Print
	Email
	Text size
	Comment

It is a maxim of both business and nature that when blood taints the water, predators gather. Many of the hungry corporates and cash-rich investors surveying the business carnage over the last few months must view the nation’s battered high streets as a running buffet.

Nick Bubb of Pali International, a respected retail analyst and a member of the influential Retail Think Tank (RTT) – ‘nine wise men’ who meet quarterly to assess the state of the economy – says the high profile mega-deals that were a feature of the M&A scene this time last year won’t re-emerge for some time, but predicts that activity will continue at the lower levels.

“Deals like Boots and Sainsbury’s are unlikely to come back in the near future, given the pressures on debt funding and the effects of the credit crunch, but at the very bottom of the pool there will be the bankrupt chains, which always seem to go under at this time of year,” says Bubb.

“So far this year, we have had Dolcis, Stead & Simpson, and The Works, the book seller. There always seem to be potential buyers for businesses like these.”

Foot in the grave

But even entrepreneurs with the Midas touch can struggle to breathe life into a business stricken with a deep-seated malaise. Having been plucked from the brink of collapse in 2006, by entrepreneur John Kinnaird, Dolcis finally succumbed to the inevitable and went into receivership last month. The footwear chain was recently snapped up by competitor Stylo Group, which trades as Barratt Shoes and PriceLess. It was understood that Kinnaird was also in the running to buy the business.

Meanwhile he has splashed out a very modest £1 to acquire Envy, the struggling menswear chain from Alexon. Says Bubb: “There will always be punters willing to buy these chains in the hope of making money, but if they don’t judge the cycle right things can go badly wrong.”

He says there will always be deal activity in retail because that is the nature of the sector. “It’s so big and fragmented that there will always be people buying and selling private companies or bankrupt businesses. However it’s hard to see where the big private equity deals, like those we witnessed last year, will be coming from.”

On the other hand, he surmises, falling share prices might well attract the interest of overseas players who scent a bargain.

European expansion

Stories persist that huge US DIY chains are eager to make acquisitions to gain a foothold in the UK, and it is well known that a large US company has been cosying up to Carphone Warehouse. UK-based Game Group is also said to be a likely target for the Americans, says Bubb.

Nick Bradley, of Royal Bank of Scotland, heads a corporate banking team with around 120 customers and believes it is too soon to call on the true state of the retail sector.

His clients range from household name high street stores to equally well-known online traders with turnover of £25 million plus, for which the bank can provide a range of funding and general banking facilities, from regular debt to managing the cash they take through the tills.

Bradley takes the talk of doom and gloom with a small pinch of salt – but reserves full judgment until a little later in the year. “You tend to find that after the Christmas trading period the bad news comes out first, because the plcs are obliged to make announcements. Often the private companies just keep quiet about their good news, which rarely seems to be reported in the same depth,” he says.

Even like-for-like comparisons, much loved by analysts, can be deceptive because they do not take into account gross margins and often ignore exceptional items, simply comparing headline figures without recognising that the previous year’s results may have been distorted in some way.

“Like-for-like isn’t the truth, and the whole truth. We won’t see the real picture for another three months or more,” observes Bradley. He adds: “Of course there are retailers out there who are looking to make acquisitions, but not many who will be wanting to buy other retailers. Those with strong brands often find it’s more efficient to roll out the brand to new stores, and there are some good deals to be had on leases at the moment, particularly in shopping malls.”

On the deal front he states: “There is still significant private equity money around, including new sources such as the Middle Eastern Sovereign Funds that are looking to spend money in the UK. “And a lot of the PE houses still like the retail sector.”

The high street at a glance

Recent deal activity has been brisk and could intensify. One of the best known high street casualties was Dolcis, the shoe firm, which had been losing market share for years to the ‘new kids on the mall’.

Problems, too, forced Stead & Simpson to seek a white knight. The chain has just been snapped up by Shoe Zone for an undisclosed sum, which presumably reflected its loss-making status.

Last year – perhaps having seen the writing on the wall – Clarks disposed of the Ravel brand. But not all M&A activity is the result of fire sales. Radley, the extremely successful fashion handbag maker, was recently the subject of a secondary buy-out valuing the business at a mouth-watering £130 million. The business, with predicted revenues of more than £60 million for the year to April, and average year-on-year increases of 30 per cent for the past five years, was sold to Exponent by the UK private equity firm Phoenix Equity Partners which acquired it two years ago.

Still in the fashion arena Sir Tom Hunter disposed of his d2 clothing business in an MBO that insiders are said to reckon would have realised less than £10 million.

Undeterred, Hunter is reported to be sitting atop a large cash pile awaiting the right opportunities in the fields of retail and property.

Meanwhile Duke Street Capital has stumped up £68.5 million for a Lancashire-based retailer with more than 80 outlets nationwide. The Original Factory Shop targets towns too small to have department stores.

The chill wind of reality is also sweeping through the retail food sector, where Prét a Manger – pulled from an IPO last year because its founders believed they could achieve more in a trade sale – is now valued at between £300 million and £350 million, well below the looked-for £400 million.

The sandwich chain was recently reported to be close to changing hands in a deal that would see a significant stake go to private equity house Bridgepoint.

Comments [0]