What’s Next for Retail M&A in 2013?

Last year was a banner year for retail and consumer product mergers and acquisitions. In fact, 2012 brought a 33 percent surge in industry deal volume—its biggest jump since 2007. This increase generated a wave of positive sentiment surrounding growth projections: 94 percent of CFOs that we surveyed earlier this year predicted either steady deal activity or more growth. They noted that less volatile markets, renewed interest in international growth and emerging markets and increased desire for omnichannel capabilities were potential factors fueling future investment. While all these growth factors remain intact, we now find ourselves well into the third quarter of 2013, immersed in a deal making environment that has been rather flat.

As it turned out, the first half of 2013 was somewhat slow. According to Dealogic, the U.S. apparel and shoe retail market saw 18 deals valued at $2.43 billion during the first half of the year, down 18.8 percent from last year’s figures. Globally, this same market’s deal volume fell 14 percent compared to the first half of 2012.
Q1 2013 was particularly stagnant. As players tried to secure their buys and avoid the ramifications of imminent U.S. tax code changes, we saw an atypical swell in last-minute deals toward the end of 2012. With that in mind, the initial letup in 2013 was likely a pause for breath in the deal space. On its heels, the second quarter brought a light increase in flow, with several high profile deals at OfficeMax, Saks and Fifth & Pacific entering the pipeline. Still, we have yet to note any significant upswings in activity.

As we move forward this year, it’s important to keep in mind that M&A performance remains heavily tied to the confidence of potential buyers. In other sectors, cheap financing has provided sufficient impetus for deal talk, but the retail industry has proven more finicky. Overall, there seems to be a relative shortage of companies that offer both a strong brand and considerable growth potential. This narrow list of promising prospects curtails supply, resulting in upward pressure on the price of deals.  It can also increase buyer anxieties around securing sound integration plans.

Despite the shortage in supply, however, buyers remain hungry for deals, as two key players look to take advantage of current economic conditions. On one hand, private equity firms are still actively leveraging high yield debt from low interest rates, as well as high levels of dry powder in their reserves. Meanwhile, retailers continue to pursue more and more strategic deal making, with successful companies seeking out new channels of growth. This is an especially popular route when it comes to enhancing brand experience with timely omnichannel capabilities, which allows companies to avoid the burden of developing technologies internally. At the same time, struggling firms continue to consider consolidation as a way to survive after suffering low margins and tough price competition.

As we move forward in the last half of the year, the question on everyone’s mind is what the emerging source of future growth will be.

What are your predictions for M&A activity in the remainder of 2013?