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A return to M&A in the retail sector?

Despite the current tough trading environment and with the global economy showing some signs of emerging from the worst effects of the recession, thoughts will inevitably turn to growth plans and what the future holds for mergers and acquisitions (M&A). By Helen Dickinson


A return to M&A in the retail sector?

We’ve been seeing numerous press headlines about M&A activity in the retail sector over the past few weeks with Supergroup, DFS, Ocado, Hobbycraft, Cath Kidston, Card Factory and TJ Hughes all named as being in the starting blocks for sales or IPOs while New Look and Matalan, which were in the frame to pursue the latter, have reportedly put their activity on hold.

The UK M&A market as a whole picked up significantly in the final quarter of 2009 with more optimism than we’ve seen for a while but dealmakers keeping one eye on the prospects of a “double dip”.

Given the challenging time which retailers have faced with many focusing more on survival than growth, it probably won’t come as a huge surprise that the total number of deals in the retail sector globally fell by almost 11% in the twelve months to June 2009.  However, at the same time the value of deals plunged a massive 73%, according to the latest report on M&A in the retail sector compiled by KPMG International.

Of course, as well as bringing challenges, recession can bring opportunities too.  The research found that the majority of M&A activity in retail in 2009 was a result of distressed sales, a trend which is expected to continue throughout 2010 as the weaker retailers create an opportunity for stronger performers to acquire bargains and pursue growth.

Another interesting global M&A trend we expect to see emerge this year is non-food companies buying brands to allow them to expand their ranges of products and services.  This relatively new phenomenon will allow retailers to exclusively distribute these products through their own networks, providing a unique selling point with which to attract customers. 

In terms of where activity might be focussed, from 2010 onwards we could see large grocers and volume retailers looking to emerging markets, particularly in Central Asia, Asia Pacific and Central & Latin America.  At the same time, retailers in emerging markets are facing low valuations and financing problems, making them prime targets for strong European and North American retailers.

Unfortunately, we do see one theme of the recession continuing, for the moment at least: retailers finding it difficult to raise any new debt required to finance deals.  Private equity houses have shown that they are now prepared to take on bigger equity stakes given these ongoing challenges in the credit markets, although the requisite element of financing will continue to prove challenging for private equity as well.

So, whether it’s in the global or in the UK market, there are signs of increased M&A activity.  But it is falling at opposite ends of the spectrum: weaker players subject to distressed deals and, at the other extreme, stronger businesses taking advantage of improved market conditions, with stories of success around how they have weathered the recession and their ability to seize the opportunities of the future.  All in all, further evidence of the polarisation of the sector we’ve been seeing over the last two years. 

Helen Dickinson is Head of Retail at KPMG

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