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A Sea Change in Luxe: Tough Market Favors Buyers Over Sellers

When sales of luxury products were riding high, it seemed just about any designer was ripe for acquisition. But now it's a buyers' market.

NEW YORK — When Pegasus Apparel Group acquired Miguel Adrover’s business in March 2000, it gave the designer a Jaguar to use for tooling around town. The car was a status symbol worthy of the successful designer Pegasus hoped Adrover would become. But it was returned when the ambitions of Pegasus —now called Leiber Group — disintegrated. These days, Adrover is bicycling his way through the city.

The trajectory of the market for acquiring designer businesses has closely followed Adrover’s mode of transportation. When sales of luxury products were riding high, any designer with a pair of scissors and a degree from FIT was ripe for acquisition by a luxury conglomerate. Even newcomers like Adrover was at the time, and whose talent was praised by the press but whose sales were untested, got generous deals.

"It was kind of a free-for-all," Adrover’s business manager, Dennis Walker, recalled. "People were throwing money and cars at designers."

Some of the most rapacious buyers were European companies. In the late Nineties, LVMH Moët Hennessy Louis Vuitton, Prada and Gucci Group appeared to be invincible juggernauts able to take little-known brands and make them bigger and better. Now, a chastened Wall Street has turned a cynical eye on acquisitions, and shareholders are telling ceo’s to stick to their proverbial knitting and put their resources —both financial and managerial — into their tried-and-true core brands.

In general, buyers seem to have a leg up over sellers these days. The door has been opened for opportunistic buyers such as Lawrence Stroll and Silas Chou — the proud new owners of Michael Kors — or any other investor nursing a dream of building a luxury group of his or her very own, to swoop down and pick brands off the larger fashion vines.

LVMH’s sale of the Hard Candy and Urban Decay cosmetics brands, Gucci’s recent announcement that Yves Saint Laurent will turn a profit one year later than most recently forecast and reports that Compagnie Financière Richemont AG is dissatisfied with its Lancel purchase are just a few examples of the uphill battle luxury brands face in these times of geopolitical uncertainties, weak global economies and nervous consumers.
"There was a moment where a company could take the luxury of nurturing small brands," said John Howard, senior managing director and head of merchant banking at Bear Stearns, which operates a fund that invests in fashion and retail. Because of the difficult economy, Howard said there’s now no longer time for marginal brands to leach valuable time and money from healthier brands.

"A lot of the acquisitions had to do with ego on one level and a belief that the stock market would keep rewarding growth," Howard said. "There’s no more or less discipline in the fashion industry than anywhere else. Three to five years ago it seemed like anything was possible and that you could grow anything overnight."

But the state of the economy has not dulled everyone’s appetite for acquisitions.

"If anything, it’s an opportune time to buy because of cheaper leases for stores," said Stroll, who owns the brands Asprey and Garrard with his partner, Chou. "Prices, too, should be less expensive. Good companies are always a value and the great brands out there are becoming greater. I’m not saying that Silas and I are actively looking for more acquisitions, but if another opportunity like Michael Kors crosses our plate, then I’d be very excited to have it. Maybe we’ll buy five companies in the medium term, maybe we won’t buy any. It all depends on the opportunities we spot."

Stroll added that his criteria for future acquisitions is growth potential. "The companies we’ve bought are very young — in their infantile stages — and for the next 10-15 years they will be all about growth. For that reason, too, I think the economy has less effect on us than it would on a mature brand."

While Hong Kong businessman Dickson Poon stayed on the sidelines during the last buying spree, he remains prepared to pounce on designer brands if the right one becomes available. Dickson North America president and ceo Charles M. Jayson said, "We are exploring many businesses that we believe have growth potential and are viable candidates for investment or acquisition.

