Improved market conditions are driving retail M&A deals.
Investor interest in the middle-market retail sector appears to be heating up. And as a number of key market conditions evolve, a more favorable environment for retail M&A may be on the horizon. Aided by an improving economy, retail business owners and investors alike are getting in position to make a move.
Today, retail M&A is at a point where retailers and investors really need each other. Retailers need investors to aid expansion efforts and gain a competitive edge as omni-channel retailing accelerates. At the same time, both private equity and corporate investors have stockpiles of cash they need to invest.
So why are things looking up for retail M&A?
Growing consumer confidence. Consumers need to have the confidence to spend money and the disposable income available to give retail the boost it needs. If we look at the Consumer Confidence Index in May 2010 (63.3), compared to December 2014 (91.3), we’ve come a long way.
Sure, we have a way to go, but clearly, consumer confidence is up significantly. At the same time, more consumers are employed today. The unemployment rate at the end of November was 5.8 percent. While unemployment still impacts the U.S. economy, it has declined dramatically from the staggering 10 percent that the Bureau of Labor Statistics reported in 2010.
Retail sales numbers are moving in the right direction, which means consumers are spending more. Improvement in the housing market has given big box retailers Lowes and Home Depot a boost, and other retail segments are expected to follow.
Expansion opportunities in the global market. PricewaterhouseCoopers (PwC) reported that Q3 2014 retail and consumer M&A activity across the border increased on both a year-over-year and sequential basis
Based upon an analysis of 19,907 transactions that closed since June, 23 percent were cross-border transactions and sales multiples for those transactions rose from 8.5 times EBITDA to 9.2. Rapidly growing international economies provide appealing opportunities for retailers unable to achieve growth organically. Business owners should work with M&A intermediaries and investors who have insight and access to resources in global markets.
Consumer demand for omni-channel retailing. Today’s consumers expect to complete retail transactions in a variety of ways: from traditional storefronts, outlet stores and online stores, to emerging mobile and social transaction technologies. To stay competitive in the retail environment, business owners must adapt.
Many retailers won’t have the know-how or funding to develop an efficient and secure omni-channel plan. You can expect these retailers to seek out investors and investment bankers who can facilitate financing and expertise in the omni-channel environment.
Investor interest has been peaked due to low valuations. CNBC’s Jim Cramer suspects businesses in the retail space may be undervalued. He noted that when Carl Icahn put a stake in Family Dollar stores, “rival Dollar General rallied 7 percent based on speculation that it could merge with Family Dollar.”
As the economy continues to expand and retail grows, the demand for well-managed, successful middle-market retail companies will increase. The abundance of capital and more available credit will boost retail company values as more investors compete to expand existing retail operations into new markets.
Big retailers are using M&A to grow. Many retailers struggle to grow organically, which often means they will seek growth through acquisition. We’ve seen this occur among some high-profile retailers who have gone after direct competitors to meet expansion goals. Two prime examples include the $1.8 billion Men’s Wearhouse acquisition of Jos. A. Bank this past March and the merger of Office Max and Office Depot last year.
Activity is heating up in the retail sector – for deals of all sizes. This could bode well for middle-market retailers, manufacturers and supply chain service providers. Eventually, investor competition to acquire successful, privately held, retail-focused companies will accelerate. And as this investor competition swells, company valuations should rise.