Last year was characterised by a stagnating number of transactions along with a high proportion of company divestitures out of bankruptcy.

With a total of 95 M&A transactions in the three core countries US, UK and Germany, the number of transactions in the multi-channel retail market remained stable compared with 2007 – in spite of the worsening financial crisis.  However, the proportion of companies that was acquired out of bankruptcy proceedings or was about to go bankrupt was high at 25% of all transactions.  In addition, we suspect that the number of unknown bankruptcy or pre-bankruptcy stage cases is quite high and would have significantly added to the count. 
   
Number of M&A Transactions Development in the US, UK and Germany*

* Exclusively majority stake, 100% or asset deal transactions, announced transactions
Source: BBR Associates GmbH & Co. KG

Despite of the financial crisis and its negative ramifications for the private equity industry in terms of the ability to access bank financing, the trend for private equity deals was unbroken in our industry.  The number of deals with private equity participation was at 25 only marginally less than the previous year.  Mainly, this has to do with the structure of our industry with many players in the small to medium size range.  For medium size deals financing was easier to obtain than for large transactions.  By the same token, in our industry there are quite a few private equity firms operating in the turnaround segment.

When looking at the geographic segments, it becomes obvious that the US could significantly increase its total share of all transactions – even beyond 2006 levels.  On the one hand, this development can be explained by the acquisition hunger of Airgas, a multi-channel retailer of industrial gases and supplies.  Airgas accounted for 10 acquisitions in 2008. On the other hand, the US is an early indicator for the development of M&A transactions in other parts of the world.  It is conceivable that cash rich buyers could already take advantage of lower price levels in the market.

In the UK, the number of M&A transactions remained stable at 20, only one transaction more than the previous year.  Regarding the UK transactions it is eye-catching that half of all transactions were bankruptcy or pre-bankruptcy cases. In addition, there were a high number of very small transactions.

Development of M&A Transactions Segmented by Region



Source: BBR Associates GmbH & Co. KG

Germany accounted for only 8 transactions.  The German market is already highly consolidated and unlike in the UK, there were no published transactions out of bankruptcy.  However, there were several companies that would have gone bankrupt, if there had been no buyer…

Cross-border transactions in 2008 basically almost halved in number compared with 2007. Cross-border transactions are those transactions where the seller or the buyer is located in the UK, USA or Germany and the counterpart is located in any country. In difficult times, companies have to focus on core competencies and these are likely to be located close to home.  

It is noteworthy that last year was a stellar year for experienced buyers in our industry.  Notably, on the strategic side, these were the large b2b multi-channel specialists like Airgas, Manutan, Staples, Henry Schein, Bechtle and Grainger. On the financial buyer side these were Munich based Aurelius with 3 transactions as well as US investors Golden Gate and Sun Capital.

A b2b multichannel merchant also won the race for the largest transaction in the industry.  After a lengthy take-over battle, American Staples won the bid for Dutch Corporate Express for a purchase price of USD 2.6 billion in June 2008. 

Our industry continues to debate the question as to whether a retail store centric business mixes with distance selling speciality businesses.  For example, American retailer Charming Shoppes sold cataloguer Crosstown Traders for USD 35 million to Golden Gate Capital.  Charming Shoppes had only bought Crosstown Traders in 2005 from JP Morgan for USD 218 million.  On the other hand, traditional retailers GAP and Foot Locker acquired distance selling businesses.  GAP acquired Athleta, a distance seller for sporting outfits for women with a focus on yoga, swimming and jogging.  Foot Locker purchased e-commerce skateboarding specialist CCS from Delia.
After Redcats had been on a shopping spree in the US in 2007, last year was the time for house cleaning.  Unable to turn around the business, Redcats sold all major assets of UK Empire Stores to Littlewoods.

The year 2009 starts with toned down expectations – also as it relates to M&A transactions.  In this environment of decreasing purchase prices, shareholders of well positioned businesses are reluctant to sell.

On the other hand, we expect that the market shake out will continue.  In that sense, we expect that the larger players will further focus on core competencies and divest non-core assets or even sell part of their core business as the liquidity crisis forces them to increase their equity position.  By the same token, private equity companies may be forced to sell some of their portfolio companies at suboptimal terms.