Competitive Pressures Expected to Drive M&A Activity

It may very well be another lively year for deal activity in the U.S. retail sector. According to the latest data from our 2014 Retail Compass Survey of CFOs, most retail CFOs expect 2014 to bring more deals, or at least remain on par with last year.

The year kicked off with chatter around major deals, such as the Office Depot-Office Max merger and Men’s Warehouse’s bid for Jos. A. Bank, both of which highlight the pressure retailers are facing to expand their reach and offerings: Forty-two percent of respondents say increasing market share will be the main impetus behind deal activity in 2014. At the same time, though retailers are optimistic about consumer confidence in the coming year, shoppers remain price-conscious and discerning, putting greater emphasis on convenience, product assortment and low prices. Consolidation and fierce competition will likely be another major driving force behind deals, with one-third of CFOs noting it as a leading business risk. Meanwhile, CFOs are split on whether strategic or financial buyers will move deals, but slightly favor strategic buyers, and  they project potential buyers will see an average EBITDA multiple of 4.24, down slightly from last year’s projection of 5.15.

As we noted in January, the IPO market was active in 2013, as well, with 19 retail and consumer product company IPOs yielding $8.3 billion in proceeds, according to Renaissance Capital. However, CFOs are split about whether the momentum will continue in 2014: A majority (58 percent) expect less momentum around IPOs in 2014, while one-third expect to see an increase. More than one-third (35 percent) are pegging their expectations to ongoing economic recovery, indicating that the strength of the U.S. economy and stock market will be the key drivers of IPO activity this year.  In terms of what sectors they expect to see the most activity, half of all respondents project the e-commerce sector will be a hot spot, followed by non-food and beverage consumer products (25 percent) and food and beverage (12 percent).

In the realm of financial markets, CFOs expect 2014 to be a challenging year when it comes to securing financing options. The Federal Reserve is pulling back on its economic stimulus program and the public markets have been off to a rocky start in 2014. About three-quarters of respondents believe it will be difficult to refinance their debt in the coming year; nearly half expect it to be “somewhat” to “very” difficult.

Stay tuned to the blog for additional findings from this year’s Retail Compass Survey of CFOs, including retailers’ online sales projections, growth strategies and key capital investments in the year ahead.