M&A: Feeding Frenzy Ahead?

NEW YORK — The high-flying days of private, equity-led buyouts may have come to a standstill, but don’t count out the potential for some serious deal-making in 2008.

Though there is no end in sight for the soft consumer-spending environment, analysts and experts said small- to mid-size deals in the $10 million to $100 million range will occur in the footwear market over the next six to nine months as company valuations begin to bottom out and sellers’ expectations regarding their firms’ worth adjust downward.

That could be a good thing for powerful public companies. With cash in their coffers and typically high borrowing capacities (through easy access to established credit facilities), firms such as Wolverine World Wide, Brown Shoe, Skechers USA, Genesco, Deckers Outdoor, Foot Locker, Iconix Brand Group, The Walking Company Holdings, VF, Jones Apparel Group and Nike are believed to be actively searching for deals to help prop up earnings. Among privately held firms, Camuto Group has been vocal about its desire for new acquisitions.

At least one brand rumored to be in play is Havaianas (owned by Brazilian firm Alpargatas, which also has offices in New York). One source speculated the firm could be sold to a larger company or potentially seek an initial public offering. The firm did not respond to requests for comment.

“The strong have an opportunity to be stronger and pick up market share in this marketplace,” said Lawrence Siff, principal at Gordon Brothers Group, an advisory and investment firm. When the stock market eventually starts to improve, said Siff — whose firm has only 35 percent of its $320 million equity fund committed and is “aggressively” looking for acquisitions — the marketplace should respond positively to deals made in the current environment.

“I keep hearing there is going to be more mergers-and-acquisitions activity in the [footwear] area. No one knows exactly when or who, but that there’s big potential,” said Dana Telsey of Telsey Advisory Group.

“Strategic buyers are out there,” agreed Scott Krasik, senior analyst at C.L. King & Associates, adding, however, “I wouldn’t be surprised if there were deals sometime in 2008 or 2009, but I could also see an instance where sellers, unless they’re absolutely strapped [for cash], would hold out for better [economic] times.”

Yet some struggling firms would benefit from being owned by a larger conglomerate, according to Brian Tascher, VP of investment banking at BB&T Capital Markets. “There are brands that have less than $20 million in sales, but have less traction [and] are getting killed right now because of product costs overseas,” he said.

It’s not just troubled firms that can take advantage of the market, though. “If you’re growing your company the right way and have a good product and the right positioning, you can still get [deals] done in the market,” noted Christy Lowe, a managing director at investment banking firm Imperial Capital who is working on two deals that overlap with the footwear space.

But Sam Poser, an equity analyst at Sterne Agee, holds a slightly different opinion. He said there are too many footwear players in the market and that the time could be right for some firms to shutter their doors altogether. “We have to separate the men from the boys. We don’t need all these brands and all these companies. Only a handful are executing well,” said Poser.

Clearly, there’s no shortage of distressed firms in the market, due largely to the drop-off in consumer spending and exacerbated by the collapse of the credit markets. NexCen Brands, Bakers Footwear Group, Shoe Pavilion and Steve & Barry’s University Sportswear are all experiencing problems, and chances are some of these names may not exist in a year, sources said.

Bakers, which has been plagued by liquidity problems, is one public retailer the Street is watching closely. “I don’t know if they’ve been officially shopped or unofficially shopped, but everyone has looked at them, and no one has taken the bait,” said an investment banker who requested anonymity.

The banker noted that despite Bakers’ recent 10.4 percent rise in June same-store sales following months of declines, “if they don’t show a sustainable comp increase over the next year, it may be tough for them to avoid bankruptcy.”

The source said Bakers would not be able to support a leveraged buyout from the private equity sector given its lack of cash flow and that its stock is trading at around $1.50 a share.

Krasik agreed that Bakers’ future looks dim. “The multiple of sales that [Bakers stock] is trading at implies a high degree of risk that the company won’t make it.”

