It is no great surprise that the mergers and acquisitions environment has been getting much tougher over recent months with increasingly volatile trading conditions and darker consumer outlook – but more about that later, what has happened so far this year?

It is no great surprise that the mergers and acquisitions environment has been getting much tougher over recent months with increasingly volatile trading conditions and darker consumer outlook – but more about that later, what has happened so far this year?

In overall terms, there has been as much corporate activity in the year to date as there was in the whole of 2010 and, as it happens, in the equivalent period last year as the fourth was very quiet.

As we predicted in February, corporate buyers have continued to be very active with only six (out of the 20) businesses sold going to private equity investors and five (out of the six) online deals going to trade buyers with four of them going for between two to four times sales and 10 to 20-plus times EBITDA; and there was strong demand and pricing too from corporates for the better positioned shoe and aspirational or luxury brands.

Recent trading statements have highlighted how difficult trading is – and is forecast to be – but we have been surprised in the disparity of performance and it is becoming much clearer who will be the likely winners and losers in these conditions.

The mass market is now a very uncomfortable place to operate for those without a distinct competitive advantage and having hundreds of stores, once considered to a key route to market, is becoming a millstone around the necks of some of the large players.

In these circumstances, there have been corporate, deal and management casualties and, no doubt, more will follow – we suspect that the headhunters have never been busier and that talented retail executives will be much in demand.

We are aware of eight current sale processes, most of which have been well flagged over the summer and five of which are in or adjacent to the grocery sector – it is pretty quiet elsewhere.

It is far from clear how and when these will conclude, as both trade and private equity buyers and the lending banks are being increasingly cautious about current trading, Christmas and beyond. It may seem odd, therefore, that vendors have decided to embark on or continue with business sale processes that seem to have considerable execution and pricing risk. But we have observed across the broader consumer space that some ‘unnatural’ owners – for instance, lending banks – have finally decided that this year is the time to exit, and that some candidates offer trade purchasers significant strategic benefits.

There are other businesses that are being marketed purely on their own merits and where there is very real buyer interest but vendor price expectations reported in the press may turn out to be aspirational.

Consequently, we do not believe that many retail transactions will close this side of Christmas but, if any do, both vendor and buyer will have to take very pragmatic approaches.

However, looking forward to 2012 we believe that it will be another active year for mergers and acquisitions in the retail sector despite the trading environment remaining challenging.

  • Clive Baker, managing director, McQueen