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M&A: Is Private Equity Losing Its Steam?

Private equity's domination of the retail mergers and acquisitions market may have an expiration date.

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NEW YORK — Private equity's domination of the retail mergers and acquisitions market may have an expiration date.

Heads of investment banks, private equity funds and strategic apparel giants agreed during a seminar last month at the Princeton Club here that private equity's ability to outbid strategic buyers for apparel acquisitions was an historic anomaly, and that the Liz Claibornes and Jones Apparel Groups of the world will win back the competitive advantage.

"Conceptually, if everything were equal, strategics should pay more because we have synergies," Peter Boneparth, president and chief executive officer of Jones Apparel Group, said during the seminar, "M&A: Finding the Strategic Fit.''

But Jones has not made a deal since it bought Barneys New York in 2004 for $397.3 million. Boneparth explained that public apparel companies like his trade around six or seven times earnings before interest, taxes, depreciation and amortization, "so it's hard to rationalize buying at nine or 10 times EBITDA," which is what private equity firms have been paying. However, he predicted that a few bad deals will put an end to that practice in time.

"We used to say we would only do deals over $100 million or $200 million, but it's become a challenge in the last 24 months," Boneparth said. "In a perfect world, we would have contemporaries to round out our portfolio. There have been cases where we have loved the brand, loved the management, but we couldn't come close on the price."

Previously, corporations like Jones were able to spend more because of the cost savings associated with economies of scale, said Adam Rifkin, senior vice president of the retail apparel group at Lehman Brothers. But now, private equity firms can leverage more capital, and the risk associated with fashion has decreased as the market in general thrives with upward shopping and purchasing trends, he said.

"Private equity funds are willing to supply not only the equity but also the debt — they are one-stop shops and management welcomes private equity," said William Susman, president and chief operating officer at investment banking firm Financo Inc.

David Landau, a partner at LNK Partners LLC, a $400 million private equity fund that focuses on the retail sector, said although private equity firms often pay more than strategic buyers, he predicted that trend will reverse itself. "Are private equity firms seeing something the strategic buyer does not, or are they being stupid?" Landau asked. "Time will tell."

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