Out of crisis comes opportunity.

As typified by reports this week that Amazon is seeking to buy all or part of bankrupt J.C. Penney, the potential for mergers and acquisitions amid the pandemic is emerging across virtually every industry.

Any potential deals would likely require a fair amount of liquidity and available funding, something that is short supply as many companies struggle to navigate the new normal. And any negotiations, due diligence and third-party consents (including those from brand owners) would also take longer than usual, Richard Harroch, Head of Global Mergers and Acquisitions at Vantage Point Capital, wrote recently in a  Forbes blog post. The U.S. Department of Justice also has asked firms involved in M&A to add 30 days to the timing of their agreements, while European regulators suspended investigations of a number of proposed deals. 

Acquisition Discussions                 

Despite the hurdles, many companies are opening M&A discussions, some of which began pre-pandemic. For example, WildBrain (formerly DHX Media), whose IP portfolio includes Peanuts, Strawberry Shortcake and others, has “identified a pipeline” of potential tuck-in acquisitions that would enhance the company’s “growth prospects” and build out its advertising-based Spark video-on-demand (AVOD) service, CEO Eric Ellenbogen said last week when the company reported Q1 earnings. Potential acquisition candidates could include Spark content developers or standalone brands that have retained their licensing, merchandising and new production rights, Ellenbogen said. WildBrain will fund potential “six-to-seven-figure” deals from a $25 million financing agreement it signed recently with its largest shareholder, Fine Capital, Ellenbogen said.

“The current market which has many opportunities for IP investment and we will now have the capital to pursue those opportunities and to support our [Spark]content partners” some of whom have been affected by a “fallback in advertising” tied to COVID-19, Ellenbogen said.

There will be “many opportunities” for acquisitions for companies that have the needed financial backing, says Basic Fun CEO Jay Forman.

Deal Flow

There will be a “deal flow in mergers, acquisitions and bankruptcies that will commence in the second half of the year and into 2021,” says Forman. “Companies are able to get some near-term relief from government stimulus and the slow first half business cycle.

“However, once the need for capital really ramps up in the summer, a lot of businesses are going to face a liquidity crisis as payment terms to factories tighten and payment terms with retailers stretch out,” he said. “It’s a perfect storm for a capital crisis in our industry and others. This will force a lot of toy companies to seek options and alliances to provide liquidity outside of traditional banking in order to stay alive in the near- and mid-term as this crisis lingers, as it seems it will.”

There will be brands “that need a new parent and can’t carry their overhead,” says an apparel licensing executive. “There are going to companies out there in a tough spot and we are positioning ourselves to gain share coming out of this. Any acquisitions we have made in the past have been of companies with some issues that needed to be part of a bigger platform.”

VF Corp. (Vans, North Face, Dickies and Timberland), which recently spun off its jeans business as Kontoor, appears poised for a return to M&A. It recently completed a $3 billion bond offering that creates $5 billion in  liquidity. While VF’s “first priority” is to stabilize its business during COVID-19,  the company is “well positioned to take an offensive posture when prudent,” CFO Scott Roe said last week when the company released its Q1 earnings. “M&A remains our top capital allocation and strategic priority on a medium to long-term basis.”

VF has a “challenging [but reasonable] outlook for the upcoming fiscal year and a “strong enough” balance sheet to pursue acquisitions, says Sam Poser, an equity research analyst at Susquehanna International Group.