Buyers in the consumer goods and retail sectors are looking for brands with longstanding cachet and room to grow, as PVH Corp.'s (NYSE: PVH) recently-announced acquisition of apparel designer and distributor the Warnaco Group Inc. (NYSE: WRC) demonstrates. The $2.9 billion deal, which is expected to close in early 2013, gives PVH several household names popular with consumers, including Calvin Klein, Speedo, Body Nancy Ganz/Bodyslimmers, Warner's and Olga.
"I think a driving force was to put Calvin Klein back under one roof," says Alan Myers, partner at Skadden Arps Slate Meagher & Flom LLP, who advised Warnaco on the deal.
PVH has owned Calvin Klein since 2003, but Warnaco kept operating the jeans and underwear business.
Calvin Klein, which PVH will acquire the rest of through the Warnaco deal, is synonymous with fit and form - with knowing no matter what shape a woman's body is, there is a style that will work for her - making it valuable, according to managing director Joe Pellegrini (pictured) from investment bank Robert W. Baird & Co. Prior to his investment banking career, Pellegrini spent seven years in the National Football League, playing for the New York Jets and Atlanta Falcons.
"The deal made an incredible amount of sense," says Pellegrini.
PVH's stock rose from a close of $91.50 on Oct. 31 to close at $113.71 Nov. 1, the day after the deal was announced.
Right now the brands that are really resonating with consumers aren't the ones that spend a lot on advertising, they are the ones that have another factor - like superior fabrics or an established lifestyle vision - according to Pellegrini.
"Those are the brands that are going to be in higher demand because they are the most difficult to replicate overnight," Pellegrini says.
Those brands include Sperry, Spyder and North Face, according to Pellegrini, because they offer a product that comes with an emotional connection to a lifestyle that a consumer may want to have.
For example, the North Face brand products can be used to climb Mt. Everest, but people who just like that idea or lifestyle vision, Pellegrini says, can also use them. The brand, which has the slogan "home of technically advanced, innovative apparel, footwear, and gear that inspires athletes to never stop exploring," doesn't have an easily replicable 40-year history. North Face is owned by VF Corp. (NYSE: VFC).
There is an enormous appetite for brands with affluence, which are viewed as "authentic brands," Pellegrini says. North Face represents one of the best brands for climbing, but it also represents a cool or healthy way of living that people connect to.
"People buy for the meaning," Pellegrini says. They already have a pre-conceived notion of what they want before they walk into a store.
One way to resonate with a buyer is through social media and e-commerce, according to Adrian Barrow, head of planning for marketing firm JWT in New York. Their clients, he says, are trying to take advantage of consumer search behaviors - how people use their phones and tablet to search for product reviews and better prices on a product before and while they shop.
The companies that invest in social media have a chance to de-commoditize the product by finding ways to add information services for the consumer.
Though it's hard to track if social media has an impact on a company's bottom line, according to Barrow, indications are that social media does create a return on a company's investment; it just may not be immediate.
Social media isn't the only technology companies have been using - mobile payment sector M&A has had a string of deals in 2012.
In July, PayPal bought card.io, a company that develops technology that allows credit card information to be scanned with a mobile camera. In August, Starbucks Coffee Co. (Nasdaq: SBUX) announced it would invest $25 million to partner with Square, a mobile-payment platform. The coffee chain's customers can pay with the application and use it to find other Starbucks locations. Also in August, mobile-payment company Global Payments Inc. (NYSE: GPN), acquired payments-technology company Accelerated Payment Technologies for $413 million as a means to expand its business. And in October, Brussels-based Ogone announced it would purchase Tunz.com to expand its online payments service across Europe. The target offers customers a mobile-wallet service that allows them to use their phones as a means of payment.
2012 was the host to several large consumer retail deals, such as Nike's sale of Umbro, which makes soccer-related products, to Iconix Brand Group Inc. (Nasdaq: ICON) for $225 million. The sporting company is also looking to sell its Cole Haan brand so it can focus on its Nike, Jordan, Converse and Hurley Brands, it announced in May.
Private equity firm Clayton Dubilier & Rice purchased David's Bridal Inc. from Leonard Green & Partners in October for $1.05 billion. The target sells wedding gowns and other special-occasion dresses through 300 U.S. and five Canadian stores, and is known for affordable prices.
2012 also brought reports that Rip Curl International Ptdy. had hired Bank of America Merrill Lynch to go through unsolicited offers to buy the surf-wear company. The brand started in 1969 in Victoria, Australia as a surfboard manufacturer. Now it sells clothing, accessories, wetsuits and watches.
Other Australian surf-wear brands, Quicksilver Inc. (Nasdaq: KWK) and Billibong (ASE: BBG) have gone public.
In November, Warren Buffett's Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) announced it would buy Oriental Trading Co., which sells party supplies and other goods, for a reported $500 million.
"By increasing revenue, profits and the customer base over the last few years, Sam Taylor and the entire Oriental Trading team have successfully improved the business and positioned it for long-term growth," Buffett says.
Private equity firm Kohlberg Kravis Roberts & Co. has owned about a third of Oriental Trading since it swapped its debt for equity when the target exited from bankruptcy protection in August 2010.
Private equity companies will continue to play a large role in consumer retail M&A.
There is a lot of money on the private equity side sitting on the sidelines looking to buy consumer-retail businesses that have sustainable growth stories, according to Pellegrini. Strategic buyers too, have a lot of money they can invest, he says.
