Respondents to our recent M&A survey said the consumer and retail sectors will enjoy significant outbound Asia M&A activity in the medium term. Melvin Glapion from risk consultancy Kroll discusses in more detail the prospects and potential pitfalls for brand acquisitions.
What is creating the flurry of interest by Asian and specifically Chinese buyers in European brands?
The interest is mostly driven by availability and the supply side. Europeans brands from the UK, France, Italy and others are quietly putting themselves up for sale. When lists are drawn up of who could be potential buyers, Chinese are invariably on them. Mid-level and upper end brand owners are trying to tap into the opportunity to create demand for their products in Asia and boost sales.
Are the sellers typically running auctions or are deals being done principal-to-principal?
We have seen both types. There have been some auctions which have been shown to a limited list of potential buyers. But brand owners are also contacting buyers on a principal-to-principal basis. Some obvious Asian buyers are those who already have minority stakes in luxury businesses or are in the business of retail. Big names like Roberto Cavalli and Tom Ford are said to be in the market for funding. Seeking investment can also be related to expansion in Asia. In 2009 when the Aquascutum brand was sold by Japanese owner, Renown, the brand rights were split geographically. The worldwide rights, excluding Asia, were acquired by UK retail entrepreneur Harold Tillman and Belinda Earl [Earl is CEO of the company which owns the Jaeger brand]. The Asian brand rights were acquired by YGM Trading. YGM was already the Hong Kong and China distributor for Aquascutum.
What kind of due diligence do buyers hire you to do before they strike deals?
Due diligence centres around three key areas: reputational; operational; and commercial. We are asked to determine why the seller is selling and whether it is a distress situation, which can be useful information at the negotiating table. We are also asked to ferret out any other information which may be useful. We could also be asked to do a ‘sanity check’ on the financial forecasts ie take a big-picture view of the numbers and see whether they make sense.
What issues do buyers need to be more aware of and sensitive to?
The ‘halo’ effect of buying a well-known brand oftentimes obscures the actual financial weakness underlying the business, and with continuing economic worries in the eurozone, due diligence efforts on even the most established of brands is necessary. Further, the brand may have strong appeal in Europe based on the brand story and heritage but that may not be easily exported. Sometimes western brands need to rethink how they market or their format or even their product line when they are targeting Asian consumers.
