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Who Wants to Buy Europe's Failing Fashion Brands?

An online retailer chasing growth, a supplier-turned-retailer, and a worried Italian government are among the unlikely cast of investors shelling out for brands including Warehouse, Naf Naf and Corneliani. The assets are small fish, but the deals could hint at bigger transactions to come.
Warehouse store | Source: Shutterstock
By
  • Robert Williams
BoF PROFESSIONAL

PARIS, France — While bankruptcies at big American fashion brands have been ripping through malls and making news since the spring, Europe's fashion bankruptcies have gotten off to a slower start. But the coronavirus pandemic has taken casualties on this side of the Atlantic, accelerating the decline of brands that were already struggling to compete.

Pushed over the edge by coronavirus shutdowns, the distressed European fashion labels to have changed hands this summer ranged from high street brands like France's Naf Naf and the UK's Oasis to Italian luxury menswear maker Corneliani. These companies may be tiny compared to J.Crew Group or Men's Wearhouse owner Tailored Brands, but Europe's nascent wave of coronavirus M&A could already signal the kinds of transactions likely to happen later this year, when both bankruptcies and deal-making are expected to accelerate.

Room for Outsiders

Luxury conglomerates and major investment funds like Mayhoola or Eurazeo — all typical acquirers for fashion and luxury assets — have mostly refrained from striking fresh deals during the pandemic. The luxury groups are too busy dealing with challenges at the brands they already own (as well as, in the case of LVMH, managing a pre-existing deal to acquire Tiffany & Co. for $16 billion), while most private equity firms "are essentially risk-averse and need some of the uncertainty to dissipate before they commit themselves," said Pierre Mallevays, managing partner at boutique M&A advisory firm Savigny Partners.

European brands pushed to sale by the pandemic were smaller than those in the US, and already weak in most cases. With traditional buyers waiting for bigger fish, “this is opening an opportunity for ‘outsider’ investors to make a move,” said Anne Raphael, managing partner at the executive search and governance consultancy Boyden.

The cast of investors who emerged this summer to “save” various European brands include some unexpected players who wouldn’t have had the capacity or interest in buying brands during the pre-coronavirus bull market. But each one has a specific objective.

Direct-to-Consumer Plug-ins

Domestic high street and mall brands — which loom large in their respective home markets selling accessibly priced fashion, but rarely succeed in expanding abroad — were among the quickest to crumble amid coronavirus lockdowns. Weighed down by costly store networks but without the negotiating clout and marketing scale of international brands, they have struggled for years to compete on style or price with the likes of Zara and H&M.

In the UK, the popular Oasis and Warehouse labels, both owned by Aurora Fashions, were among the latest to hit a wall, closing stores definitively in June. When no investor was willing to purchase the entire business, British e-tailer Boohoo swooped in to nab their e-commerce businesses and intellectual property for £5.25 million ($6.9 million), a price Jefferies analyst Andrew Wade called “immaterial.”

Boohoo's plan is to keep the brand names alive through their e-commerce sites while rapidly switching over design, manufacturing and distribution to the group's own systems, with a relaunch scheduled for as soon as mid-September. It's a strategy that Boohoo has effectively deployed with NastyGal, whose trademark and client lists it acquired in 2017.

“We have a strong track record of integrating new brands quickly,” Chief Executive John Williams Lyttle said in a June call with investors. Boohoo also bought the rights for failing UK brands Coast and Karen Millen last year. Lyttle said the company would keep making “opportunistic acquisitions” as M&A options arise.

Deals like these are hardly ideal in a socio-political climate that's increasingly concerned with protecting employment (Boohoo in particular is facing scrutiny over alleged labour abuses in its supply chain). But they reveal that even as the fashion market increasingly favours the biggest and strongest brands, investors still see an opportunity for small failing ones — once they've been divorced from their cost base.

Big US brands currently facing bankruptcy could likewise be broken up and given an e-commerce-only reboot if their brick-and-mortar business fails to improve. It remains to see whether larger platform players like Amazon Fashion, which has so far focused on selling discreet, neutral private labels, would get involved in the action. Luxury e-commerce platform Farfetch could also make such a move through its New Guards Group division, which has already seized opportunities to add hip names like Opening Ceremony to its shared-sourcing hub.

Supply Chain Protection

Rising consumer interest in where and how their products are made, as well as increased competition among brands to secure the best suppliers, could make factories and craftsmanship a key theme in the next round of M&A, particularly for the luxury sector. Some governments are wary of losing the cultural value and jobs associated with production facilities, while brands are concerned about losing access to suppliers which close or are bought out by rivals.

