Hilco Could Take By Richard Collings
Within Two Years
Fashionology Weathers Lawsuit;
Was Interested In Eddie Bauer IP;
Consumers On A Diet, CEO Says
Published: August 20, 2009
Hilco Consumer Capital, the Toronto-based private equity firm, could take its investments in an assortment of brands public within the next year or two, according to CEO Jamie Salter.
Out of all of its acquisitions, the company has only leveraged one deal, and only in a couple of cases, citing Fashionology as an example, did the private equity firm invest in the operating side of the business, Salter said.
For the most part, Hilco has pursued distressed companies and is mainly interested in acquiring companies' intellectual property, or IP, and then licensing the IP, or brand names, out to other entities, content to collect the royalties without getting tied up in, or having to manage the costs of, the operating side.
By licensing out the brand name, the royalties are basically guaranteed, and the risk is very low, Salter said. "It doesn't beat you up when you loose a license," he said.
Concerning Fashionology, which was a licensee for Ellen Tracy sportswear, the company attempted to sell that entity, determining that the risks of investing in the operations of a business were too great. When the initiative to sell it was unsuccessful, the decision was made to shut Fashionology down.
The now-defunct Fashionology, which held the Ellen Tracy sportswear license, recently made the news when Shanghai K&J Apparel Co. Ltd., Chinamine Trading, Excellent Jade Ltd., and Shanghai Mandarin Fashion Ltd. filed a lawsuit against the company, petitioning for an involuntary Chapter 7, which seeks to liquidate it due to money owed the plaintiffs.
The operating side against which the lawsuit was filed is separate from Ellen Tracy's IP, which is owned by Brand Matter. Brand Matter took the license back from Fashionology, as it was in default concerning royalty payments. Brand Matter has licensed the Ellen Tracy name to several entities under which to make an assortment of products.
Ultimately, both the potential and the challenge of licensing such names, such as Halston in apparel, outside of their core categories is what appeals to Hilco concerning its investment strategy.
As Hilco and its co-investors re-establish the Halston name in the market place, for example, it can then license out the name on everything from home décor to luggage to jewelry to fragrance to footwear to handbags and accessories.
The most recent example of how the company profits from a wide array of product categories is licensing out the House of Marley or Bob Marley name to appear on coffee products. Concerning House of Marley, Hilco could also ink a deal to put the name on beverages and personal care products, for example.
Rather than acquire companies all in the same industry or sector, Hilco also has made a number of bets on a wide variety of companies and their brand names, from Polaroid to The Sharper Image. Not only does it invest in a wide array of businesses, it usually does so with other investors involved.
The hope is to roll up all of its investments in its portfolio into one company and to take it public in the next year or two, Salter said.
The brands in which Hilco has invested ring up some $2 billion at retailer's cash registers, Salter said. The full list of brands in which it has invested includes Caribbean Joe, Ram Golf, Tommy Armour Golf, Ellen Tracy, Bombay Brands, The Sharper Image, Linens ‘n Things, Polaroid, Halston, and House of Marley.
For now, Hilco is not noting anything interesting up for grabs, Salter said. The company was involved in the bidding for Eddie Bauer, but in the end, was only interested in the IP, whereas the winner of the auction, Golden Gate Capital, wanted to keep most of the stores open, he said. Hilco's plan was to liquidate all the stores and assets and retain the brand name.
Salter said the Hilco offer was hampered because for it to acquire the IP while shedding the rest would have cost it about $80 million in administration claims, while Golden Gate's administration claims were a good deal less, at about $25-to-$30 million. In essence,
If there is a poor Christmas, however, Salter said there is likely to be another wave of bankruptcies, and therefore, a number of distressed assets will come up for sale.
In terms of credit, Salter said it is not loosening up, and private equity firms, as a result, are having to put a lot more of their money to work. Before the financial crisis, it was not unusual for a private equity firm to put up 20 cents for every dollar put into a deal, while borrowing the rest. Now, for every dollar, firms must put up 70 cents.
While the private equity industry will continue to weigh deals in a similar manner as in the past, no longer will they be able to pay the same multiples, with valuations dropping from around seven times EBITDA, to about three-to-four times EBITDA.
Salter said, in terms of consumption, his view is that consumers right now are on a diet, and if the economy stabilizes and experiences some growth even, most people, like with any diet, will eventually stop. But if unemployment lingers, consumers will begin to undergo permanent life changes, much as the generation that experienced the Great Depression did.
If consumer spending does not grow, yet internet retailing continues to increase its share of consumers' dollars, then a number of bricks-and-mortar stores will have to go out of business.
The biggest question, in Salter's mind, is where many of those who will be or are already unemployed will find jobs in the future? He said he believes there is no way industry will return to the U.S., and with technology only enabling people to work longer hours while making them more efficient, the number of jobs technology will eliminate is likely to increase.
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By Richard Collings