A new trend for mergers and acquisition (M&A) deals seems to be appearing in the retail sector as companies search for ways to combat sales slumps.
According to a study compiled by RPC, a professional services firm, 2017-2018 saw 37 retail M&A deals in the year leading up to 31st March. This is up from 32 in 2016-27.
M&A deals that were announced during this sales period include The Co-op’s decision to take Nisa, which is valued at £143 million, DFS’s acquisition of Multiyork Furniture, and Visions Express owner Grandvision’s acquisition of Tesco Opticians.
Other recent deals include the much publicised Asda and Sainsbury’s merger, which is estimated to be worth around £10 billion and will allow the group to overtake current leader Tesco. Indeed, conclusions drawn by RPC suggest that this particular merger is illustrative of the food segment’s new prerogative to increase economies of scale in order to compensate for markedly paltry organic sales growth.
M&A deals appear to be more popular than flotations, as investors focus their interests on sectors other than retail. Selling up to a rival company is thought to be a relatively safer way for current investors to get out of a deal with a smaller retail than an initial public offering (IPO). This is because an IPO could be terminated at any point depending on short-term volatility or weak sentiment towards the retail sector.
According to a spokesperson for RPC, mergers such as that of Asda and Sainsbury’s demonstrate a rational and level view towards what is increasingly viewed as the ‘meltdown of the high street’. Indeed, rather than myopically panicking about the future of a sector which occasionally comes into trouble, M&As demonstrate an awareness of market fluctuations and a solid approach to building a wider breadth of offering and of scale.
Value of M&As fall despite jump in numbers
Despite the jump in the number of deals occurring within the retail sector, the actual value of these transactions has fallen from £4.3 billion to £3.7 billion within a year, representing a not inconsiderable fall of 16 per cent. In many ways, this is indicative of a tough economic climate and demonstrates the need for sellers and creditors to be realists about what to expect from M&A deals right now.
Many buyers are looking to take advantage of the fact that various retailers are struggling, as they look to obtain high discounts from those that are approaching insolvency. The number of retailers that have been forced to enter insolvency has gone up by around 7 per cent over the last year.