Heritage Brands, the Fung family's luxury investment arm, failed to find a buyer to stop its well-loved Sonia Rykiel fashion house from being liquidated last year. But this year they managed to sell the less well-known shoe brand Clergerie even as the coronavirus pandemic crushed the outlook for the industry. Tellingly, when Mirabaud Asset Management bought the shoemaker last month, the fund's directors said they were interested not just by the brand but by its factory in the former French footwear hub of Isère.

“This brand is one of the last survivors of high-end shoemaking in France and a real centre of savoir-faire,” Renaud Dutreil, a former French government minister who heads Mirabaud’s “Living Heritage” fund, said by phone. Supplying other brands isn’t currently a significant business for the house, but this is something Dutreil sees as an opportunity for the future. “We want Clergerie to become the reference for producing luxury shoes in France.”

In Italy, fashion manufacturing is carried out by a dense network of workshops, small and large, with most products changing hands multiple times before delivery. Supply chains are formed and re-formed according to the changing demands of each collection, and fashion trade groups have lobbied for extensive government support, arguing that no part of the ecosystem can be allowed to perish without risking extensive damage.

"The Italian ready-to-wear system is so interconnected. Its suppliers are extremely specialised," said Carlo Capasa, president of Milan Fashion Week's organising body Camera della Moda. "If we allow even the tiniest company to close down it's a big loss."

Corneliani, a Genoa-based maker of silk ties and luxury suits for its own brand as well as for other names, like Ralph Lauren, closed its factory and applied for composition with creditors in June. The brand has been slow to adapt to the rise of casual dress, and as a wholesale-dependent brand its rebound prospects were further dimmed by the decline of department stores and multi-brand boutiques. Still, the Italian government intervened, injecting €10 million and entering the company's shareholding.

“[Corneliani] needs to transition to a less formal product whilst retaining its cachet,” Savigny’s Mallevays said. “They were caught out by Covid, and the Italian government pitched in to buy some time.”

After having to suspend operations during coronavirus lockdowns, suppliers are now falling further behind financially amid reduced orders for the coming seasons, as brands adapt to lower demand. Analysts expect bigger players in luxury to get involved in deals to protect suppliers and craftsmanship. For years, LVMH and Chanel have already been buying key suppliers and could accelerate their pace of snapping up tanneries, mills and handbag factories with specialised skills.

Atypical Buyers

It turns out vertical integration between brands and suppliers can also go the other way: last month Naf Naf, a distressed French label that sells €20 lace camisoles and €50 sundresses, was sold with an administrative court's blessing to SY International, a textile company based in Turkey and Tunisia that produces around one-third of the brand's products.

Naf Naf’s biggest struggle has been competing with the responsiveness and tight delivery schedules of fast fashion, said Stephane Cohen, founder of Paris’ Wingate bank, which advised on the sale. “The best option for Naf Naf was to team up with its supplier, to bring together as much as possible the sourcing with the client,” Cohen said.

Naf Naf’s orders accounted for half of SY’s French revenues and nearly 10 percent of its global business. As such, the supplier has a vested interest in keeping the brand going, as well as preventing its sale to a competing bidder who may have wanted to change suppliers.

It’s unusual for a supplier to become a retailer, and it’s hardly a trend. But the deal highlights how pandemic bankruptcies may continue to open up the M&A process to atypical players. Court-managed sales still favour deep pockets, but they also can take into account which buyer’s plan would save the most jobs. SY International’s offer pledged to keep more than 100 French stores open and 900 workers on the payroll, which helped clinch the deal.

Solving Strategic Challenges

Major deal-making is expected to pick up again starting this autumn, and analysts expect large groups and global private equity firms to get back in the mix. Corporate bankruptcies are expected to surge to a record as well, possibly leading to once-in-a-lifetime bargains. But the strategic specificity seen in recent small deals is likely to remain.

“Anybody who still has dry powder left will be looking for opportunistic M&A,” said Alyssa Auberger, M&A Partner at law firm Baker McKenzie.

But rather than immediately reverting to the traditional model of buying competing businesses to expand their scale, she thinks companies will focus on assets that could help them address specific challenges, such as transitioning to e-commerce and omni-channel models, diversifying and securing supply chains, or improving sustainability.

“M&A can help respond to a company’s renewal phase. Businesses are going to be looking at assets that can help them come out of the pandemic stronger than they were before,” Auberger said.

“Businesses won't just be asking themselves whether they can afford to buy an asset, but also if they can integrate it,” she added. “Either an asset needs to be a real gem which they’re getting for a good price, or it needs to help them advance strategically.”

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