Footwear firms are doing some early holiday shopping.
Cole Haan found a new private equity owner Friday morning, a month after Umbro and Heelys Inc. also changed hands.
Market insiders said there could be an uptick in acquisition activity over the next two quarters, with interest continuing from both financial firms and strategic ones.
“Our deal flow has been very good and we’re excited about that,” said Richard Kestenbaum, partner at Triangle Capital. “[Mergers-and-acquisitions activity] is a function of what’s happening in the equity markets and the economy, and both those things are doing OK. “
Some experts noted smaller transactions seem more popular now, while others believe executive boards won’t touch any transaction that doesn’t move the needle. Regardless, it’s clearly prime time for deals of all sizes, as companies reevaluate their portfolios.
As Andy Martin, managing director at Baird Investment Banking, told Footwear News, “There was so much consolidation leading up to the downturn that some platforms now no longer make sense. You’ll see bigger players — Nike Inc. being a prime example — asking themselves if they need all this.”
With strategic firms still digesting large acquisitions — such as Wolverine World Wide Inc.’s $1.24 billion buy of Collective Brands Inc.’s Performance & Lifestyle Group — the conditions are ripe for private equity funds to invest in the shoe industry, some for the first time.
The key to identifying good targets, dealmakers say, is to find one with a well-defined niche. For example, when private equity firm Freeman Spogli & Co. acquired Boot Barn Inc. last December, it was capitalizing on the Western and workboot retailer’s stable customer base and growing Western trend in pop culture, as well as the opportunity to ramp up store growth and retail comps, said Christian Johnson, principal at Freeman Spogli.
As part of the aggressive growth plan, Boot Barn went on to acquire RCC Western Stores in August.
Investors noted the footwear sector also is appealing to funds because of innovative business strategies: Vendors are moving into owned retail and managing their own distribution points, creating additional channels to grow revenue and profitability.
Other opportunities lie in strong growth trajectories for brands, which is what prompted private equity firm Evergreen Group Ventures to last month acquire Heelys, its first footwear asset, for $13.9 million.
Jim Wagner, manager at Evergreen, told FN, “The footwear industry is going through an interesting transformation, and we think there’s a lot of innovation happening and opportunities to build some strong brands in that space. We’re focused on brands we can turbocharge.”
All told, bankers said, deal activity is high because funds need to put their cash to work for bigger returns after being more inactive than normal.
Allan Ellinger, senior managing partner at investment banking and strategic advisory firm MMG, noted, “A lot of the funds also have multiple funds under them, which really just results in a lot of money sitting around.”
Interest rates remain favorable, making borrowing easier. And an additional impetus in the coming months is that Bush-era tax cuts may come to an end in 2013, meaning capital gains tax rates could increase significantly from the current 15 percent rate.
“There was a lot of activity in the summer because what people were trying to do was get an asset into the market before the end of the year when the tax rates could change,” said Martin. “Deals take time. [Some] from the first two-thirds of the year are still in the process [of closing].”
Ellinger agreed: “There are a couple of deals we’re trying to get done now before the year ends. … Clients have literally said to us, ‘Make sure you get it done.'”
In today’s market, private-equity buyers are more willing to pay premiums, while strategic players are more financially limited. “M&A activity is now driven principally by financial buyers. Increasingly, they are the ones that are paying higher multiples,” said Marty Staff, founder of advisory firm Marty Staff Associates.
Ellinger noted, “[Nowadays, strategic buyers are only interested in] companies that will take them global, and smartly so because overseas is where the growth opportunities lie. But the kinds of companies and brands that satisfy those strategic needs are few.”
That said, VF Corp. remains an active acquirer in the current M&A environment, according to analysts. Steven Rendle, VF’s group president of outdoor and action-sports Americas, told FN the firm is “absolutely motivated and continues to look [for acquisitions] in the outdoor and action sports space on a global basis, [as] that has proven to be where we get really solid returns.”
Without denying he has his hands full, Wolverine Chairman, President and CEO Blake Krueger said the firm remains open to other additions if the right opportunities came up: “You might see a specialty bolt-on acquisition over the next couple of years. I never say never, but I suspect that over the next two years, you won’t see anything approaching the [scale of the PLG buy].”
Steven Madden Ltd., too, is actively shopping for new assets.
As for brands looking to be acquired, K-Swiss Inc. might soon be on the block, given its prolonged decline in market share. Analysts noted its stock rose 42 percent in September after rumors surfaced, fell again in October when nothing materialized, and is up again this month as chatter recently resumed.
Jeff Van Sinderen, analyst at B. Riley & Co., said there is value to the K-Swiss and Palladium brands, even if the firm’s overall road to profitability is unclear. “The $40 million in cash on the balance sheet, plus its inventory, are all assets worth considerably more than what the enterprise value is today,” said Van Sinderen. “What we don’t know is where the company stands on the desire to do something strategic.”
Modern Vintage is understood to be looking to sell part of its business — although when contacted, Modern Vintage CEO Rick Cytrynbaum declined to comment.
Cole Haan was sold Friday for $570 million to Apax Partners, which has a history of acquiring other fashion brands such as Tommy Bahama and Tommy Hilfiger. But the auction process was not without keen interest from TPG Capital, whose offer had been spearheaded by senior adviser Matthew Rubel, a former CEO at Cole Haan.
Not all deals have to be transformative, however. Licensing agreements are also a good way for brands to expand categories without actually changing hands. Iconix Brand Group Inc., which recently bought Umbro for $225 million, has been prowling for shoe partners for some of its brands.
And don’t forget cross-border activity, which has ticked up in the last two years, as New York-based Blackstone Group acquired German outdoor brand Jack Wolfskin; and Searchlight Capital Partners, which has offices in London, New York and Toronto, took a majority stake in British brand Hunter Boot.
This year, the international interest continued. Korean retailer E-Land actively bid — even if ultimately unsuccessfully — for Collective Brands; and Japanese retailer ABC-Mart Inc. acquired LaCrosse Footwear Inc. for about $138 million, foreshadowing more out-of-border activity to come in 2013, insiders observed.
“Asian buyers are becoming much more assertive, and it’s interesting to note that the Koreans and Japanese are a bit more sophisticated than the Chinese in doing deals in the Western markets,” said Martin. “Larger players in the apparel and sporting world in particular are aggressively looking for American brands that can sell in Asian markets.”
This story has been updated from the print edition to reflect Friday morning’s news that Apax Partners inked a deal to acquire Cole Haan.