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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Landau emphasized that private equity firms seek an exit strategy. "We are looking for how we leave before we ever walk through the door," Landau said.

In addition to an "attractive exit opportunity," Landau said private equity firms look for strong management, profitable businesses with growth prospects and business that is "not volatile or dependent on fashion or economic cycles."

Rifkin said that last year, M&A activity in the sector was $134 billion, up 12 percent over the record 2005 total of $119.4 billion, and he expects this year will again break volume records. Rifkin pointed to an upward trend in hostile activity, successful instances of apparel companies creating an initial public offering and public companies' evaluation of all business segments — not just weak areas, as in the past — as they focus on enhancing shareholder value.

Acquirers look for strong brands, multiple formats, consistent cash flow, real estate, international sourcing potential, relative immunity from Wal-Mart, information systems and international growth opportunity, Rifkin said. He added a list of transaction-related considerations: valuations, capital structure and financial flexibility, impact on base business, culture and market reaction.

The average size of deals has dropped, according to CIT, an independent financing company focused on middle-market businesses that cosponsored the seminar. "Smaller branded apparel companies of less than $100 million will be attractive targets for midsize firms," said Christopher Westfall, managing director of the M&A division of CIT, who identified Li & Fung, Iconix, NexCen Brands and G-III Apparel Group as leading middle-market companies.

Midsize vendors who attended the seminar drilled the panelists on how smaller companies without branded products could survive, but the panelists had neither a good prognosis nor an easy answer.

Consultant Emanuel Weintraub, whose firm hosted the talk, estimated market share breakdown at 30 percent private brand, 40 percent national brands and 30 percent unbranded. But he thinks that will shift to 45-40-15, with national brands spending increasing amounts on marketing to hold onto their market share in the face of stronger private labels and unbranded goods vanishing.

What with the emergence of private label, retail consolidation, limited growth in the marketplace and Wall Street's demand of 10 percent growth, companies have no choice but to merge and acquire, Weintraub said. "In an industry with limited growth and redistribution of market share, plus Wall Street's demands of growth — guess what: The big fish need to eat the little fish," he said.

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