Private Equity Muscles In

NEW YORK — Private is the new black.

While several recent merger-and-acquisition deals have been struck with industry players such as The Jones Group Inc. and VF Corp., an increasing number of agreements are being inked with private equity funds such as TPG Capital and Leonard Green & Partners. Just last month, Golden Gate Capital and Blum Capital jointly acquired Payless ShoeSource for $770 million.

Chief among the reasons for the uptick in private equity interest is that those shops are flush with cash right now, said market experts.

“It’s busy because it’s that time of year when they either use [the cash] or lose it,” said Marty Staff, president and founder of consulting firm Marty Staff Associates. “All these companies get audited in March or April, which is when they either decide to sell [existing assets in their portfolio] or kick the tires.”

The wheeling and dealing is also to take advantage of the fact that “leverage has come back into the marketplace and there are a lot of companies that are confident in their business plan [to make purchases],” said William Susman, managing director of advisory firm Threadstone Partners.

In addition, both private-equity and strategic players said now is a good time to strike as banks are lending again.

Blake Krueger, CEO of Wolverine World Wide Inc., notably told analysts a week before announcing his firm’s acquisition of Collective Brands Inc.’s Performance & Lifestyle Group, “Money, at least in the U.S., remains relatively cheap by historical standards, so that’s probably also weighing into the minds of some sellers [and buyers]. There’s a trend going on around the world [of] consolidation of brands. We think it’s going to continue.”

Two footwear brands currently shopping for new owners are Cole Haan and Umbro, after parent company Nike Inc. announced last month it was seeking to divest them. Industry sources also said last week that Aerosoles may be searching for a new owner, as well as Charles David.

While potential acquirers for these properties are unknown at the moment, sources said private equity firms could be likely bidders.

“Cole Haan is attracting a lot of interest from the funds,” said Susman. “Nike’s approach is to tell the world they’re for sale and drive the [search for the] highest value.”

Staff, who is one of several informal advisers to private equity firm Sycamore Partners, revealed, “A couple of funds have reached out to me [expressing interest, but Nike] is asking for a lot of money for that brand, more than 10 times EBITDA. [Market talk is that] whoever is going to buy [Cole Haan] is going to do a diffusion line and take it down-market to a JCPenneys.”

In today’s market, private equity has more room to play because, as Staff said, there is “a paralysis of activity on the strategic side.” He noted strategic players are putting increasing importance on return on investment instead of topline growth. “They are patient and will pass on a deal if it’s not a good price. Companies are looking to be sold at 10 to 12 times EBITDA, while strategics are offering five to six times. There’s an enormous disparity.”

Susman agreed: “Strategic buyers continue to be disciplined in this market. There’s just a certain price at which they’re willing to buy things.”

In contrast, “funds have always had an appetite for business. Everyone is much more opportunistic today than they have been for quite some time,” said Gilbert Harrison, founder and chairman of Financo Inc.

Additionally, the few firms with the financial wherewithal to strike sizeable deals have their hands full. Big players on the footwear front, including Wolverine, VF and Jones, have been active in sizeable deals recently, so they may slow down later this year, insiders said.

Funds, meanwhile, have the advantage of larger coffers and a more hands-off approach to operations. However, financiers cautioned that they shouldn’t be treated as an easy way out for beleaguered businesses.

“Usually a [distressed asset] is not suitable for a financial acquirer because they need an immediate return. But when you can take a company apart and pull out pieces that by themselves can support debt, then you can structure a deal around [any potential problem areas],” said Richard Kestenbaum, a partner at private investment banking firm Triangle Capital.

For instance, a source close to Blum and Golden Gate told Footwear News that when the firms bought Payless, whose domestic business had struggled with lackluster comps, one of the key parts of the deal was that both firms fully support the turnaround plan already in place for the retailer. Morever, Blum was already a 6 percent stakeholder in the chain and is well known in the industry as a long-term investor.

Deal brokers predicted brand consolidation will continue as smaller firms see margins shrink further. And as more targets come onstream, interest may start flowing in from overseas, especially Asia.

“I don’t see anywhere near the number [of dollars from them] that we should, even though [investors there] have the growth and they like American businesses,” said Harrison. “Currently, it’s a combination of them not understanding the market and taking their time. One of the biggest problems with all these transactions is that people take too long to make decisions.”

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