Inflation may be disrupting consumer spending, but robust deal activity shows M&A buyers are focused on the long-term. Nicola Sartori explains the recent trends and key deals.
Record inflation has put household budgets under immense pressure and squeezed consumer spending. However, this did not dampen appetite for retail assets in Q1; there were 18 deals, the second-highest quarter since the start of the pandemic.
UK quarterly retail M&A volume/value chart
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Q1’s £1.5 billion announced deal value was more than double that of Q1 2021, but was down on Q4’s 2021 £4.4 billion (although this included the £4 billion Selfridges sale).
The road to net zero: Q1’s biggest (reported) deal
March 2022 – Antin Infrastructure Partners sold UK motorway service operator Roadchef to Macquarie Asset Management for a reported £900 million. As the UK moves towards net zero, Macquarie intends to help Roadchef roll out electric vehicle recharging facilities and invest in retail partnerships.
ESG and health and wellness remain active areas
Environmental, social, and governance (ESG) factors and health and wellness remain hot sectors as post-pandemic consumers focus look to nurture the planet and themselves.
ESG deals
Giving back
February 2022 – Inflexion Private Equity acquired Blue Light Card, an omnichannel marketplace that offers discounts to members in the UK emergency services, NHS, social care sector, and armed forces. This deal stands out as it specifically targets the ‘social’ aspect of ESG.
Health and wellness deals
A healthy deal
March 2022 – Norwegian consumer goods brand Orkla acquired the Guernsey-based Healthspan Group. The deal gives Orkla a route to the UK market through Healthspan’s established D2C retail channel.
The return of trade buyers?
While historically trade buyers have always seen good opportunities through retail M&A, conditions created by the pandemic precluded many trade from pursuing an acquisition strategy. Trade accounted for 59% of deals in Q1 2022, compared to 90% a (largely) pre-COVID-19 Q1 2020. The drop can be explained by two key reasons:
- Retailers were focused on challenges, such as temporary closures, in-store health measures, and furloughing staff
- Multi-channel retailers had first-hand optics on the coronavirus-bounce effect, making them more cautious about valuing companies based on trading during the pandemic.
As ‘post-coronavirus’ trading has stabilised, these concerns are less relevant. We've seen an increase in interest over the last two quarters and expect to see the proportion of trade deals increase in coming quarters as these complete.
The rise of trade deals
March 2022 – personal hygiene giant PZ Cussons acquired UK baby and child personal care brand Childs Farm. It's what Cussons terms a ‘must win brand’ – those that hold leading positions in its priority markets. The larger company will use its brand-building capabilities to increase Childs Farm’s market share as well as help it grow internationally.
Cross-border activity
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Overseas acquirers accounted for 39% of deals in Q1 2022 (37% in Q4 2002). Headline deals included US-based Sycamore Partners offer for Ted Baker. This represents a growing interest from US buyers in UK chains that tick the following boxes, such as Wolverine World Wide’s 2021 acquisition of Sweaty Betty and General Atlantic’s 2020 investment in Gymshark:
- it has established sales in the US
- it has a clear growth story that features the US.
Capital markets: IPOs on hold
Global stock markets have been hit by several material macroeconomic factors, initially concerns about record inflation and interest rates and subsequently geopolitical tensions. As a consequence, institutional investors have paused their support for new IPOs with an expectation that activity will start to recover most likely after the summer.
Restructuring and Special Situations
In February 2022, Frasers Group acquired Studio Retail from administration. Studio sells a mix of cut-price own-brand products, giving shoppers the option to spread payments over many months.
This was Q1’s only restructuring deal. As we mentioned in a previous report, we expect to see more restructuring and special situations deal activity driven by the tailing off of COVID business support measures, the ending of restrictions on landlord recovery actions in March, and the dampening of consumer spending confidence from rising cost of living.
What’s next for 2022?
Retail-sector watchers will be keeping a close eye on allocation of household spending. Inflation will introduce a new set of choices for consumers: should I forgo eating out to save for a holiday; new clothes or spend on the house?
Buyers of retail businesses will either be looking for compelling propositions that consumers will consider worthy of their shrinking budget, or robust models that will thrive regardless of macroeconomic headwinds (or at least ride them). In the latter case, they may look for lower multiples to counterbalance a foreseeable choppy consumer environment.
For more insight and guidance on retail M&A in Q4 2021 get in touch with Nicola Sartori.