failed the exam [to make money]. We are still in the stage of entrepreneurs who miss the valuation times they had in 2020. [Companies] will need to have higher cash flows – in other words, earning money – to justify these higher valuations.”

While the market appears to be full of opportunities, Shiffman believes that “M&A activity has been very, very selective” with companies shifting their focus from apparel brands to health & wellness, beauty, sporting goods home and outside.

“[Private equity] was a reluctant participant in the retail game,” he said. “Borrowing money has become more expensive. [But] I think you will see in all quality companies that are looking for a home. People are always interested in owning good companies, regardless of the sector. We observed the most activity in brand management. They’ve done a tremendous job buying branded retailers.”

One such example is WHP Global’s recent participation in Express. The brand management company invested $260 million in a 7.4 percent stake in the clothing retail chain. The partnership includes the creation of a platform for the acquisition of other brands in the future.

“Historically, there have always been opportunities in fashion here and there. But given today’s environment, the number of opportunities has certainly increased,” Yehuda Shmidman, president and CEO of WHP Global, told WWD in December. “You can imagine the types of fashion brands that are out there that we are very excited about.

“Just this year, with the macro landscape shifting and the fact that the IPO markets have closed, the stocktakes have been tight and funding difficult to secure, the amount of opportunities has definitely increased for people like us,” he added.

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