U.S. Apparel and Footwear Mergers Surge Amid Tariff Turmoil
The ongoing trade war initiated by former President Donald Trump has significantly impacted the U.S. apparel and footwear industries, leading to a remarkable surge in mergers and acquisitions (M&A). As companies grapple with the financial implications of tariffs, many are opting to consolidate or go private to mitigate risks and enhance their competitive edge.
Record-Breaking M&A Activity
In 2023, the U.S. footwear and apparel sectors have witnessed unprecedented M&A activity, with deals totaling approximately $21 billion announced so far. This figure not only surpasses the previous record of $16.1 billion set in 2022 but also highlights a growing trend in an industry that typically does not see valuations as high as those in technology or financial services. According to data from LSEG, this year’s figures are particularly striking given the economic climate and the challenges posed by tariffs.
The Role of Tariffs
The tariffs imposed during Trump’s presidency have created a dual-edged sword for retailers. While they have introduced chaos into the market, they have also opened up opportunities for strategic partnerships and acquisitions. Many companies are merging to achieve greater scale, which allows them to negotiate better terms with suppliers and navigate the complexities of a tariff-laden environment.
Carmen Molinos, Morgan Stanley’s global co-head of consumer retail investment banking, emphasized the importance of scale in such turbulent times. “Scale is more important in a tariff-rich environment because you can negotiate better terms across a larger base with many of your counterparties,” he stated.
Notable Deals and Strategic Moves
One of the most significant transactions this year was Skechers’ announcement of a $9.42 billion deal to go private. This decision came shortly after the company, along with 75 other footwear brands, expressed concerns to Trump about the tariffs being an “existential threat” to the industry. Similarly, Foot Locker accelerated its $2.4 billion sale to Dick’s Sporting Goods, a move that was also influenced by the looming tariff challenges.
These deals, while in the works for months, were expedited by the urgency created by the tariffs. Foot Locker’s executives noted that the tariffs were negatively impacting their stock prices and contributing to a weaker-than-expected earnings report, prompting a swift decision to finalize negotiations.
The Gildan-Hanesbrands Merger
Another noteworthy transaction involved Canadian apparel maker Gildan Activewear’s acquisition of U.S. underwear manufacturer Hanesbrands for $2.2 billion. This merger is particularly strategic, as both companies produce a significant portion of their goods in Central America and the Caribbean, utilizing U.S.-grown cotton. This geographic advantage provides them with a buffer against the tariffs that have disrupted many competitors.
Gildan’s CEO, Glenn Chamandy, expressed optimism about the merger, stating, “We think that we’re really well aligned to take advantage, actually, of this near-shoring opportunity.” This sentiment reflects a broader trend among companies seeking to localize production to mitigate tariff impacts.
The Shift to Private Ownership
The trend of going private is gaining traction among companies looking to escape the pressures of public market scrutiny. Skechers’ move to privatization is emblematic of this shift, as it allows the company to navigate the uncertain landscape without the burden of quarterly earnings reports. This strategy is particularly appealing for firms that feel undervalued in the public market.
Foot Locker’s decision to expedite its sale to Dick’s Sporting Goods was also influenced by the desire to stabilize its operations amid the volatility caused by tariffs. The urgency to close the deal was evident, as the board sought to finalize negotiations quickly to avoid further declines in stock value.
Future Outlook for M&A Activity
As the year progresses, industry experts anticipate continued M&A activity in the apparel and footwear sectors. Stronger retailers are likely to seek out acquisitions to bolster their market positions, while struggling companies may look for partnerships to enhance their resilience.
Private equity firms are also active in this space, with Bain Capital reportedly looking to offload its stake in Canada Goose. Additionally, Lands’ End has received interest from brand management firms, indicating a robust appetite for acquisitions in the current market.
David Shiffman, a partner at Solomon Partners, noted that brand management firms have emerged as prolific acquirers in both the middle market and among larger retail brands. These firms typically acquire a brand’s intellectual property and license it to operating partners responsible for manufacturing, design, and sales.
Conclusion
The U.S. apparel and footwear industries are navigating a complex landscape shaped by tariffs and economic uncertainty. The surge in mergers and acquisitions reflects a strategic response to these challenges, as companies seek to consolidate resources and enhance their competitive positions. As the year unfolds, the trend of consolidation is expected to continue, driven by both the need for scale and the desire to mitigate risks associated with the ongoing trade war. The evolving dynamics of the market will undoubtedly shape the future of the industry, making it a critical area to watch in the coming months.
