Fashion Finds

Orange County Business Journal, Mar 17-Mar 23, 2008 by Lee, Jessica C

Apparel Industry Ripe for Consolidation; County Hot for Deals With Plenty of Players

A number of factors are fueling deals in Orange County's apparel industry, analysts say.

The sector has seen a number of headline grabbing deals during the past year, including one of the biggest deals for OC overall-the $2.1 billion buyout of Foothill Ranch-based Oakley Inc. by Italy's Luxottica Group SPA. The deal closed in November.

Large companies with extra cash are looking to buy other businesses to help diversify their operations in a slower economy, according to analysts.

Staying ahead of competition also is fueling deals, said Claire Armstrong Gallacher, analyst at the San Francisco office of New York-based Caris & Co.

Such was the case with Luxottica and Oakley, she said.

"Oakley was a better run company and efficient operator," Gallacher said. "The eyewear they were producing was very good and I think Luxottica looked at it as a way to augment its own growth while also removing Oakley as a competitor."

Before the acquisition, Oakley had a market value of about $2 billion and generated yearly sales of about $920 million with its sunglasses, glasses, goggles, shoes, shirts and other gear.

Luxottica counts about $5 billion in revenue making upscale glasses frames and sunglasses as well as running the Sunglass Hut, LensCrafters and Pearlc Vision chains.

The two had been big rivals before the deal, going back and forth on various issues, including a lawsuit.

One of the key parts to the deal was the changes spearheaded by Oakley Chief Executive Scott Olivet, who came on board in 2005.

Gallacher credits Oakley's attractiveness as a buyout candidate to Olivet's changes.

"What we saw with the Oakley and Luxottica deal was really a result of Oakley's restructuring and the changes that Olivet made," she said.

Olivet, a former Nike Inc. executive, helped the company expand beyond its edgy sunglass designs by appealing to more fashion savvy consumers, particularly women.

The company also acquired upscale and chic sunglass makers Los Angeles-based Oliver Peoples and Optical Shop of Aspen in Aliso Viejo under his helm.

For Luxottica, the deal was a way to combine two market leaders.

"This is not one of those acquisitions by Luxottica where we are restructuring from A to Z the company that we buy," Luxottica Chief Executive Andrea Guerra said in an earlier conference call. "We are combining two strengths. We are combining two leaders. We like Oakley. We understand the potential of Oakley around the world."

Luxottica can help grow Oakley's brand on a larger scale, according to Gallacher.

"Luxottica is a much larger corporation with a lot of resources," she said. "It has the infrastructure to grow Oakley on a bigger scale by helping it launch more products and market its brand."

Plus the buyout price wasn't bad either, Gallacher said.

"When you come up with that kind of purchase price, how do you go to your shareholders and say no?" she said.

A retail slowdown and drag in consumer spending is adding fuel to the fire. Often, selling is a great way for smaller companies to grow, analysts said. It also gives bigger companies a chance to get into new markets.

Take Costa Mesa-based Volcom Inc.'s buy of San Clementc's Electric Visual for $25.3 million.

Volcom bought its way into new markets with Electric's sunglasses and goggles. And Electric now can expand its clothing line.

"The timing felt right," said Volcom Chief Executive Richard Woolcott in an earlier interview. "It gives us the ability to compete in categories that we currently do not compete in."

Volcom, which had a recent market value of about $430 million, has followed the lead of OC's biggest surfwear makers such as Huntington Beach-based Quiksilver Inc. and Irvine's Billabong USA. Both have bought smaller edgy labels during the years in a bid to drive sales and diversify.

"Volcom had extra cash on the balance sheet and they were looking for another brand that could augment growth and Electric fit their criteria," Gallacher said.

Electric, which is known for its lightning bolt logo and makes sunglasses, goggles, T-shirts, sweatshirts, bags and other accessories, should benefit from the deal by having access to the money and experience that Volcom brings to the table, Gallacher said.

"For a small company like Electric, teaming up with a big player can be huge," she said.

Irvine-based Shimano American Corp., a division of Japanese cycling and fishing equipment maker Shimano Inc., spearheaded its own deal last month.

Shimano American said it would buy Colorado-based Pearl iZumi for about $70 million.

The company will pay $65.3 million in cash and assume $4.2 million in long-term debt. The deal is expected to close by the end of this month.

Shimano spokesman Devin Walton said the company bought Pearl iZumi because it wanted to deepen its business in athletic clothing. Pearl iZumi makes clothing and accessories for biking, running, and other outdoor sports.

"Pearl is one of those companies that has similar synergies and is a quality leader in their industry," Walton said. "It shares a lot of the same integrity that Shimano has."