California Apparel News

Plenty of money is floating around for merger-and-acquisition deals to be done in the apparel industry.

Witness the November agreement in which Fast Retailing, the Japanese parent company of retailer Uniqlo, acquired 80.1 percent of Los Angeles–based J Brand denim for $300 million.

Or that TSG Consumer Partners, a private-equity investor in San Francisco, made a sizeable investment in Los Angeles–based Paige Denimto grow the 9-year-old brand.

Those were just some of the examples of successful deals done in the last year involving Los Angeles apparel companies, said Ilse Metchek, president of the California Fashion Association.

Metchek was speaking at a Feb. 26 seminar on mergers and acquisitions that she organized at the California Market Center in Los Angeles.

On her panel were Kevin Sullivan, executive vice president at Wells Fargo Capital Finance; Jeremy Weitz, a shareholder in law firmBuchalter Nemer; and Philippe Faraut, a managing director at Intrepid Investment Bankers.

All have noticed an uptick in apparel deals being made. “We’re seeing a couple of reasons for vibrant M&A activity,” Sullivan said. “First, many of the large retailers have chosen to consolidate their vendor base. So there may be companies that are not as important to the retailers as before and need to take advantage of a larger manufacturer that has more clout.”

Sometimes apparel labels are desirable because they sell well to a certain customer base a larger company would like to attract. And other times, big companies buy smaller companies to help the smaller companies grow their sales and consolidate infrastructure costs.

Faraut noted there have been a number of apparel deals lately because of past successful deals.

One of those was VF Corp. acquiring Los Angeles contemporary brandsElla Moss and Splendid. “For the larger, strategic companies, they can’t grow on their own, so they are going to need to acquire smaller companies. And the private-equity companies have a business model of buying and selling companies to help them grow. More and more are looking into the apparel space,” Faraut said.

When it comes to price, branded companies fetch more money than non-branded companies.

Typically, a branded company will sell for eight to 10 times EBITDA, or earnings before interest, taxes, depreciation and amortization. Non-branded companies go for four to five times EBITDA, which is an accurate measure of a company’s financial health.

Ready, set, go

Apparel companies need to take certain steps to get ready to sell themselves.

Apparel labels should have a sound financial infrastructure in place. “Your accountant is very important. That will give more validity about the financials because acquiring companies don’t want to hear that the financials have been pumped up,” Sullivan said.

From a legal point of view, Weitz pointed out that a company should make sure its trademarks are protected in the United States and beyond. “You may have a great name here but then find out someone has it registered in Europe. You have already diluted the value of your brand,” Weitz said.

It is better to do your due diligence about intellectual-property protection when you first start your company rather than later, when it may be too late.

Sullivan noted he was involved in a deal where the company’s name had been registered in China by someone who was not using it. “The company had to pay hundreds of thousands of dollars to get its name back from the Chinese squatter. They had no choice because the deal was so lucrative,” he said.

Dealmakers are looking for brands with a point of view, Metchek said. They also want to know if there is a loyal customer base and where the brand can grow. “These are strategic questions you really have to answer,” the CFA president said.