2007 M&A Transaction Review - Last year, M&A activity in the multi-channel cataloguing industry declined by app. 10% in three core countries.  The US was over proportionately affected by this downward trend.

When analysing our M&A transactions database for 2007, there were three burning questions we sought to answer:

To what extent was/is our industry affected by the financial crisis unfolding in the second half of 2007?
If there was a significant downturn in financial buyer transactions, to what extent were strategic buyers able to fill the gap?
What are the significant trends of the past months that may give us a glimpse of the coming months?

The total number of M&A transactions in the multi-channel cataloguing industry declined by app. 10% from 106 transactions in 2006 to 95 transactions in 2007.  Despite the financial crisis unravelling in the second half of 2007, the total number of transactions still remained more than 20% over 2005 levels.  

Of course, this begs the question if there was a rise in the number of transactions for the first half of 2007 over the first half of 2006 and a sharp decline in transactions for the second half of 2007 over the second half of 2006.  At least, this was what we expected given our own experience with several transactions put on hold during the second half of 2007 – but the answer is surprising.

Development of M&A Transactions – USA, UK, Germany*     

* majority stakes and 100% acquisitions only, announced transactions
Source: BBR Associates GmbH & Co. KG

When looking at the distribution of the transactions by region (US, UK, Germany and cross-border transactions) it becomes clear that with a 16% decline in the number of transactions in 2007, the US was over proportionately affected by the trend.  However, the number of US transactions are still 40% above 2005 levels when we counted 30 domestic US transactions.  

Taking an even closer look at the transactions, we notice that – just like in retail, the devil lies in the detail.  In 2006, Brady acquired 10 domestic and overseas companies but could not keep up the pace in 2007 when Brady “only” acquired 3 companies.

As for the other segments, they were still going relatively strong in 2007, with the number of German transactions even remaining stable at 13 in a largely consolidated market.   UK transactions were down to 19 transactions from 21 transactions in 2006 and 22 transactions in 2005.  We suspect that this may be due to a progressing consolidation of the industry in the UK.

In 2007, there were 21 cross-border transactions (involving either US, UK or German buyers or sellers) down only by one transaction from the year before.  Again, Brady accounted for 5 cross-border transactions in 2006 compared with 2 cross-border transactions in 2006.  From this data, we conclude that cross-border M&A activity has still been a strong trend in 2007

Number of Transactions by Country in 2006 and 2007

Source: BBR Associates GmbH & Co. KG

M&A activity is seasonal with the first six months of the year traditionally stronger than the latter part of the year.  So, it does not come as a surprise that in 2007 the number of transactions for the second half of 2007 was down to 45 by 5 from 50 in the first half of the year.  However, it is a surprise that the number of transactions were only down by 5 or 10% compared with 2006 when the number of transactions in the second half of the year were down by 12 or 20%.

Despite the financial crisis and ensuing difficulty of the private equity industry to obtain financing at favourable terms, the private equity boom remained unbroken for our industry.  The number of private equity backed transactions amounted to 26 in 2007.  With the same number of financial investor transactions in 2006, the private equity industry has gained even more ground vis-à-vis strategic investors and now accounts for more than 27% of all transactions in our industry.

Most noteworthy transactions for 2007 include:

Appleseeds/Golden Gate Capital’s acquisition of US-based Blair Corporation, a leading cataloguer of value for money apparel for golden agers.  This appears to conclude Golden Gate’s series of acquisitions in the same segment started in 2006.

Bridgepoint’s acquisition of UK-based Fat Face, the leading British multi channel retailer of street wear targeted at a younger audience.

Celesio’s (D) acquisition of Doc Morris, a Dutch based online pharmacy which is the number one online pharmacy in Germany.  With this transaction, Celesio secured itself a pole position in a rapidly deregulating market.

Redcats’ (F) acquisition of US-based United Retail Group, a speciality retailer of women’s plus size fashion apparel.  This transaction further strengthens Redcats’ position in the US as one of the leading multi-channel women’s apparel retailers.

Sun Capital’s (USA/UK) announced majority acquisition of German-based big book Neckermann from Arcandor (formerly KarstadtQuelle).  If this transaction closes, it would be one of the very few cross border transactions involving a turnaround situation.  At app. €1 billion in annual sales, Neckermann would, however, be well worth a try with the right strategy.

The new year 2008 bodes a difficult retailing environment in all three geographies.  We expect that the overall economic environment will put further pressure on valuations and will  strengthen the position of insightful buyers – financial and strategic - who are able to manage risky turnarounds, find geographic expansion opportunities or consolidate properties into their own organisations.  In addition, the UK and Germany already exhibit  a high degree of consolidation in the industry.  Therefore, we expect M&A activity to remain flat or decrease this year.

© January 2008 - BBR Associates GmbH & Co. KG