Authentic Brands Group’s acquisition of Forever 21 is the latest in a series of deals that have transformed Authentic Brands into the second largest brand management company in the world, behind only Walt Disney.
The $81 million transaction, in which Authentic Brands (ABG) partnered with mall operators Simon Property Group and Brookfield Property Partners, increases the company’s annual global retail sales by nearly 20% from over $10 billion to over $12 billion. ABG and Simon will each own 37.5%, and Brookfield will own 25% of the intellectual property and operating businesses, according to a statement.
In the past 12 months, ABG has scooped up well-known brands including Barneys New York and Sports Illustrated, adding to a stable that already includes Juicy Couture, Frederick’s of Hollywood, Nine West and Aéropostale as well as the likenesses of celebrities like Marilyn Monroe and Shaquille O’Neal.
ABG’s purchase of Forever 21 could prove to be its most ambitious acquisition yet in light of the retailer’s vast presence in the U.S. and around the globe. Despite the fast-fashion retailer’s financial woes, ABG’s CEO Jamie Salter said he believes the company can be fixed.
Salter acknowledged in a sit-down interview with Adweek that while Forever 21’s prior owners, the Chang family, who founded Forever 21 in 1984, built a great brand, they erred by growing the company too quickly.
One of the first steps in the turnaround is to overhaul the company’s retail operating system, Salter said, because if the apparel chain had a proper one in place, that system would have told the company it was overexpanding in the first place.
The other major component of reviving Forever 21 is restructuring its store base, not only in terms of the number of stores, but also each store’s square footage, Salter said. The company may no longer have department store-sized locations like the one Forever 21 opened in Las Vegas’ Fashion Show mall in 2010, a 126,000-square-foot behemoth that took over a space once occupied by Lord & Taylor.
Initially, the plan is to continue operating Forever 21 and assess the business, and to keep as many stores open as possible.
As for the opportunity, ABG measured the brand’s strength utilizing consumer analytics and weighed those numbers against competitors, Salter said. What the brand management company found was that Forever 21 still resonates strongly with shoppers. Indeed, the brand remains popular in overseas markets such as India, where ABG sees huge potential.
According to a statement, Forever 21’s new ownership group will work with existing and new partners to expand the retailer across key territories, including South America, Western and Eastern Europe, China, Southeast Asia, the Middle East, and India. Forever 21 will also convert its current owned store operations in Central America, South America, Mexico, the Philippines, and the Caribbean to a licensed partnership model.
ABG and its partners have confidence in their ability to breathe new life into Forever 21 largely because it’s not the first time they’ve done something like this. ABG, Simon and Brookfield, formerly General Growth Properties, teamed up for a similar deal to buy Aéropostale in 2016.
ABG and its retail-operating partners will extract royalties and rents from Forever 21, as they did with Aéropostale, but not to the extent that such payments cause the retailer to be unprofitable, Salter said.
A changing landscape
In the brand management world, there is life before and life after Salter, who founded Authentic Brands with his son Corey in 2010.
Until Salter entered the picture, brand management companies had a somewhat dubious reputation. They were sometimes referred to in private conversation as “bottom feeders” and “vultures” in part because businesses of that type often scavenged bankruptcies for the intellectual property of faded brands and then purchased the assets for pennies on the dollar.
In ABG’s case, there’s an important nuance. Where others might have seen a failed business, Salter sees opportunity, but not merely to buy a brand on the cheap and license out what little value it had left. Instead, Salter hopes to restore the name to a semblance of its former prominence.
Salter’s ambition is to build the next Walt Disney, only without the operations.
“What we’re trying to build is a content experience lifestyle company from A to Z but run it like an Uber or Airbnb platform,” Salter said.
Since ABG began doing business, the company has grown exponentially. By 2015, the company was generating EBITDA (earnings before interest, taxes, debt and amortization, a measure of cash flow) of $75 million, when it was contemplating an initial public offering.
By the time BlackRock purchased a stake from the company’s private equity backer Leonard Green, ABG was valued at around $4 billion including debt. Today it boasts more than 200 employees, some 50-plus brands, more than 5,000 stores under its retail banners and in excess of 900 global partners.
Birth and rebirth
After Salter left Hilco Consumer Capital over differences about how to run the private equity unit’s portfolio, he immediately went to work on his next venture, applying his vision and the lessons he’d learned from in the recent and distant past.
Salter said his grand plan at Hilco was to bring all of the private equity division’s brands under one roof with one board of directors. That portfolio of businesses included Halston, Polaroid, Ellen Tracy, The Sharper Image, Linens ‘n Things and Bombay Company. Each business had its own board of directors with its own employees, which in turn meant more overhead. And for each new deal, Salter would have to go out and raise more money.
