Looking back, 2010 turned out to be a pretty active year for retail M&A, with 14 UK deals worth more than £50m, of which seven were over £250m.
Looking back, 2010 turned out to be a pretty active year for retail M&A, with 14 UK deals worth more than £50m, of which seven were over £250m. But it was a year of two halves, with the larger and higher multiple deals occurring in the first six months and only one sizeable transaction, Office, in the second - and that was sensibly priced.
On the Continent, on the other hand, the reverse occurred with considerable sizeable activity in the last quarter including LVMH taking a stake in Hermes, Phillips-Van Heusen acquiring Tommy Hilfiger, Takko moving from Advent to Apax ownership, and Bridgepoint leading a consolidation in the European jewellery sector.
So what does this mean for 2011? A couple of smaller deals have already completed (Jones Bootmaker and Phase Eight), there are a number of processes that started last autumn and that have yet to cross the line but should do so soon or at least within the next couple of months (like Bathstore and Kiddicare), and a number of businesses/owners have appointed advisers with the expectation of starting processes in the first half of the year (such as Americana and Joules).
While the latter point should not be a surprise given the level and maturity of private equity investment, it may seem brave in the context of some parts of the sector already finding trading tough and with the expectation that it could easily get tougher as the coalition’s economic actions begin to bite and, particularly, with the possibility of interest rate increases later in the year.
That said, there is still real appetite from the private equity industry to invest in retail but they will be very selective: businesses will need to have category-leading positions, robust operating models, diverse routes to market, high growth potential and not be threatened by the multiple grocers.
We envisage, therefore, that there will probably be more interest in specialist players and those operating at the extremes of value and premium/luxury rather than in the mass-market middle ground.
We also believe that banks will continue to be very cautious lenders into leveraged transactions in UK retail and this will limit private equity’s ability to pay, in terms of multiple and equity cheque size, but may encourage some of the larger players to participate in deals smaller than their historic norms - as TPG did in acquiring Republic last year.
I noted in a column last July that we may see more action from corporate buyers looking to improve their strategic positioning, whether defensively or securing new areas of growth.
There was more evidence of this over the past six months and we do expect to see them outbid private equity from time to time and, very occasionally, comprehensively - look out for the Kiddicare outcome.
At the end of the day, the level of activity will largely depend on whether purchasers, of whatever type, can meet vendors’ price expectations. That is a hard call in the current consumer environment. Whatever happens, however, it will be another fascinating year for UK retail.
Clive Baker, managing director, McQueen