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Why a Flood of M&A Activity Isn’t Likely to Follow the VF-Supreme Deal

Like much of the world, the mergers-and-acquisitions market went quiet in recent weeks as companies waited to find out the results of Election Day and understand what the country’s future might look like for the next four years.

That pause came to an end yesterday, as VF Corp. announced it would acquire streetwear brand Supreme in a deal reportedly worth $2.1 billion. Wall Street cheered the news, sending VF’s stock up to its highest levels since mid-February, based on the strength of the two parties’ joint prospects. At press time today, VF shares were still trading at a premium, at $77.50.

But market watchers suggest one deal doesn’t necessarily open the floodgates for a wave of further M&A activity.

Camilo Lyon, an analyst with BTIG, noted that retail executives are eyeing the fate of the United States Senate, which remains undecided until Georgia holds runoff elections in January for its two seats. He explained that if the Senate again ends up under Republican control, President-elect Joe Biden is unlikely to be able to make extensive changes to the corporate tax code.

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Believing that scenario to be likely, investors as well as deal-makers, aren’t feeling as much feel pressure to hurry a sale.

“I think that’s why the market has been so strong,” said Lyon. “Late last week, even when it started to look like Biden was going to win, it was pretty clear that the Senate was not going to flip Democrat.”

Conversely, if investors had expected the Senate to flip Democrat, there may have been a flurry of deals from those hoping to cash in on the current tax code.

Lyon added, “Sure, there is still a bit of uncertainty with the Senate races. It could be a 50-50 Senate with Vice President-elect Kamala Harris serving as the deciding vote. But it certainly looks like any sort of major tax overhaul is not likely to happen — certainly not next year. So that lessens the urgency to complete [a deal] prior to Dec. 31.”

Meanwhile, analysts said there is a shortage of strategic investors in a position right now to buy.

“VF has made it clear since, well, pretty much forever, that acquisitions are a major part of their growth strategy,” said Sam Poser, an analyst with Susquehanna International Group. “[Their deal with Supreme] came a little earlier than I anticipated, but it’s not a surprise that it happened. I don’t know how many other companies have that as a priority and, in my world, at least, are ready to buy something.”

Lyon agreed, adding, “Maybe the European players could take advantage of some depressed valuations for luxury brands. If I’m thinking about companies that have raised some cash, sold some assets or have just the wherewithal to do so, those guys come to mind. But I don’t know of any other strategic acquirers that would be buying in this type of environment —outside of VF.”

Both Poser and Lyon did note that Authentic Brands Group is always in the mix, though as a licensing company its business model is different than brand-builders like a VF or Tapestry. The New York-based firm has — in the past year — snapped up Barneys New York, Forever 21, Lucky Brand and Brooks Brothers out of bankruptcy. And CEO Jamie Salter has publicly expressed his desire to also snag the Reebok brand, which has again become the subject of sale rumors lately.

Aside from ABG, other companies reportedly eyeing Reebok are private equity firms Permira and Triton.

“With Reebok, it would need to be somebody who completely appreciates what the brand is and was able to restore its heritage,” said Poser.

Other brands that could be ripe for a sale are Canada Goose and Deckers Brands, according to Lyon.

“Especially when the [Canada Goose] stock was in the low 30s Canadian dollars, it just seemed like a screaming opportunity for Bain to go back and acquire the remaining position that they didn’t already own,” he said. “And I think Deckers could fit really well within the VF portfolio, although their size may now have become too prohibitive.”

Lyon also pointed to opportunity with digitally native brands like Allbirds, which has been rapidly expanding into new categories such as apparel.

For his part, Poser thinks early 2021 will bring more acquisitions, as economic pressures from the coronavirus continue to weigh on balance sheets. “I think some of these companies could see a drip, drip, drip, and then they’re going to realize they’re in trouble and need to make a deal,” he said.

But the key, Poser added, is finding the right asset. “Companies buy for so many different reasons, but in this environment, you need authenticity, you need a compelling story and then you need an exceptionally good execution,” he said.

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