Mergers Market Could See Some Rebound in’09

NEW YORK — While this year will be defined by store closures and bankruptcies, mergers-and-acquisitions activity will continue across the footwear industry — and the action should be centered around strategic buyers looking for bargains.

But the credit crisis and an uncertain economic outlook could deter many buyers for several more months, according to analysts and financial experts.

“Until lenders return with more reasonable terms and fundamentals improve, there will be no M&A activity for the first half of the year,” said John Christiansen, a banker and head of consumer equity capital markets at Cowen & Co.

It’s no surprise that Christiansen and many other insiders are staying cautious after a tumultuous 2008. In the middle of the subprime mortgage crisis and the unraveling of the financial markets, deals stalled across the footwear and retail sectors last year. It was a marked departure from earlier in the decade, when the economy was good, money was free-flowing and overpriced acquisitions were typical.

While no one expects this type of deal-making environment to return anytime soon, some observers believe M&A activity could pick up later this year.

“The impediment to consolidation would continue to be capital market sluggishness, but we expect this to improve over the next three months,” said Richard Hastings, consumer strategist at Global Hunter Securities. “The footwear industry could see some consolidation since there are a number of smaller players in the industry capable of merging to improve marketing and channel efficiencies.”

“If we see some stabilization in the markets, some strategic buyers could come out in the second half of the year,” added Scott Krasik, an analyst with C.L. King & Associates.

Sam Poser, analyst at Sterne Agee & Leach, said he expects some deals to happen in 2009, but noted that the timing is unclear.

“A lot of these firms are looking,” he said. “However, the outlook is about as hazy as we’ve ever seen. While most footwear firms have clean balance sheets, some of their businesses aren’t great.”

Wolverine World Wide, which earlier this month acquired comfort-oriented brand Cushe, made another small buy last week when it snapped up Chaco. The company did not disclose the terms of either transaction. (For more on the Chaco acquisition, see page 4.)

Poser said Skechers USA Inc. — which last year made an unsuccessful attempt to acquire Heelys — might also be looking at new deals. And he believes Steven Madden Ltd. would consider an acquisition “if the right thing came around,” although it now has a full plate with the Kimora Simmons line for JCPenney and L.E.I. for Wal-Mart.

Krasik said a small men’s brand might be a good fit for Madden, given its desire to expand its men’s offering.

Another potential buyer could be Iconix Brand Group Inc., one of the most active acquirers during the past few years. It said in late 2008 it was still exploring acquisitions.

Still, no deal is a given in this marketplace. But one thing is clear: Strategic buyers are more likely to engage in deals than private equity firms.

“I haven’t made a retail investment in 36 months,” said John Howard, formerly of Bear Stearn’s private equity division and now of private equity firm Irving Place Capital. “I’m looking for investments and analyzing opportunities. … I’m looking to invest in things previously untouchable.”

But Howard might be shut out of the marketplace for another year. That’s because private equity investors like to have some visibility on what a company’s performance will be a couple of years out. Given the frozen state of consumer spending and few indications that a recovery is imminent, opacity has become the norm.

In addition, some industry executives say that even if the economy begins to brighten by the fourth quarter of 2009, it could take three or four years before any real growth occurs. That prognosis dampens the IPO market and suggests the stock market might head sideways or waver up and down, instead of simply going up. Because financial players prefer, or even insist on, doing deals with an established exit strategy, all this will discourage M&A action on their parts.

For sellers, this environment might mean that the ideal buyer would be a strategic player who typically works under a longer time frame and doesn’t need to worry about an exit strategy. But they’re looking for “value” deals, too.

One such example was the Bill Blass sale in December. NexCen Brands Inc. sold the brand to Peacock International Holdings LLC in an all-cash deal valued at $10 million — a substantial drop from the $54.6 million in cash and stock NexCen paid for the brand in December 2006. Essentially, all Peacock bought was the trademarks and licensing rights.

That leaves NexCen with its franchise operations, which include The Athlete’s Foot and Shoebox chains. So far, there’s been no word of any other planned sales, but speculation is that the company might eventually decide to keep just its quick-service restaurant franchises as it restructures operations.

But the latest round of restructurings and bankruptcy filings shows that even those who bottom feed aren’t biting at the opportunities.

Shortly after the first of the year, Goody’s Family Clothing filed for bankruptcy and said it would liquidate its stores after it failed to find a buyer.

Gottschalks Inc. also filed, although it might have a better shot at surviving if ongoing discussions with Everbright Development Overseas Ltd. and El Corte Ingles prove fruitful.

The wave of bankruptcies is expected to continue — and even solid companies are likely to have a tough year.

Cowen’s Christiansen pointed out at the company’s Seventh Annual Consumer Conference in New York earlier this month that consumer stocks, on average, fell 48.5 percent in 2008. By sector, retail stocks averaged a drop of 48.4 percent, and footwear and apparel lost 45.4 percent. He also noted that it has been 14 months since a consumer company went public.

Crocs, long a Wall Street darling, went from a $3 billion market value to $102.9 million, he pointed out. And Lululemon Athletica’s stock price went from an all-time high of $60.70 to a low of $6.82. All told, only 15, or 7 percent, of 214 consumer stocks Cowen tracks finished the year in positive territory. Among those were Finish Line Inc. and Steven Madden.

Given the tough market conditions, speakers at this month’s National Retail Federation convention concluded that this is a time for companies to hunker down.

Peter Solomon, founder and chairman of Peter J. Solomon Co., told NRF attendees to “worry about cash” and wait a year before they make any big moves.

J.C. Penney Co. Chairman and CEO Myron Ullman agreed, noting that the current recession is balance-sheet oriented — and consumers and companies both have to clean up their debt loads. Past recessions, he said, have been income-statement oriented, where job losses and interest rates have hurt consumers.

Ullman said the “next generation will have to manage debt for what they want to buy, [while] what we put on the floor will have to be tailored to what people want to buy.” The retailer foresees a tough 2009 and expects that the gross domestic product — 70 percent of which is derived from consumer spending — won’t improve until early 2010.

Bill Lapp of Advanced Economic Solutions, a firm that provides economic and commodity analysis, also issued a bleak forecast for this year at a Cowen & Co. conference. “The housing hangover will persist through 2009, making an economic rebound slow going,” he said. “When housing stabilizes and bottoms out, that’s when the economy will head for a rebound. … Prices are down 20 percent, but still higher than they were five years ago.”

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