Through the downturn, strategic buyers were able to improve their operating efficiency and reinvest in their companies, making themselves stronger than they were before the economic crisis, according to Pellegrini.
There is a continued private equity interest in the consumer retail space that will likely continue through 2013, according to Steve Robb (pictured), managing director at investment bank Morgan Joseph TriArtisan.
Buyers will be looking for strong, franchised brands that don't have all the pieces in place. Then brands, such as luxury sportswear designer Peter Millar LLC, will be able to leverage their international capabilities.
Peter Millar didn't have the infrastructure, but now that it has been purchased by Belllvue, Switzerland-based Cie. Financiere Richemont SA, it can be developed and expand in Asia and Europe where the brand didn't previously have a presence, according to Pellegrini. Richemont, which declined to comment for this article, owns several luxury companies, such as designer Chloé, jewelry-makers Cartier and Van Cleef & Arpels and high-end shopping destination, Net-a-porter.com.
The same is true of the PVH Warnaco deal, according to Dana Perlman, PVH's treasurer and head of international relations, and Mark Fischer, PVH's senior vice president and general counsel.
Not only does the deal allow PVH complete control of the Calvin Klein brand, it allows the company to put Calvin Klein brand jeans and underwear in their North America and Europe platforms, Fischer and Perlman say. PVH, which owns Tommy Hilfiger, Van Heusen, Bass and Arrow, will also be able to take advantage of Warnaco's strong operational experience in Asia and Latin America for the benefit of their Tommy Hilfiger business, they say.
The deal also eliminated efficiencies stemming from licensing agreements over the underwear and jean divisions.
The potential to expand is one thing that experts agree makes a retail company attractive to potential buyers.
Panelists at ACG New York's 2012 Consumer Brands Conference agreed that when it comes to retail M&A, brands need to leave runway for the next buyer. Private equity executives Lou Marinaccio from North Castle Partners and Alexander Panos from TSG Consumer Partners, Brett Brewer from weight-loss product company Sensa and Jack Belsito, from Voss water were panelists at the conference, which was co-chaired by AGC New York president Martin Okner, managing director, SHM Corporate Navigators, and Fuad Sawaya, co-founder, Sawaya Segalas & Co. LLC.
For example, several companies have approached Voss asking it to distribute their products, Belsito said, but it declined. Belsito believes the fact that other companies want Voss to act as a distributor, is something that could make the company valuable to a new owner or investor, because it presents an expansion opportunity, he said at the conference.
Sensa also didn't expand as much as it could have, Brewer said. The company started expanding in Europe, but didn't fully expand, so that a potential buyer would have locations to grow the company.
That strategy is the right one, according to analysts.
"There's a trend of getting in earlier and focusing more on growth companies," says Robb.
"Having a growth thesis to sell off of can change the dynamic of where you trade by many multiple Ebidta points," Robb says. If there's limited growth potential, companies might not be able to get anything done.
Private equity firm JH Partners LLC invested in Providence-based jewelry brand Alex and Ani LLC in October. The company has a plan to expand its offerings, which include expandable bracelets, into 18 more states by the end of 2013.
It may be interesting to watch how private equity firms exit the assets they purchased between 2005 and early 2008. Those investments may not result in substantial gains for the current owners, Robb says, because firms paid high prices, and put a high amount of leverage on the companies. That combined with the difficult economic environment over the past few years, may have caused the companies to become "anemic," Robb says.
Toys "R" Us, which was taken private in 2005 by a $6.6 billion leveraged buyout by Kohlberg Kravis Roberts & Co., Bain Capital and Vornado Realty Trust, intended to go public in 2010, according to Securities and Exchange Commission filings. The company has yet to schedule its IPO.
Despite any struggles that private equity firms may face, consumer confidence is on its way up, according to multiple indexes.
The Conference Board's Consumer Confidence Index shows that consumer confidence had risen to an all-year high in October, the last month of data available. Consumers were generally more optimistic about their financial situations and short-term economic outlook, and appeared to be in better spirits approaching the holiday season, according to Lynn Franco, director of economic indicators at the Conference Board, in the October report, which was issued prior to Hurricane Sandy.
Bloomberg's consumer confidence was also up to almost a six-month high at the end of October. The company's consumer comfort index was minus 34.7 for the week ended Oct. 28, the highest since the previous week, at minus 34.6, the organization reported.
Macy's Inc. (NYSE: M) announced it would hire about 80,000 seasonal workers for the holiday 2012 season, up slightly from the 78,000 it announced it would hire in 2011. Target Corp. (NYSE: TGT) planned to hire slightly fewer holiday workers than it has last year, estimating it would hire 80,000 to 90,000 seasonal employees compared to last year's 92,000. Kohl's Corp. (NYSE: KSS) announced it would hire about 52,700 associates for the holiday season, up from last year's 40,000 hires. WalMart Stores Inc. (NYSE: WMT) announced it would hire around 50,000. Toys "R" Us announced it would hire 45,000 workers for the season. Last year, the company announced it would hire 40,000 workers. Best Buy Co. Inc. (NYSE: BBY) announced it would hire an additional 24,000 workers, also up from last year's 15,000 hires.
Alison Chaltas, the executive vice president for GfK, a consumer brands marketing company, who was also at ACG New York's 2012 Consumer Brand Conference, says that though consumer confidence is way up (about 25 percent) from where it was immediately after the recession, consumer spending is only up about one percent.
Experts were hesitant to say if holiday hiring projections meant anything for the upcoming holiday shopping season or for M&A in the sector in 2013.