Initially the breakup was, in Salter’s own words, “not pretty.” And there was a lot of emotion involved. Though Salter wanted to take over and buy Hilco’s stakes in the brands, he was ultimately rebuffed. In the end, Salter was paid for his shares in the businesses.
To fund his new company, Salter needed capital. He held talks with a number of potential backers including pension fund Ontario Municipal Employees Retirement System and private equity firm Onex. In the end, he turned to Jon Sokoloff, a managing partner at Leonard Green.
In May 2010, Salter asked Leonard Green for $250 million to $500 million, but the private equity firm countered with $230 million if Salter would invest $20 million of his own money. Not only did Leonard Green provide the cash, it also provided M&A expertise and back-office support at a time when ABG needed both.
Relationships again came into play when it came time for Leonard Green to sell some of its holdings in the company, and that’s when Salter turned to Colm Lanigan, a managing director at private equity firm BlackRock.
Leonard Green last year sold a 30% stake in ABG to BlackRock for $875 million while retaining a 16.6% stake, achieving a return on equity invested of around 40 times. That result would include both realized and unrealized returns.
Though ABG prepared for a potential IPO at one point, Salter now dismisses the idea, saying he prefers being private because it gives him more flexibility in decision making. Instead, the investment from BlackRock is intended to be long-term and likely to exceed a 10-year time frame.
Control center
Authentic Brands’ corporate headquarters is located in the former showrooms of apparel brand Jones New York in New York’s garment district, once the seat of some of apparel’s most powerful conglomerates, including Jones Group and Liz Claiborne.
The spartan offices are a maze of white walls, concrete floors, glass partitions and filing cabinets, with a single horizontal blue stripe running the length of the walls near the entrance. The space is given energy via imagery of the multitude of brands and estates the company now owns. Pictures of Monroe and O’Neal hang on the walls alongside those of Elvis Presley and Muhammad Ali, whose likenesses ABG also owns, a modern testament to capitalism and royalty, American style.
The recent additions of Barneys and Sports Illustrated complement the existing roster of sports personalities, celebrities and brands. While Forever 21 is the newest addition, plans are currently being hatched for both the storied media property and the luxury retailer.
ABG recently inked a deal, for example, to sell topical CBD cream under the Sports Illustrated name, one of the ways the brand management firm plans to expand that business. The sports recovery space is changing, Salter said, and the integrity of the Sports Illustrated name gives it permission to go into different businesses. With recovery important to athletes, CBD could play an important role and is a space the company understands due to existing relationships.
It is the kind of move ABG is becoming known for, with various parts of its business reinforcing the other parts, not unlike Walt Disney. A number of holdings, such as Ali’s and O’Neal’s images, easily cross over with Sports Illustrated as do athletic brands such as Spyder and Volcom. Salter ticked off a number of categories under which consumers might see Sports Illustrated-branded merchandise, from swimsuits to tailgating to gaming.
And more media deals are in the pipeline for the brand development holding company, with current interest in acquiring two different publishing properties, one in the gaming world and the other in education, Salter said.
ABG is well-suited for the future in a rapidly changing world precisely because it has minimal operations and the overhead associated with it. While its goods are sold in thousands of stores, it doesn’t source production, operate factories, maintain distribution systems or own any of the store leases.
Lessons learned
The first lesson Salter learned in his decades-long career came from his mentor Jerry Sprackman, who owned Toronto-based Landawn Shopping Centres. In the mid-1980s, Sprackman controlled some 100 shopping centers with a value of up to $1 billion. But when interest rates spiked to 15%, it led to the company’s demise. It would be Salter’s first lesson: Never overleverage a company with debt.
“Jerry treated me like gold, and taught me a lot of skill sets,” Salter said, which included a disciplined work ethic, being the first person to work, and writing down what you want to achieve at the beginning of each day. Salter learned additional lessons as a result of his dealmaking in the early 1990s. He co-founded Ride Snowboards and took it public. Later, he launched Gen-X Companies, sold it in 1998, then bought it back 6 years later. The lessons learned from both deals: the pitfalls of shorting stock and not doing due diligence when accepting stock as payment.
Salter picked up two more important lessons in the 2000s: that you can buy and then license brands while learning how to value their intellectual property, which was during his dealings with FGL Sports, and then how to value liquidations, which was during his stint at Hilco.
Editor’s note: This article has been updated with additional information regarding Leonard Green’s return on equity provided after publication.