"We continue to exercise a focused and disciplined approach, with the criteria being upscale or luxury businesses that are or can be evolved into lifestyle brands," he added. "We pay special attention to companies that can be enhanced by our wholesale and retail network of owned companies in the Dickson Group, like Tommy Hilfiger handbag and small leather goods in the U.S., the Harvey Nichols Group in the U.K., Paris-based S.T. Dupont and Dickson Concepts International Ltd. in Hong Kong."
Like Stroll and Chou, Jayson isn’t letting the dismal economy put a damper on Dickson’s plans. "We believe this is an excellent time for investment in select businesses," he said.¿"We are poised buyers with a strong cash position and well respected within the financial community based on our conservative operating philosophy and years of positive financial results and continued growth. While the world is clearly going through a challenging retail cycle, we have a long-term optimistic view about quality products that offer fashion and style."

While this is a buyer’s market, companies still aren’t giving away their secondary brands for nothing. "We’ve seen a couple of businesses that people paid $200 million for that are worth 20 percent of that now. These are companies that are not worth a lot of money. They’re going to attempt to sell a lot of these brands. The question is, ‘Who are the realists [in terms of asking price]?’" Howard wondered.

One investment banker who looked at Jil Sander about a year ago concluded that Prada Group "paid way too much money for that company and invested a huge amount of money in Jil Sander stores. It’s probably worth less than it was worth in the beginning."

Jil Sander wasn’t the only one with a hefty price tag. Like the dot-com industry, when venture capitalists funded start-ups basing their investment decisions on little more than a ceo’s hypothetical vision, fashion titans believed they could breathe life into a luxury business and virtually spin wool into gold. At one particularly frenzied moment, Prada and LVMH joined forces in 1999 to buy 51 percent of Fendi for $545 million, which valued the company at more than $1 billion.

Of course, the "great brands," as Stroll calls them, are probably not going to end up on the selling block. A company would be foolish to dispose of its strongest assets. Then again, everyone’s definition of great is different and a brand that is languishing at one company because its resources are being directed elsewhere could be nurtured and grown under a different owner.

Not surprisingly, fund groups are taking a safer path than entrepreneurial folks like Stroll and Chou, who successfully built Tommy Hilfiger into an industry giant.
Laurence C. Leeds, chairman of Buckingham Capital Management, which invests in the fashion industry, subscribes to the Leslie Wexner school of brand building: the Limited Brands ceo has said a company isn’t worth owning unless it has the potential of becoming a $1 billion business.

"Nobody wants to back or buy a small, unprofitable fashion designer," said Leeds, whose fund is focusing exclusively on public companies these days. "Generally speaking, unless you can get a business into the hundreds of millions in terms of volume, it doesn’t work."

That seems to be the strategy of LVMH ceo Bernard Arnault, who, after sparking the luxury sector’s takeover mania, now plans to focus his investment and energies on brands and stores with the most profit potential — and quietly divest of "nonstrategic" and "marginal" brands and assets. But he so far has declined to be more specific.

However, a source at LVMH called the sale of Thomas Pink "a virtual certainty" and said the company has been quietly shopping around Guerlain for the last 18 months. In addition, LVMH is trying to boost Givenchy to make it more attractive to prospective buyers, sources claimed. Kenzo and Loewe also have been cited as fashion houses the ceo may be willing to part with, and the company has made public references to a sale of its troubled DFS business.

That doesn’t mean that LVMH isn’t open to finding the next John Galliano or Marc Jacobs. Yves Carcelle, chief executive of Louis Vuitton and head of LVMH’s fashion and leather goods business group, cited the company’s one-third purchase of the Marc Jacobs business in 1997 as a positive example that could be replicated.

"When we invested in Marc Jacobs in 1997, he was a young designer," Carcelle said. "In six years, the company has been multiplied by 50, so we have proof that this group can invest and help the young designer to develop his business. We’re very happy that we invested in Marc Jacobs’ own brand. He’s proven to be a fantastic talent both at Louis Vuitton in France and with his own collection."

According to Carlo Pambianco, president of the luxury goods consultancy in Milan that bears his name, there were 122 mergers and acquisitions in 1999, a 107 percent increase from the previous year’s 59. In 2000, M&A operations rose 29 percent to 158. In 2001, the number of operations dropped 2 percent to 155. Last year, there were 162, up 5 percent from 2001. These figures include M&A deals in countries like the U.K., the U.S., France and Italy. They also include companies buying control of subsidiaries or licensees and small companies buying other small companies.
While there’s been a slowdown in M&As in terms of percentage growth, Pambianco believes M&A activity will continue, but with small and medium-sized companies buying their peers.