At Shoe Pavilion, which on July 15 filed for Chapter 11 bankruptcy, weak consumer spending has negatively impacted the firm’s financial results. In addition, the company recently took on debt in order to fund an expansion of its store count. It had even started selling consignment merchandise as a new revenue generator. At this point, liquidation might be Shoe Pavilion’s best option, said observers. Following the bankrutpcy filing, the firm said it wants to close more than half its 117 stores.

“I’m not sure they can survive, but I think they’re doing everything they can to try,” said Jeff Mintz, an analyst at Wedbush Morgan Securities, who has since dropped his coverage of the firm. “They’re one who could very well not make it, especially as the consumer slowdown stretches out further.”

Shoe Pavilion is “far worse than Bakers in terms of where they want to be,” said the investment banker source. “They started trying to grow out stores to 25,000 square feet completely at the wrong time because DSW, as an example, was shrinking its store size.”

NexCen, owner of The Athlete’s Foot and Shoebox chains, is in the midst of restructuring and is likely preparing to sell off its Bill Blass and Waverly brands due to liquidity constraints.

“My expectation is they’ll sell off pretty much everything and not exist anymore. I’m shocked The Athlete’s Foot is still around. The mall is over-stored. How can you compete against Foot Locker and Finish Line?” said the banker.

But Krasik said that if NexCen can sell Bill Blass and Waverly, “it would seem to have a decently healthy franchising business.”

Steve & Barry’s is another firm that recently filed Chapter 11 after defaulting on a nearly $200 million loan. The retailer, whose ultra-low prices made its operating model questionable, is expected to hold an auction on its assets Aug. 12. “I don’t know if it was ever profitable,” the banker said.

As for potential private equity interest in the footwear sector, that environment has not yet rebounded. While private equity firms are always on the prowl for growing brands, the still-weakening consumer market, the lack of a clear exit strategy for an investment and the difficulty of getting financing are hampering efforts.

Private equity firms, though, likely wouldn’t have to support an entire deal, given the large amount of fundraising they’ve done recently. According to Thomson Reuters and the National Venture Capital Association, 71 venture capital funds raised $9.1 billion at the end of the second quarter, a 3 percent increase in dollar value from the same period last year.

“Private equity [deals] will come back when things get really bad, and then you’ll start to see the acquisitions multiples come down,” predicted Krasik. “Clearly, it hasn’t happened yet because sellers are still in a bit of denial in terms of what they think their assets are worth.”

BB&T’s Tascher pointed out that some brands have accepted that if they were to sell they would not receive more than 1 times revenues — as was the norm during the heyday of the past M&A boom. But, he admitted, “most people haven’t gotten there yet.” That eventual realization, however, could make the pipeline for deals stronger six months down the road, when companies do begin to grasp the reality of their firm’s valuation, he said.

Alex Panos, managing director at New York-based TSG Consumer Partners, a private equity firm that invests in the consumer sector, said that from his perspective, the environment for footwear deals is difficult for several reasons. “You’re looking for companies with the best sourcing relationships, and [firms that] still have positive same-store sales. [But brands] are facing challenges alongside [their] retailers — a lot have negative comps right now. It’s tough to invest in a down market,” said Panos, who noted that his firm evaluates nearly “every footwear deal” that comes down the pike.

For those reasons, TSG Consumer Partners prefers to invest in brands that can diversify across several categories, such as apparel and accessories, and could support expansion to its own retail operations.

“People like to buy on momentum, and healthy business performance is also important. You need growth and consistency. People are concerned about what the performance is going to be two years out,” said Panos.

In that regard, private equity firms also would be hesitant to make deals because potential exit strategies, such as IPOs, remain cloudy, given the crumbling stock market.

“Frankly, this is a better environment for a strategic buyer than a financial buyer,” said Wedbush Morgan’s Mintz. “Strategic buyers tend to be more forward and long-term thinking on acquisitions than financial buyers.”


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