Fashion has been one of the sectors hardest hit by the Covid-19 pandemic, resulting in depressed M&A trends for the foreseeable future and a tough road ahead for GPs exposed to the industry. Alessia Argentieri explores dealflow expectations and potential silver linings for the segment
The fashion sector has been deeply affected by the Covid-19 pandemic, which has led to a dramatic loss of sales, threatening thousands of jobs, affecting established designer boutiques and putting at risk high-street retailers and clothing manufacturers.
According to the latest economic forecast published by the European Commission in July, retail spending has fallen by 11.7% in the euro area, with France, Italy and Spain recording the worst figures - a 30% decrease in April compared to their February readings. Furthermore, industrial production has collapsed by 17.1%, resulting in a cumulative contraction of around 27% since February, with the clothing and leather goods sectors being among the most affected, recording a decrease of 60% and 40% respectively.
This worrying trend has already had the effect of discouraging some investors from scouting the fashion industry for new opportunities, driving them towards more resilient segments of the market. According to Unquote Data, six buyouts have been inked across the sector since the coronavirus outbreak, worth an aggregate value of only €110m. By comparison, in March-July 2019 the industry saw 11 buyouts for an EV of €899m, while 13 buyouts worth €593m were signed in the same period of 2018.
“We have seen a noticeable slowdown in deal making across the sector, especially from private equity players, which are considerably reducing their exposure to the fashion industry,” says Fabrice Martineau, co-CEO of DC Advisory France. “Fashion has always been a difficult business, affected by intricate global trends and which requires a high level of expertise, and the pandemic is making this game even more challenging for private equity investors.”
Fashion deals that have stalled or have been delayed amid the pandemic include the sale of Valextra, an Italian luxury bags brand owned by Neo Investment Partners, which had attracted the interest of financial and industrial players before the outbreak.
The sale of a minority stake in Ermanno Scervino, an Italian fashion group that came on the radar of various private equity funds at the beginning of the year, has also been delayed, and so too has the search for a financial investor initiated at the beginning of this year by Italian streetwear label GCDS.
Carlyle had mandated JP Morgan as financial adviser in January for the sale of Italian fashion brand Twinset, which generates revenues of around €230m and EBITDA of €40m. The sale was expected to take place in the second quarter of this year, but might be further delayed by the crisis.
In the UK, the sale process for footwear brand Dr Martens, launched by Permira in 2019, when the GP hired Goldman Sachs and Baird to explore its exit options, saw KKR drop out in March, leaving Carlyle as the only bidder. The process seems to have stalled for the moment and might resume after the summer.
While this inactivity is undeniably concerning, new opportunities have arisen for managers able to bet on a sector that despite its current challenges has always been fertile ground for profitable and healthy assets.
Several restructuring funds have been launched in the last few months, to seize the best deals available and support the recovery of companies at risk of collapsing, including Antares’ Fondo Lusso & Lifestyle, a vehicle exclusively dedicated to the fashion industry. The fund has a €300m size and is composed of two separate compartments: a credit section and a finance unit for the relaunch and development of its portfolio companies.
“This crisis has hit every level of the supply chain and, with different intensities, each segment of the fashion industry from high-end couture to high-street retail,” says Angelo Bonissoni, managing partner at legal firm CBA, which is advising Antares in the management of the fund. “The retail segment has been devastated, experiencing a vertical drop in sales, especially in countries like Italy, where only around 5-6% of customers shop online.”
Italy, where some of the most prestigious fashion companies are based, has been one of the countries most affected by the pandemic and has seen deal activity across the industry contract significantly. The country recorded only one buyout in the sector between March-July 2020, while four deals were closed in the same period in 2019 and five between March-July 2018.
Bonissoni says: “Companies operating in the fashion industry present a significant working capital absorption compared to other sectors, because of the time frame of around 12-18 months between the launch of a new collection and the actual sale. In addition to this structural feature, the need for capital for fashion companies has become even more stringent with the unprecedented drop in sales and the supply chain disruptions caused by the pandemic. This is why the sector is developing a massive borrowing burden towards both its financial lenders and its commercial suppliers and needs a strong recovery intervention.”
In the stockroom
A large stake of the fashion and luxury industry is already in the hands of private equity funds, which have been heavily investing in the sector in the last decade. While this might be bad news for some of these assets, especially those with liquidity issues or on the verge of collapse, for others the backing of a sponsor could provide the additional capital and support necessary to endure the downturn and recover.
Italian sneakers designer Golden Goose was acquired by Permira from the Carlyle Group just before the coronavirus outbreak, marking the company's fourth buyout. The deal gave Golden Goose an enterprise value of €1.28bn, equal to around 15.5x its 2019 EBITDA and 13x the EBITDA expected for 2020.
