The megamerger is back.
Not only were there were big transactions, such as the $54 billion acquisition of Gillette Co. by Procter & Gamble & Co. and the $17 billion acquisition of May Department Stores by Federated Department Stores, there was also a staggering number of deals, many involving private equity funds.
According to the most recent data from research firm MergerStat, the largest number of deals within the international consumer products sector involved retailers. At the close of the third quarter, there were about 50 more deals announced than by the same period in 2004, while the price tag on mergers and acquisitions more than doubled to $148 billion from $72 billion.
William Susman, president and chief operating officer of Financo, estimated that about 40 percent of the mergers and acquisitions over the past year involved private equity funds. Susman said private equity investors had a strong interest in retail because there was “consistent, positive same-store sales by key retailers” as well as “a low-interest rate environment.”
This combination of factors, coupled with over $120 billion in private equity money on the sidelines waiting to be invested, made it seem that everyone was in play at some point during the year. Indeed, in the first half of the year, J.C. Penney was said to be eyeing real estate and/or another retailer to acquire while it was also said to be up for sale.
What also defined 2005 as far as M&As was the premium paid for acquisition targets. Price tags on deals, represented as a multiple of adjusted pretax earnings, rose significantly. Deals that had multiples of 5 percent in prior years rose to 6.5 and in some cases 7 percent in 2005.
Some notable 2005 transactions include:
Related Articles
- The $5 billion sale of the Neiman Marcus Group to Warburg Pincus & Co. and Texas Pacific Group LLC.
- The $5.9 billion acquisition of Toys ‘R’ Us Inc. by a consortium of private equity players.
- The $2.3 billion acquisition of paper and stationery supply company MeadWestvaco Corp. by Cerberus Capital Management.
- The sale of Calloway Golf Co. to MacGregor Golf Co. for $1.2 billion.
- The sale of Haggar to Perseus LLC, Infinity Associates and Symphony Holdings for $212 million.
- The acquisition of Junkfood Clothing by Delta Apparel Inc. for an undisclosed sum.
- The sale of Casual Corner Group Inc. to Gordon Brother Group by Retail Brand Alliance for an undisclosed sum.
- The acquisition of a large stake in The Colibri Group Inc. by private equity firm Founders Equity Inc. for an undisclosed sum.
- The acquisition of Joe Boxer by Iconix Brand Group Inc. for an undisclosed sum.
For 2006, the M&A picture is murky. Bankers remain optimistic that there will be significant deals done as well as ongoing consolidation.
Fitch Ratings said in a recent report that U.S. retailers will be facing lower sales growth and higher operating costs for 2006. “The U.S. retail industry performed well in 2005 despite some challenges, including a spike in energy prices and persistent intense competition, but the sector faces modestly slower growth rates in 2006.”
“The luxury chains and warehouse clubs led the industry again in 2005, suggesting shoppers were willing to splurge even as they continued to look for bargains,” the firm said in its outlook report. “On the other hand, those retailers catering to lower- and middle-income consumers had a hard time generating meaningful comparable-store sales growth. This lack of growth, along with ample private equity capital and real estate assets, precipitated a resurgence of merger and acquisition activity in the industry.”
For 2006, the industry can expect Fitch and the other ratings firms to keep a closer eye on the debt loads generated by so many deals.