Private equity firms and other opportunistic companies are readily eying possible acquisition targets that may not make it through the COVID-19 pandemic. Recently, British online fast-fashion retailer Boohoo announced stronger-than-expected earnings – and revealed that it is looking to scoop up some of its struggling rivals. “It is likely that many opportunities will arise in the coming weeks, and we will take a look at those and make an assessment on whether we can add value,” said Neil Catto, the company’s finance director.
Boohoo will not be alone in the quest to take advantage of acquisition targets that are suffering financially. While the coronavirus has interrupted deal-making and inflicted damage on financial markets everywhere, many companies are desperately trying to keep their businesses afloat. However, in the aftermath of the coronavirus pandemic, some industry observers expect an influx of mergers and acquisitions, with bigger and well-capitalized players and private equity groups using the opportunity to gobble up companies that became vulnerable in the crisis at bargain prices.
The odds of this happening look especially good in retail, where the crisis has significantly impacted mass-market and luxury brands, alike, and is intensifying the difference between winners and losers – or maybe more accurately, the hunters and the prey.
Trouble Before the Coronavirus
The issues that the fashion industry is facing in light of the pandemic are not exactly new. An April 2020 report from McKinsey showed that roughly 34 percent of publicly traded fashion companies in Europe and North America were showing signs of financial distress before the pandemic. Add in three months or more of shuttered retail outposts and mounting unsold merchandise, and the consultancy expects that number to possibly increase to 80 percent or higher. The report anticipates that to continue, many companies will have to seek financial relief, file for bankruptcy, or become acquisition targets for stronger companies or private equity firms.
Experts say that viable companies may want to acquire their direct competitors in an effort to combine their strengths and streamline their costs. Or companies may seek to bolster their weak spots. For example, the Gap acquired activewear maker Athleta in 2008, during another economic crisis to build out its activewear business in light of a larger consumer movement away from denim and towards athleisure.
Another option for these companies and cash-laden private equity firms is to try to target companies with different business models or technology they do not have. In this case, there would be plenty of opportunities of for acquiring companies with strong holdings.
Private Equity Firms, Big-Box Stores & Luxury Conglomerates
Private equity firms will definitely be shopping when the crisis dissipates, as fashion continues to be a draw. “While fashion companies are investing in adjacent sectors, private equity investors are continuing to prioritize luxury fashion, despite the mixed success of such investments,” Vogue Business wrote last year, citing a Deloitte survey of 60 leading private equity firms, which found that for a third year in a row, private equity firms were most interested in investing in fashion.
This segment has seen an array of high-profile purchases in recent years – from the Carlyle Group taking a 50 percent stake in the streetwear giant Supreme in 2017 to Permira acquiring a controlling stake in cool-girl outfitter Reformation in July of 2019. Estimates as of last June say that private equity had nearly $1.5 trillion in ready capital, according to a report by Preqin, a data and research firm for finance professionals.
Big-box retailers, such as Walmart and Target, along with e-commerce kingpin Amazon, may also uncover worthwhile opportunities. (Amazon, after all, has been rumored to be looking into bankruptcy department store chain J.C. Penney). The three are among the few retailers that have the financial bandwidth to actually come out of the crisis stronger and in a good position to expand via acquisition targets. Still yet, giants like LVMH Moët Hennessy Louis Vuitton and Kering, whose multi-billion dollar models depend – and thrive – on the pooling of luxury goods brands under their ownership umbrellas, very well may make moves in light of the pandemic.
No doubt, like the world’s economy, it will take some time before M&A deals get going once again.
The COVID-19 crisis has upset the normal flow of business, and some deals have been put on hold for the duration or quashed altogether. One transaction has gone to court. Retail group L Brands and private-equity firm Sycamore Partners are fighting over their proposed deal as Sycamore is said to have attempted to back out of the $525 million transaction due to the coronavirus pandemic. The deal would have had Sycamore take over 55 percent of Victoria’s Secret Lingerie, Victoria’s Secret Beauty, and the Pink fashion brand—valued at $1 billion.
But for those ready for action, they are looking for possible acquisition targets now to be ready to move when the dust of the pandemic starts to clear.
Carpenter Wellington is a boutique commercial law firm, with offices in Seattle and Portland, partnering and advising fellow in-house counsel, business executives and entrepreneurs. (Edits/additions courtesy of TFL)