For footwear players, the time to buy — and sell — could be now.
A number of high-profile deals, including Coach’s $574 million Stuart Weitzman buy, New Balance and Berkshire Partners’ $280 million acquisition of Rockport, and Iconix Brand Group’s $37 million investment in Pony, have altered the playing field in the past month.
And once the market digests the latest round of earnings reports, more companies could be poised to join the fray.
The uptick in M&A activity is due to the solid economy — buoyed by the recent drop in oil prices — and still-plentiful access to equity and debt capital, analysts said.
Over the past few years, growth in the footwear market has been relatively stable, though not robust. With that in mind, Steve Marotta, senior research analyst at C.L. King & Associates, predicted that larger, cash-flow-positive footwear companies will seek growth via acquisitions of smaller companies or brands.
Companies with revenues of $50 million and above are most attractive to potential buyers, said William Susman, managing director at consulting firm Threadstone LP.
Steve Madden has been actively seeking these kinds of buys. Last summer, the brand snapped up Dolce Vita for $60.3 million. On a smaller scale, Madden bought the intellectual-property rights and assets of Blondo in January for an undisclosed amount.
“The opportunity is going to be what attractive brands of scale are ready for sale. There’s a limited supply of them today,” said Susman. “There are a lot of small brands seeking capital, but it’s very hard to raise [money] for businesses with less than $20 million in revenue.”
While add-on acquisitions are likely to be the focus, analysts also think that a few bigger deals, particularly in the athletic space, could be in the works.
Puma is rumored to be on the block, with VF Corp. seen by some market watchers as a potential bidder. Puma, which is owned by European luxury-brand conglomerate Kering, had revenues of 3 million euros in full-year 2013 (about $3.4 million currently), the most recent year for which data are available.
Reebok is another brand that many see being in play, despite its 1.2 percent drop in revenues, to 1.3 million euros (about $1.4 million currently), for the first nine months of 2014.
The brand has pulled German-based parent company Adidas Group down, said Paul Swinand, an equity analyst at Morningstar. Adidas tends “to have a penchant for funneling the bad [ideas] through Reebok and then having a tough compare [the next year] when [the idea] was just a gimmick,” he said.
Reebok would stand a better chance on its own, Swinand suggested. “Even though executives say they’re not selling, it has to be in the back of their minds. [Reebok’s] growth rate is slower, and it’s hurting Adidas Group’s profitability. If someone is willing to pay a lot for it, as a fiduciary duty to the shareholders they have to take a look at it.”
In the case of Rockport, which Adidas sold on Jan. 23, the brand will likely fare better in a different environment, market watchers said.
The label will be housed with other comfort-driven brands in a new standalone company called The Rockport Group. It will include Cobb Hill, Dunham and Aravon, which had been operating as part of New Balance’s Drydock Footwear LLC.
Luxury is also top of mind in the M&A world. Sources cited the continued success of $3.91 billion Michael Kors Holdings, which has been a public entity for four years.
Private equity is “fixated” on the hot accessories, shoes and handbag markets, said Susman. And these players are willing and able to pay more than a strategic buyer could because they often load up companies with high levels of debt.
On the leveraged-buyout front, there is speculation but no confirmed companies in play.
Both Dick’s Sporting Goods Inc. and DSW Inc. have recently been the subjects of LBO talk, but each has a controlling shareholder family — not an ideal scenario for a private-equity firm looking to take a giant publicly traded company private, analysts said.
“With the [current] low interest rates, private equity might be amenable to taking a company like Dick’s private, leaving management in place. Dick’s management is in a good negotiating situation. They could cash out, still remain in control — and get another cash-out,” said Swinand. Recent reports suggest that Dick’s is off the market, however.
While private-equity firms can typically offer the biggest bucks in a deal, they don’t always emerge victorious.
Take Coach Inc.’s recent purchase of Stuart Weitzman: Private-equity firm Advent International was reportedly also interested in buying the footwear brand. But there are synergies that a strategic buyer like Coach can provide that private equity can’t match, despite being able to pay more, analysts said.
Iconix, along with other brand-management firms like Authentic Brands Group and Sequential Brands Group, has built a powerhouse business by being acquisitive and is now vying for a bigger piece of the footwear market.
Last year, Sequential purchased Avia and And 1 from Brown Shoe Co., following its 2012 buy of Heely’s. “They can be the re-igniter for a brand that’s underinvested in,” said Camilo Lyon, managing director of equity research at Canaccord Genuity.
Sequential and others are likely to look at brands being divested by Brown Shoe and other players that continue to make “house-cleaning” a priority. Brown recently sold Shoes.com to Shoeme to focus on its its wholesale business and its omnichannel push at Famous Footwear.
“Companies want to streamline their business units to focus on the things they want to [emphasize] with top-tier brands and core categories,” Lyon concluded.