5 Possible Apparel Buyout Targets
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Talbots (NYSE: TLB), a women’s retail chain, in December rejected a buyout offer at $3 per share from private equity firm Sycamore Partners. Sycamore has acquired a stake of 9.9% in the company, to which Talbots reacted by adopting a poison pill which would be triggered if an investor acquired 10% of the company. TLB’s worth has been impacted by its weak sales figures, the closing of one in five of its approximately 550 stores, and the retirement of its CEO. Talbots' financial advisor Perella Weinberg has recently started soliciting bids, and Golden Gate and TPG Capital are apparently interested. Talbots’ market cap has risen to around $225 million, above the $212 million value of the Sycamore offer.
On a small scale, the Talbots situation reflects previous deals in the apparel industry, which have been driven mostly by private equity. Several retail chains have seen PE investors acquire minority stakes and then offer to buy them outright. This was the case for BJ’s Wholesale Club, which in June 2011 agreed to an acquisition by Leonard Green and CVC Capital Partners for $2.8 billion, nearly one year after Leonard Green took a 9.5% stake in BJ's. The deal followed another buyout by Leonard Green, that of crafts retailer Jo-Ann Stores for $1.6 billion. Before that, the children’s clothing store Gymboree sold itself to PE firm Bain Capital for $1.8 billion.
Although private equity has recently dominated retail takeovers, there have been some strategic purchases, notably by French companies. LVMH Moet Hennessy Louis Vuitton (LVMHF.PK) took over Italy’s luxury goods maker Bulgari for $5.2 billion. In a smaller deal, Surf lifestyle brand Volcom was purchased by French conglomerate PPR, owner of Gucci and Puma, for $607.5 million. In the U.S., the main strategic acquisition in 2011 was the $2.2 billion acquisition of Timberland by VF (VFC), owner of clothing brands such as The North Face and Wrangler jeans.
For both financial and strategic buyers, the retail apparel industry is expected to remain an active space for M&A in 2012. Several publicly traded apparel retailers have depressed valuations that could present an opportunity. The companies that are most attractive to private equity bidders are those with a stable, steady cash flow and strong balance sheets. Strategic takeovers are also a possibility as the retail sector is growth constrained and many clothing companies have already maximized the potential of their core concepts. In this highly competitive sector, retailers with available cash and low debt are in a prime position to diversify their product offering and expand market share by buying rather than building a new brand.
Corporate buyers could come from outside the U.S. They include Japan-based Fast Retailing (FRCOY.PK) which is aiming to make its Uniqlo brand the largest apparel retailer in the world. Fast Retailing has $2.6 billion in cash and short-term investments, more than any other clothing retailer in the world, apart from Spanish Inditex, the producer of Zara, and Swedish Hennes & Mauritz (HNNMY.PK).
The following American apparel companies could attract both financial and strategic buyers:
Abercrombie & Fitch (NYSE: ANF): Abercrombie & Fitch is a casual fashion retailer for men, women, and kids. As of October 29, 2011, it operated a total of 1,092 stores. It could be an LBO candidate. It has more cash than debt and its price to cash flow ratio (P/CF) is 8.8, compared to 10.10 for apparel stores in general. A private equity bid would have to be approved by ANF management. ANF has moved its incorporation from Delaware to Ohio, which has anti-takeover laws that helps protect companies from unwanted approaches. As Ohio is arguably friendlier in terms of protecting directors from liability, the move might also facilitate a management buyout. Strategic buyers could be attracted by ANF’s international opportunity and pricing power. ANF has a market cap of $3.83 billion and a forward P/E ratio of 10.60.
Aeropostale, Inc. (NYSE: ARO): Aeropostale, a mall-based retailer of casual teen apparel and accessories, operates over 1,000 stores in the U.S. and Canada. The growth potential of its new children's concept P.S. from Aeropostale increases its appeal as a takeover target. AEO turned down some PE buyout offers in December 2010, but has since seen a decrease in profits and a squeeze in operating and gross margins. It comes out on top in an evaluation for a PE buyout with a P/CF ratio of 6.8, total cash of $1.36 per share and no debt. Fast Retailing might also be interested in acquiring the company, as it would complement the Uniqlo brand and provide access to mall-based shoppers across America. ARO has an equity value of $1.32 billion and is trading at 14.01 times next year’s earnings.
American Eagle Outfitters (NYSE: AEO): American Eagle Outfitters sells clothes, shoes and accessories to the same demographic as Aeropostale, but with a higher price point. It also competes with Abercrombie & Fitch. A deal would make sense for private equity because AEO has a strong cash flow. Its price to cash flow ratio is 8.20; it has total cash per share of $2.48 and no debt. Its viable concepts in its namesake and children's brands could also make it a target for Fast Retailing. As of January 29, 2011, the company operated 929 American Eagle Outfitters stores, 148 Aerie stand-alone stores, and nine 77kids stores. AEO has a market value of about $2.68 billion. It currently trades at 13.03 times forward earnings.
Jones Group (NYSE: JNY) –The Jones Group engages in the design, marketing, and wholesale of apparel, footwear, and accessories in the United States and Canada. As of the end of 2010, it operated 279 specialty retail and 524 outlet stores. In June 2011, Jones Group bought Kurt Geiger, Europe's largest luxury shoe retailer, from private equity firm Graphite Capital for about $350 million. The deal should be positive for JNY as it makes it 20 % international and gives it an entry into a higher-growth luxury segment, a diversification away from its moderately priced department-store products. JNY has P/CF ratio of 6.40. It has total cash of $61.2 million and total debt of $914 million. At $ 746.5 million, its market cap is smaller than those of the other apparel targets. It looks cheap with a forward P/E ratio of 7.96.
Gap (NYSE: GPS): The $9.1 billion fast-fashion retailer Gap has been rumored to be a target for Hennes & Mauritz. It might be of interest to Fast Retailing as well. Gap’s strong brand names would also make it valuable to a private equity firm. In addition to The Gap, GPS operates four other brands: Old Navy, Banana Republic, Piperlime, and Athleta. The company has total cash of $1.42 billion and total debt of $1.66 billion. Although Gap has been struggling domestically, the company’s aggressive international expansion presents a good opportunity. Gap operates about 3,100 stores worldwide. Its share is trading at 5.8 times its cash flow and 10.83 times its forward earnings.
The Motley Fool owns shares of Aeropostale and Gap and has the following options: long JAN 2014 $10.00 calls on Aeropostale, long JAN 2014 $15.00 calls on Aeropostale and long JAN 2014 $20.00 calls on Aeropostale. Vatalyst has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.