By Eric Smith
With one quarter in the books and three to go for 2018, M&A activity in the outdoor and active lifestyle space has already made a splash and remains poised for solid performance throughout the year, according a host of industry experts and recent reports.
“The general environment for M&A continues to be good,” Joe Pellegrini, managing director, Baird, told SGB Executive. “It doesn’t matter if you’re an industrial company, a health care company or a consumer company, there’s still a lot of private equity money sitting on the sidelines and interest rates are still low from a historical perspective. So even if they come up 100 basis points from the absolute lows that we had earlier in the year or late last year, the debt markets are still wide open.”
Last year’s private equity spending in the consumer and retail sectors totaled $120 billion, the highest since 2008, and that should persist all year, according to the latest report from A.T. Kearney’s Can M&A Reignite Growth in Consumer and Retail?
“Private equity firms are … looking for acquisitions that provide synergies with their existing holdings,” states the report, whose authors are Bob Haas, Bahige El-Rayes and Marc El-Khoury. “In fact, ‘platform companies’ and ‘add-ons’ are becoming a key growth strategy for private equity firms that want to compete with strategic buyers. They, too, are also interested in top-line growth and, much like the legacy players, they’ll likely consider adjacent industries to drive it.”
Not only is private equity looking to deploy cash, but strategic buyers remain on the hunt for strong assets in need of a company to help them unlock growth. What are buyers looking for in an asset? Pellegrini outlined four traits that will help a seller stand out no matter if they’re looking to sell to PE, a competitor or a consolidator.
- Great product – This will place you at the top of the pile.
- Strong brand position – This means your product boasts a “core customer and an enduring value,” Pellegrini said. “Lululemon, as an example, has great positioning with that female consumer who is looking for a performance-driven product that has authenticity.”
- A relentless focus on innovation – “It doesn’t matter how powerful your brand is; it doesn’t matter if you’re a Patagonia or a Nike or whoever,” Pellegrini said. “If you take your foot off the gas in innovation, whether it be new materials, new construction, new performance features, maybe you’re figuring out ways to integrate electronics and technology as part of the equation because people are sharing more and more of their experiences with social media.”
- Great leadership and management – Pellegrini said the best companies are defined by C-level executives that are “constantly, relentlessly focusing on ways to be smarter, more nimble and not losing the entrepreneurial innovation edge that make any of the brands in a portfolio unique.”
There are lessons for buyers that can be gleaned from today’s M&A climate, too. They shouldn’t settle for anything less than exemplary performance in the aforementioned traits, or they risk an imperfect asset.
As consolidators look to rebalance their portfolio–which could include shedding underperforming assets, adding attractive targets or some combination of both–this can require tricky maneuvering. And plenty of companies have made serious miscalculations when targeting certain assets that they view as a fit but wind up off kilter with the rest of their portfolio.
“You can’t just mesh brands together and expect things that work out because you’ve acquired a portfolio. You have to think critically and logically about how you can add value,” Pellegrini said. In the outdoor and active lifestyle space, notably in athletic footwear, there are “cases where one plus one was something meaningfully less than two,” he added.
In addition to ensuring your portfolio is properly balanced, it’s also important to be realistic about the growth that a new asset will add to your portfolio. Asking too much too soon can diminish a brand’s long-term value.
“The ultimate thing everyone’s chasing is growth, but I will define that it’s sustainable and consistent, predictable growth,” Pellegrini said. “It’s much better to grow 5 to 10 percent consistently and sustainably and trying to grow 20 percent and then down 10 percent and then up 15 percent.”
Chirag Patel, chief operating officer of Pentland Brands Ltd., discussed this approach for the recent SGB Executive article, Pentland COO Talks Endura Acquisition, M&A Strategy. Companies like Pentland differ from public companies because they won’t sacrifice the brand’s long-term growth for a short-term gain, but instead want to nurture that brand to properly unlock its growth.
“We are absolutely about driving performance, but we will do that always in the context of what’s right for the long-term brand strategy,” Patel said. “We will not make, for example, distribution decisions that might drive a number at the risk of long-term brand health. We’re absolutely interested in growing things for the longer term.”
What’s next for M&A in the outdoor and active lifestyle verticals? Anything could happen, but recent examples of financial and strategic deals abound. Click here for a recent roundup of some notable transactions, including JD Sports Agrees To Acquire The Finish Line; Billabong Shareholders Approve Boardriders Acquisition; Oboz To Be Acquired By Kathmandu; Ibex Finds A Buyer and Pentland COO Talks Endura Acquisition, M&A Strategy.
Most analysts agree that M&A will accelerate in 2018, and SGB will be there to chronicle each one–the successes and the failures. What’s known is that the best-prepared companies will be able to financially benefit in what continues to be a favorable climate.
“Because of lower interest rates, cash sitting on balance sheets of the public companies, cash sitting in private equity and now portfolio rebalancing,” Pellegrini said, “I think you’ll see more activity than we’ve ever seen.”