As it is, the big boys have their hands full right now.

"We’re very happy with what we’ve bought, and now we need to work with the brands we’ve acquired," said Gucci ceo Domenico De Sole at the Milan rtw shows late last month. "Our priority is to turn around what we’ve already purchased." De Sole added that the company was not actively seeking out acquisitions. "It’s a question of time management for us.

"Yes, I think there could be good opportunities now," he continued. "But it’s a very different economic environment today, compared to when we made our acquisitions. We went from one brand to nine brands overnight, and we’re repositioning them under very difficult circumstances — but that’s life."

Some experts question whether the idea of owning multiple brands under the same roof is viable in today’s business climate.

"It’s unclear whether the strategy was ever good," said Peter J. Solomon, chairman of the investment bank that bears his name. "Whether LVMH in fact got synergies or savings or added sales is questionable. It looked like every company was its own silo."

Dana Telsey, a retail analyst at Bear Stearns, said sales gains and expectations are being moderated to suit the muted economy, but insisted the multibrand model still has validity.

"Vertical integration brings better real estate costs, better advertising costs and better manufacturing costs," she said. "You’ve seen some of that already with Gucci, which bought the Sergio Rossi shoe factories. That’s now helping Gucci produce better-quality shoes.

"Some small brands may never have the potential to grow into big brands," she added. "It takes a lot of manpower. Each model has its own positive attributes and maximizing optimal performance is key."

Steven L. Ruzow, president of women’s wear at Kellwood Co. and the former ceo of Pegasus, learned the hard way.
"In tough times, categories either stay flat or shrink," he said. "At the same time, competition is stiffer than ever in terms of the number of brands, and all those brands are more aggressive than ever in order to survive. That doesn’t create a climate that will be receptive to a niche company or niche business.

"Some of the marginal players are going to fall by the wayside," Ruzow added. "You’re going to wind up with a handful of top designers who are going to dominate the real estate in the stores."

But Nancy Koehn, a professor of business administration specializing in retail and branding at Harvard Business School, said the aspirational factor that has kept people interested in luxury goods for thousands of years will continue to attract them — that is, whenever the next boom cycle may come.

"There’s room for more brands, whether in microbrewery beer, coffee or fashion," she said. "There’s room for more young designers. Look at how many new players we have on the landscape and the fact that there’s so much more mixing of high and low now. I think we’ll see a lot of fabulous first-name or new-name designers whether LVMH is funding them or not. We just all have to be better empathic sociologists and figure out what the luxury customer really wants."

Since fashion is all about reinvention, Adrover is looking for ways to develop his business in the post-Pegasus world. Walker said the designer will have only one major show a year. "All the shipments and capsule collections will be related to the show. That will make the collection more cohesive." Adrover believes that women don’t want to see a wide variety of themes from season to season within the same collection.

Adrover is working on a shoe license in Majorca. "Our plan includes a five- to 10-year program for licensing products," Walker said. "We’re also in the process of talking to different financial backers."

Adrover, who is filling orders for Colette in Paris and Jeffrey New York, said, "For now, it’s easier to work with boutiques because they’re more flexible in terms of my financial situation. I’ll make clothing for anybody that will give me 50 percent in advance."
So what of the potential cast-off brands, which luxury groups made conquests of, like so many notches on a bedpost? Maybe there’s a buyer waiting in the wings for some. One thing is certain: Those doing the acquiring will be much more realistic about company valuations now than they were in the any-price-goes Nineties.

"Today, for a designer to be viable is no different from any other company," Ruzow said. "They have to be profitable. They might lose a little money on the couture or rtw side of the business because that’s the show and you have to have a show, but they have to be profitable with fragrance and accessories. At the end of the day, they have to make money overall, and few designers do."

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