Survey: Retail M&A activity to stay busy

Chicago -- An overwhelming majority of retail CFOs (96%) expect merger & acquisition (M&A) activity to increase or remain consistent with 2013 levels during 2014. According to the new BDO Retail Compass Survey of CFOs, two-thirds of CFOs anticipate that the majority of deal activity will occur in the U.S., followed distantly by Asia-Pacific (17%) and Europe (8%).

Survey respondents also project that potential buyers can expect to see an average EBITDA (earnings before interest, taxes, depreciation and amortization) multiple of about 4.24, down slightly from last year’s projection of 5.15.

CFOs suggest that consolidation and fierce competition in the retail sector, which about one-third cite as a leading risk to their business, may be a driving force behind the expected increase in transactions. Just more than half of CFOs surveyed say that strategic buyers, as opposed to financial buyers, will propel M&A activity in 2014, and a plurality (42%) cite increasing market share as the main impetus behind deal activity.

Other notable findings include:

CFOs split on IPO activity. 2013 was a record year for retail and consumer products public offerings, with Renaissance Capital reporting 19 initial public offerings (IPOs) yielding $8.3 billion in proceeds. Retail CFOs have decidedly mixed sentiments about whether the industry can sustain this pace: A majority (58%) anticipate that the number of offerings will decline in 2014 as the IPO environment right-sizes. However, some CFOs believe that last year’s positive momentum will continue this year, with 33% projecting an increase, more than double the number who did so in 2012. Overall, about half expect that the majority of IPOs will occur in the e-commerce sector, followed by non-food and beverage consumer products (25%) and food and beverage (12%). Similar to last year, a plurality (35%) indicate that the strength of the U.S. economy and stock market will be the most important driver of a company’s ability to go public this year.

Sales remain a priority financial metric.
Sales continue to be a key measurement against which the retail industry assesses performance. As a result, a majority (51%) of CFOs cite it as their primary financial metric, with 32% specifically pointing to gross sales and 19% pointing to comparable store sales. These numbers remain broadly consistent with the 2013 survey, when 35% and 18% of CFOs cited gross sales and comparable store sales, respectively, as their main focus.

CFOs anticipate difficulty in the capital markets.
Financial market instability will likely remain an obstacle for retailers when it comes to accessing capital and credit in 2014. On the heels of the Federal Reserve’s 2013 decision to ease its economic interventions combined with fluctuations in the public markets at the outset of 2014, about three-quarters of CFOs surveyed expect to face difficulty refinancing their debt in the coming year; nearly half expect it to be “somewhat” to “very” difficult.

“Consumers are showing an increased willingness to spend, but they remain price-conscious and discerning. As a result, retailers are feeling greater pressure to meet consumer demands for convenience, product assortment and low prices,” said Ted Vaughan, partner in the Retail and Consumer Products practice at BDO. “One way of responding to these pressures is to pursue an acquisition. Many retailers see it as way to add capabilities or grow their geographic reach, while others hope to build market share by joining forces with a once-competitor.”
These findings are from the eighth annual BDO Retail Compass Survey of CFOs, which examined the opinions of 100 CFOs at leading retailers located throughout the country. The survey was conducted in January 2014.

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