The shoe sector can intimidate private equity buyers. There’s the fashion threat, the inventory risk, and with retailers constantly squeezing margins lower, the pricing pressures can also scare off investors.
With that said, some firms have dared to enter these waters. Hicks Muse Tate & Furst last year jumped on the Sex in the City bandwagon and acquired trendy women’s shoe maker Jimmy Choo, while Advent International bought out the decidedly less hip Shoes For Crews Inc., a maker of non-slip footwear for the restaurant industry. But Heritage Partners came in early on this trend with its 2003 acquisition of Bennett Footwear Group, and this month unloaded the investment through a sale to Brown Shoe Company.
“The opportunities in the shoe industry are pretty dubious from a private equity perspective,” Heritage General Partner Peter Hermann told Buyouts. “The industry has taken on tremendous amounts of pressure… There was consolidation on the consumer side, with all retailers looking for lower price points, and as a result almost all the manufacturing left the U.S.”
There are two things that can make a private equity pro shudder: China and Wal-Mart. Footwear is going toe to toe with each of these threats. Heritage, however, acquired Bennett after the company had already moved its manufacturing overseas to Brazil and China, and the company had positioned itself as across all cost spectrums. On the lower end, Bennett aligned itself with the likes of Wal-Mart and Payless, which removed that threat.
“The management team had already figured out how to operate in that environment and after getting past that, they were really chomping at the bit for some growth,” Hermann said.
Enter Heritage. The 2003 acquisition gave the business a much needed infusion of capital, and ultimately allowed management to go on the offensive. Prior to the Heritage investment, Bennett had relied on using licensed brands. The company’s flagship product was its Franco Sarto shoes, but that brand was owned by Pentland PLC, the UK apparel company best known for its Speedo and LaCoste trademarks.
“We are great believers that brands have a real value,” Hermann said. “Bennett put all this work to grow Franco Sarto and build its department store penetration, but all of this was done on behalf of a brand owned by someone else.”
Soon after the Heritage acquisition, Bennett went on a buying spree designed to balance its licensed products with its own stable of branded shoes. Just three months after the initial acquisition, Bennett completed a licensing deal, buying the rights to use the Etienne Aigner name from Aigner Group. Five months later the company acquired Intershoe, Inc., which brought the Via Spiga, Nickels, Paloma and Studio Paolo brands under the Bennett umbrella.
One macro-economic factor that contributed to Heritage’s success was the resiliency of the consumer base. “Shoes are a remarkably stable business,” Hermann said. “When you think about the recession we just went through, core shoe buying stayed pretty stable. It grows with the population… We have an entire fashion industry that is built around convincing women that they have to change their shoes, their handbags and their clothing every couple months.”
In the sale, Brown has agreed to pay $205 million in cash for Bennett, and the seller group could receive up to $42.5 million in an earnout consideration if Bennett hits certain financial targets over the next three years.
Heritage invested in Bennett through the 1999-vintage, $843 million Heritage Fund III, and owned approximately 60% of the company. The firm invested a total equity stake of between $40 million and $50 million. The return, if targets are met, would evidently bring in more than three times the Heritage equity investment.