2006: Deal Makers for the Apparel Industry on a Roll

By: Deborah Belgum

Five years ago, an up-and-coming boutique investment-banking firm in Los Angeles took a small-but-hot blue-jeans company called Earl Jean Inc. and sold it to Nautica Enterprises Inc. for $86 million. The apparel industry was astounded that such a young Los Angeles apparel company with annual revenues of only $30 million could fetch such a high price tag.

But ever since then, investment banking company the Sage Group LLC has carved out a niche, finding high-stakes buyers for a slew of young California apparel businesses whose owners have become overnight multimillionaires.

“Each successive deal raises our profile,” said Brien Rowe, the company’s managing director and a founding partner. Rowe came on board when Sage

Chief Executive Mark Vidergauz took a handful of ING Barings colleagues and started the Sage Group in 2000. “We’ve had real successes with high valuations in the sector, and that has made the apparel industry sit up and pay attention.”Indeed, the old rule was that if a company had, for example, $40 million in revenues, the selling price was often in that ballpark. But the Sage Group has found that if a label has strong brand recognition and the legs to expand internationally and into other categories, big apparel companies looking for an infusion of newness and high profit margins are willing to gobble up these fledgling businesses at premium values. Sage’s success, however, is causing ripples through the apparel mergers and acquisitions industry because dealmakers are under pressure to find top dollar for their clients. “Sage is really killing my business because now all my clients are asking for higher values on their companies,” said one Los Angeles acquisition expert, who asked not to be identified.

Honing in on Vince

In late September, the Sage Group engineered the sale of Los Angeles contemporary label Vince to the Kellwood Co., the St. Louis apparel behemoth that had been eyeing the fashionable label. Vince, nearly five years old, was owned by John Paul Richard Inc., a missy apparel company in Calabasas, Calif., designer Rea Laccone and Christopher LaPolice. Terms of the deal have not been revealed yet, but knowledgeable sources said it will be well above Vince’s anticipated 2006 revenues of $50 million.

Sage Group Principal Frederick Schmitt, who worked on the Vince deal, said the contemporary label had several things going for it. First, it helped that John Paul Richard handled Vince’s warehousing and distribution, which assisted the young company in growing quickly and achieving good margins. Vince also has a wide product range. Instead of concentrating on just T-shirts or blue jeans, the company manufactures sweaters, shirts, dresses and pants. “They had some scale to them,” Schmitt said.

So when buzz about the label reached Kellwood, the Vince people went to the Sage Group because of its expertise in the apparel industry. Richard Hirsh, co-chief executive officer of John Paul Richard, said he felt one of Sage’s advantages is its huge database, which helps determine the value of a deal. “I think Sage is able to illustrate what an aggressive valuation would be for a company based on their enormous database and experience. The one thing that appealed to us about Sage is that they were so tuned into our market,” Hirsh said.

Indeed, Lloyd Greif, president and chief executive of Los Angeles investment-banking company Greif & Co., said the Sage Group came into the Los Angeles market, picked a space where few investment banking businesses had gone and established prominence. “They haven’t cornered the apparel market, but they have clearly focused on the market,” he said, noting that New York–based Bear Stearns & Co. Inc., the Peter J. Solomon Co. and Goldman Sachs are other investment banking institutions that put deals together in the apparel industry.

This year, Sage is expected to close 11 to 12 apparel deals, compared with seven last year. One of the company’s most successful transactions was Juicy

Couture’s sale in 2003 to New York–based Liz Claiborne Inc. for $200 million. The Los Angeles–based maker of stylish sweat suits pulled in $47 million in revenues in 2002.

Scouting the market

Sage is always on the lookout for promising young brands that would be stellar additions to a big public company’s stable of labels.

“Wall Street likes to see these big public companies grow at double-digit rates,” said Rowe, explaining the penchant for publicly traded companies to snap up fairly new brands. “It is hard for big companies to add huge volume annually with their own in-house brands. So they are forced to grow by acquisition. It is also about the lifecycles of brands. As their older brands become more widely distributed, the bigger companies are looking to take on smaller niche brands and use their talent and power and capital to grow and expand the brands.”

Sage’s headquarters are located on the 22nd floor of a West Los Angeles high-rise once occupied by former Warnaco Co. executive Linda Wachner. The Los Angeles office employs 15 people, and there is one staffer in Sage’s New York office. Rowe said he and his colleagues dive into the marketplace to do their research on new brands, hitting trendy specialty stores or cutting-edge trade shows such as the Action Sports Retailer Trade Expo in San Diego, Project Global Trade Show in New York and Las Vegas, Fashion Coterie in New

York, and MAGIC Marketplace in Las Vegas. “We are in the stores all the time,” Rowe said. “This weekend I spent a lot of time at Fred Segal’s in Santa Monica and Madison, Bloomingdale’s and Saks Fifth Avenue. I like to walk around, see what is going on out there, or I go to the surf shops. We look at what people are wearing out there, what kids are wearing. That is one of the best ways to get a sense of what brands are upcoming.”

Trendy labels also have to be fairly profitable. The Sage Group looks for companies whose gross margins or operating margins hover in the high 50 percent to low 60 percent range and have carefully selected the stores that carry their clothing.

The Sage Group believes that California apparel companies have the kind of lifestyle cachet that make them attractive as acquisition targets. That’s why the investment banking company has eight or nine apparel deals about to be concluded and another eight or nine in the pipeline. “It has been a very good year for us,” Rowe said. “We feel we are really hitting our stride as a firm.”