US retail M&A revival seen in 2010

By Dhanya Skariachan - Analysis

NEW YORK (Reuters) - The U.S. retail sector is at the start of a deal-making revival in 2010, as cash-rich companies seek new growth avenues and private equity firms are increasingly able to finance deals.



Investors and industry analysts see early signs this year of the trend, such as Phillips-Van Heusen's (PVH.N) $3 billion deal for fashion brand Tommy Hilfiger and Walgreen's (WAG.N) $618 million bid for smaller drugstore chain Duane Reade, both purchased from private equity firms.

Next on the list could be women's apparel retailers, such as AnnTaylor (ANN.N), Talbots (TLB.N) and Charming Shoppes (CHRS.O), along with other companies with a market capitalization between $500 million to $2 billion, investors and industry analysts say.

"It was the arctic winter of private equity last year. There was just nothing going on because of risk-aversion and the inability to access capital. So this year will certainly be better," said Lawrence Creatura, a portfolio manager at Federated Clover Investment Advisors in Rochester, New York.

The credit markets eased dramatically in the last couple of months and money for good deals is becoming available -- a fact that did not exist as recently as four to six months ago, Craig Johnson, president of retail consulting and research company Customer Growth Partners, told Reuters.

Private equity firms are also betting on a recovery in consumer demand, as seen in recent deals outside the retail industry proper, such as Blackstone's (BX.N) purchase of Anheuser-Busch InBev's (ABI.BR) U.S. theme parks and Thomas H. Lee Partners THL.UL bidding for hamburger chain owner CKE Restaurants (CKR.N)

In the first quarter of 2010, retail mergers and acquisitions totaled $10.7 billion, a 146 percent rise over the first quarter of 2009, according to Thomson Reuters `Data.

Unlike last year, when retailers worried more about cutting costs to fight weak sales in the economic downturn, many expect them to switch back to growth mode in 2010.

"Management teams are going to be focusing more on growth rather than survival. It is a different type of year," Creatura said.

Reorienting their business means looking for complementary brands to boost that growth.

"They have cut all the costs they can cut. They have cut their inventories. They are getting rid of the underperforming stores. Still they are finding out that they don't have the clout to do what they need to do in the business. This is where they are going to partner up," said Patricia Edwards, founder of wealth management firm Storehouse Partners.

SMALL, STRATEGIC DEALS

However, many do not expect a return to the multibillion dollar deals from the boom years of retail.

"The big large strategic deals have already happened and those chess pieces have already been moved. One reason that the deals will be small is because that's all that's left," Creatura said.

Many retailers are still risk-averse, and may prefer to use their cash incrementally to make strategic buys rather than one big investment. Analysts see more deals in the range of a few hundred million dollars to about $2 billion.

"We have a good backdrop for increased M&A activity," BB&T Capital Markets analyst Anthony Chukumba said. "Even if firms do start to loosen their purse strings a bit... it will be more sort of smaller fill in, bolt-on acquisitions."

Chukumba said it made strategic sense for office supply sellers Office Depot (ODP.N) and OfficeMax (OMX.N) to tie up as industry leader Staples (SPLS.O) was now bigger than the two of them combined and competing more in the delivery business.

However, he saw absolutely no strategic sense in a deal between consumer electronics chain Best Buy (BBY.N) and smaller rival RadioShack (RSH.N) or Best Buy and GameStop (GME.N), a retailer of video-game software, consoles and accessories.

Storehouse Partners' Edwards said the Tommy Hilfiger deal was a bit of an outlier, adding "I think there could be a fair number of marriages among the little people but the big boys are just going to be focusing on business as is now normal."

TARGETS IN APPAREL, JEWELRY, HOME GOODS

Apparel companies such as Warnaco (WRC.N), VF Corp (VFC.N), Hanesbrands (HBI.N), Perry Ellis (PERY.O) and Urban Outfitters (URBN.O) have expressed interest in making opportunistic buys.

"This (apparel) is where you hear the banter," Creatura said, adding there was a search for strong brands which could be scaled across other product lines or geographies.

"Middle tier apparel players that do not have a unique position in the market place and unique and exclusive merchandise... are in peril. Those are the folks we believe are the most ripe for consolidation," Johnson said.

Brean Murray analyst Eric Beder emphasized that many other apparel players have lowered their debt or have more cash than they have had in a long time.

Storehouse Partners' Edwards said deals were also possible among jewelry retailers, where mall-based outlets are up against many mom-and-pop stores.

"There is an appetite out there. The shifting consumer landscape is going to make it more appropriate for economies of scale," Edwards said.

Catherine Fox-Simpson, a retail consultant at BDO Seidman, said there could be deals in the home goods space as well and noted 2010 could bode well for retailers to go public.

"There are some very large retailers that are in the low-billion-dollar range that are looking for IPOs and had potential IPOs when the market kind of fell apart," she said.

Customer Growth Partners' Craig Johnson sees a very good chance for toy retailer Toys R Us TOY.UL to go public in 2010 as its sales were "dramatically up."

Earlier this year, Express, the sixth-largest specialty retail apparel brand in the United States, filed for an IPO of up to $200 million. An IPO by youth apparel retailer rue21 Inc (RUE.O) saw its shares rise 27.9 percent in its November debut.

(Reporting by Dhanya Skariachan; Additional reporting by Martinne Geller in New York and Nivedita Bhattacharjee in Bangalore; Editing by Michele Gershberg and Tim Dobbyn)

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