Competition to Drive Robust Retail M&A Activity in 2014: BDO Survey

February 2014

Meghan Warren
Bliss Integrated Communication

Chicago – The retail industry is poised for another year of vibrant deal activity. According to a recent BDO USA, LLP survey, an overwhelming majority of retail CFOs (96 percent) expect M&A activity to increase or remain consistent with 2013 levels in the coming year. These expectations come on the heels of a robust year for mergers and acquisitions. Though the total number of U.S. retail and consumer products deals fell last year from 2012 levels, total deal value grew by 26 percent to about $176 billion, according to S&P Capital IQ. Two-thirds of CFOs anticipate that the majority of deal activity will occur in the United States, followed distantly by Asia-Pacific (17 percent) and Europe (8 percent). Survey respondents also project that potential buyers can expect to see an average EBITDA (earnings before interest, taxes, depreciation and amortization) multiple of about 4.24, down slightly from last year’s projection of 5.15.

CFOs suggest that consolidation and fierce competition in the retail sector—which about one-third cite as a leading risk to their business—may be a driving force behind the expected increase in transactions. With several noteworthy deals either closing or in the works, including Office Depot’s merger with Office Max and the ongoing Men’s Wearhouse bid for Jos. A. Bank, retailers are under increasing pressure to grow their offerings and reach. Some choose to do so by pursuing mergers or acquisitions of their own. Just over half of CFOs surveyed say that strategic buyers, as opposed to financial buyers, will propel M&A activity in 2014, and a plurality (42 percent) cite increasing market share as the main impetus behind deal activity.

“Consumers are showing an increased willingness to spend, but they remain price-conscious and discerning. As a result, retailers are feeling greater pressure to meet consumer demands for convenience, product assortment and low prices,” says Ted Vaughan, partner in the Retail and Consumer Products practice at BDO. “One way of responding to these pressures is to pursue an acquisition. Many retailers see it as way to add capabilities or grow their geographic reach, while others hope to build market share by joining forces with a once-competitor.

These findings are from the eighth annual BDO Retail Compass Survey of CFOs, which examined the opinions of 100 chief financial officers at leading retailers located throughout the country. The retailers in the study were among the largest in the country. The survey was conducted in January 2014.

Other major findings of the 2014 BDO Retail Compass Survey of CFOs:

CFOs split on IPO activity. 2013 was a record year for retail and consumer products public offerings, with Renaissance Capital reporting 19 initial public offerings (IPOs) yielding $8.3 billion in proceeds. Retail CFOs have decidedly mixed sentiments about whether the industry can sustain this pace: A majority (58 percent) anticipate that the number of offerings will decline in 2014 as the IPO environment right-sizes. However, some CFOs believe that last year’s positive momentum will continue this year, with 33 percent projecting an increase, more than double the number who did so in 2012. Overall, about half expect that the majority of IPOs will occur in the e-commerce sector, followed by non-food and beverage consumer products (25 percent) and food and beverage (12 percent). Similar to last year, a plurality (35 percent) indicate that the strength of the U.S. economy and stock market will be the most important driver of a company’s ability to go public this year.

Sales remain a priority financial metric. Sales continue to be a key measurement against which the retail industry assesses performance. As a result, a majority (51 percent) of CFOs cite it as their primary financial metric, with 32 percent specifically pointing to gross sales and 19 percent pointing to comparable store sales. These numbers remain broadly consistent with last year’s survey, when 35 percent and 18 percent of CFOs cited gross sales and comparable store sales, respectively, as their main focus.

CFOs anticipate difficulty in the capital markets. Financial market instability will likely remain an obstacle for retailers when it comes to accessing capital and credit in 2014. On the heels of the Federal Reserve’s 2013 decision to ease its economic interventions combined with fluctuations in the public markets at the outset of 2014, about three-quarters of CFOs surveyed expect to face difficulty refinancing their debt in the coming year; nearly half expect it to be “somewhat” to “very” difficult.

The BDO Retail Compass Survey of CFOs is a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, whose executive interviewers spoke directly to chief financial officers using a telephone survey conducted within a scientifically-developed, pure random sample of the nation’s retailers.

About the Retail and Consumer Products Practice at BDO USA, LLP

BDO has been a valued business advisor to retail and consumer products companies for over 100 years. The firm works with a wide variety of retail clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on myriad accounting, tax and other financial issues.

About BDO

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