UK-based Neo Investment Partners owns several assets in the fashion sector. In addition to Velaxtra, the GP has a stake in British luxury fashion brand Victoria Beckham; French upper contemporary menswear brand AMI Paris; and London-headquartered luxury fragrance specialist Miller Harris.
In France, notable fashion assets owned by private equity houses include cashmere brand Eric Bompard, which was acquired by Apax and BPI France in 2018, in a deal that valued the business at around €130m; luxury and high-end children's fashion CWF, bought by Arkéa Capital, Raise Investissement and Dzeta Private Equity last year in a €125m deal; and luxury womenswear designer Zadig & Voltaire, backed by Peninsula in January 2020, in a deal that saw the exit of TA Associates.
In Italy, Progressio holds a majority stake in Save the Duck, which designs luxury coats without using animal-based products; Consilium owns luxury footwear group GMI; Lion Capital controls shoes designer Menghi; and FSI is the sponsor of fashion house Missoni.
“There are many fashion companies in private equity portfolios that were in healthy shape before the coronavirus outbreak and saw their performance deteriorate during the pandemic,” says DC Advisory’s Martineau. “For these assets, the best strategy that a GP can put into place is to wait until we have a clearer understanding of the long-term impact of the crisis and how much revenues and profits will be affected across the sector.”
Instead of embarking on prolonged and risky negotiation for rushed exits and uncertain deals, most GPs are currently focusing on expanding and strengthening their fashion assets via a buy-and-build strategy. This can be a winning approach to navigating the crisis, especially for companies that have a strong export-oriented ethos and a wide and diversified international client base, which might shield them from the worst repercussions of the pandemic.
“Pursuing an aggregation strategy represents an extremely effective way of facing the crisis, especially across the fashion industry,” says Bonissoni. “Companies that are going through a hard time are more willing to accept the prospect of becoming part of a cluster. They can be integrated in a strong platform that will combine revenues and boost EBITDA, while building on strategic synergies and creating a solid group able to face competition in the international markets.”
Rino Mastrotto, a leather goods company backed by Neuberger Berman's NB Renaissance, has recently bolted on Nuova Osba Italia, a producer of leather for fashion brands. Rino Mastrotto sells its products in 60 countries worldwide and generates EBITDA of around €45m from revenues of €320m, of which 60% come from outside Italy.
Another fashion asset that has been pursuing a buy-and-build strategy despite the pandemic is Mandarin Capital-backed Margot. The company was established in October 2019 when Mandarin acquired Eurmoda, an Italian manufacturer of metal and leather accessories for the luxury goods industry. Margot bought ABC Morini, an Italian manufacturer of metal accessories for leather goods last May, with capital from Mandarin Capital III.
Andrea Tuccio, a partner at Mandarin, told Unquote: “The pandemic has deeply affected the sector’s revenues this year, with a decrease in demand and a sharp decline in tourism, which will also contribute to a reduction in sales across the fashion and luxury industry. Building an aggregation platform able to cover the entire supply chain for fashion accessories is the best way to weather the storm and thrive in the coming years.”
Potential for change
Alongside unprecedented challenges, the pandemic has also triggered new needs across the fashion industry, accelerating some structural changes that are destined to last.
“We have seen some key trends picking up steam amid the crisis and reshaping the sector,” Bonissoni says. “The distribution model of the fashion industry has irreversibly changed, with a strong shift towards online shopping, and the disruptions to the supply chain call for substantial revisions and adjustments.”
“Digitisation and technological innovation have become an essential ingredient,” he adds. “We have already started to see the importance of using blockchain for brand protection, to identify and trace specific goods and avoid counterfeiting issues. In addition, blockchain can be used to improve the supply chain, identifying products and monitoring manufacturing processes from raw materials to finished goods. This also implies the possibility to comply more effectively with sustainability and ESG principles, making sure that the materials used are produced protecting workers’ rights and the environment.”
This becomes particularly relevant considering that a more conscious, ethical and considerate way of buying products, especially food and clothing, has emerged, enhancing a shift in consumers’ behaviour that the pandemic seems to have accelerated.
“This trend towards responsible consumption has been gaining momentum and represents one of the main challenges that most fashion companies have to face,” says DC Advisory’s Martineau. “Consumers want to be aware of what they are wearing, where it comes from, if it is good and healthy for themselves and sustainable for the planet. Selecting companies that have integrated these values into their mission will become essential for the private equity industry.”
In addition to digital consumer engagement, e-commerce platforms and cashless payments, fashion businesses will be expected to prioritise health, safety and the wellbeing of their employees, as well as ESG and sustainability in the production and supply chain of their goods.
“This can become a time of development for companies that have a long history of family ownership and a traditional management approach,” says CBA’s Bonissoni. “With adequate investments and know-how provided by specialists, they can maximise the opportunities offered by an increasingly digitised, smart and sustainable economy.”
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