What are the key deal drivers behind the increased levels of M&A and corporate transactional activity within the UK fashion industry seen in the early part of 2012? Of equal importance, what are the chances that this activity will continue?
The Eurozone crisis, tough trading conditions and a bleak macro economic outlook have led to some highly distressed situations for high street retailers. Shortly after the New Year, the Peacocks group collapsed into administration, with its Bonmarché chain being acquired shortly thereafter by Sun European Partners, the European arm of the US private equity house Sun Capital Partners. Other high profile casualties on the high street in the first quarter have included outdoor specialist Blacks Leisure and lingerie chain La Senza.
A slump in post-Christmas trading plus incoming quarterly rent bills are common themes for early year retail turmoil. However, 2012 has seen both more administrations in the sector and also significantly higher profile companies in difficulty. Unusually weak consumer demand plus increased competition from online fashion retailers (for example Boden, who last year reported profits up by 13%) are cited as key factors in the current market.
Opportunity is often born out of adversity, and that is a sentiment that is certainly not lost on private equity houses, many of whom perceive significant investment opportunities in the current climate. Sun European Partners, for example, is already established as a player in fashion retail investment, having previously added Alexon and Jacques Vert to its portfolio. Other notable recent deals include the acquisition of Jaeger by Better Capital in a deal worth £19.5m and the acquisition of a majority stake in Hunter Boots (maker of the famous wellingtons) by a new entrant to the private equity market, Searchlight Capital Partners. Other private equity houses who have actively targeted the fashion / retail space include Isis Equity Partners (an investor in Crew Clothing Co and whose realised investments include Fat Face, Bench and Hooch), 3i (whose portfolio includes lingerie maker Agent Provocateur and Hobbs), Permira (who own Valentino and Hugo Boss) and Inflexion (whose portfolio includes niche fashion brand Jack Wills, where profits have grown at an impressive 47% per annum).
So what is it that is attracting private equity players to the fashion world? Whilst each deal is invariably distinct, certain themes seem to crop up regularly: perceived structural inefficiencies within the industry; over-rented real estate portfolios; and opportunities for acquisition of under-capitalised rival brands all give rise to opportunities that can appeal to the mindset of the private equity investor.
But there are inherent tensions between the traditional private equity investment model and the interests of a fashion house. Private equity investors often adopt process- and growth-focused strategies, which may not always fit easily with the traditions of cautious growth, exclusivity and creative freedom that inform the strategic direction of many fashion brands. For example, whilst private equity funding can, on the one hand, facilitate rapid international expansion and fuel commensurately large returns for investor and investee – on the other hand, an expansion plan that is overly aggressive can risk significant damage to a brand – both by eroding exclusivity and also by exposing it to other risks such as counterfeiting.
Despite these tensions, market interest has recently centred on iconic luxury and ‘heritage’ brands, in particular, brands that are globally recognised as ‘British’. Take, for example, the recent acquisition of Savile Row tailor Gieves & Hawkes by Trinity Limited, an affiliate of Li & Fung Group, whose private equity investment arm also controls Hardy Amies. Mulberry, the luxury handbag maker, also continues to attract interest and takeover speculation on the back of its impressive sales growth, and, at the time of writing, there appear to be at least 10 potential bidders interested in buying the collapsed Aquascutum brand – with at least a couple of those rumoured to be private equity investors.
In this Jubilee and Olympic year for Britain it seems likely that brands which are associated with ‘Britishness’ will continue to attract interest, in particular from the Far East, where growth in the luxury goods market is strong. Closer to home, the recent government initiatives spearheaded by Mary Portas have contributed to reviving interest in British fashion manufacturing and retailing. Despite the general economic climate, it is clear that there are private equity players looking to make significant investments. Investors who can move quickly and deploy substantial resources of capital and expertise to restructure struggling businesses – especially where large quantities of acquisition debt finance are either not required or can be ‘bridged’ by the investor – are likely to continue to see opportunities for acquisition or consolidation on the high street. At the luxury end of the market, investors whose exit horizon is at the longer end of the private equity model (5-7 years +) and who can bring sector-experienced management to facilitate careful growth are likely to be the most sought-after partners.
This article was written by Tom Rowley, a senior associate in the corporate department and a member of the Fox Williams’ Fashion Law Group.