The second quarter of the year contributed just seven M&A deals in the retail sector as persistent inflation and rocketing interest rates hit consumer spending. This means there were 19 retail transactions in the in the first half of 2023, the lowest figure for over a decade. 

A stand-out figure from our new Cut Back Economy Report predicted a stark consumer environment: inflation was set to erode £65 billion from UK household incomes from April 2023.

Family offices and veteran retail investors seize their chance

Inflation isn't expected to return to its 2% target until 2025. For many private equity investors, this falls too late within their typical three-five year holding cycle. Private equity’s absence has led to opportunities for vehicles that aren't bound by such timeframes. These include family offices and ‘patient capital’ specialists.

Passenger begins overseas journey with family office

In May, consumer-specialist Growth Partner invested £15 million to acquire a minority stake in eco-outdoor lifestyle brand Passenger. Growth Partner is the family office investment arm of Richard Harpin, founder of home-maintenance provider HomeServe. He's joined by Steve Hewitt, the former Gym Shark CEO who took the sportswear business from a £4 million start-up to a £400 million global brand. The pair will use their expertise to help Passenger grow internationally.

Passenger – whose products include recycled sherpa fleeces – ticks several boxes for investors. In the two years to 2022, it achieved 345% revenue CAGR and has scaled to over £33 million in sales. In addition, its focus on sustainable materials resonates with target customers. Brand affinity is key in a ‘cut back’ consumer environment where every purchase is carefully measured. We performed the financial due diligence for Growth Partner on this deal.

Opportunities unfold for Brompton with patient capital

Also in May, BGF led a £19 million investment into the folding bike brand Brompton. BGF specialises in ‘patient capital’ – investment with a longer time horizon than typical private equity and venture capital. It helps small businesses to unlock their growth potential by enabling them to invest in infrastructure and R&D, make senior hires, and expand into new markets.

Brompton has grown organically over the last two decades at circa 20% a year. For the year ended March 2023, turnover grew 21% to £130 million, boosted by a move into electric bikes. The investment will support Brompton as it moves into new markets, technology, and manufacturing capabilities.

Mega-deals are still possible

Asda’s May acquisition of petrol station and ‘food to go’ group EG UK demonstrated that leveraged deals can still happen. The deal added 350 petrol forecourts and 1,000 takeaways to the supermarket chain’s portfolio, creating what chairman Stuart Rose described as a "powerful consumer champion like the world has never seen".

The deal was reportedly funded by £770 million of new loans from private equity house Apollo and £450 million in funds from the supermarket’s owners, the Issa brothers, and private-equity firm TDR capital.

Furlough helped retailers avoid administration

There were just two transactions involving distressed companies in Q2 2023. The word ‘just’ is key here, given current pressures on consumer spending. One possible explanation is that furlough schemes and rate rebates during the global pandemic gave many retailers space to strengthen their operations and pivot to online channels. This means unwieldy store portfolios aren't overburdening stores as in the last major financial crisis in 2008.

The two Q2 rescue deals, supermarket chain Planet Organic and chocolatier Montezuma’s, have three striking similarities:

  • Bricks-and-mortar estates hit by diminishing post-COVID-19 footfall
  • A middle-to-high-income customer base – the Cut Back Economy Report showed that these two groups significantly scaled back their spending plans in 2023 compared to 2022
  • Exposure to rising input costs across food and energy

In April, Bioren Limited, a business incorporated by Planet Organic founders Renée and Brian Elliott, bought back the chain in April.

In June, we were administrator to Montezuma’s. It ran an accelerated sales process and completed a pre-pack sale to Paramount Retail, which owns Great British Confectionary Group.

Opportunities still available for retail M&A

The first half of 2023 has undoubtedly been challenging for the sector. However, deals involving high-calibre assets and investors with the right funding are still crossing the line. Retailers looking to sell shouldn't view this period as a waiting game but an opportunity to streamline operations and get ‘sale-ready’ for when the markets reopen.

For more insight and guidance, get in touch with Nicola Sartori.

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