By  on February 16, 2010

E-commerce proved the exception to the rule of contracting merger and acquisition activity in specialty retailing during the second half of 2009, according to a report from investment bank Tully & Holland.

Improving economic conditions and continued tightness in the credit markets held off private equity-backed leveraged buyouts, leading to a temporary contraction in M&A activity, the report said. Nineteen transactions occurred in the second half of 2009, compared with 29 for the same period in 2008.

“Retailers receiving funding generally operated in one of three segments — discount/value/off-price; health and wellness, or Internet retailing, all believed to have superior growth prospects,” the investment banking firm said. “Meanwhile, a still tepid mergers and acquisitions market saw multiple retailers, primarily in the multichannel and Internet segments, acquired by strategic buyers.

“Perhaps most interesting were Billabong’s and Beverly Hills Teddy Bear’s acquisitions of pure-play Internet retailers in their respective product categories. As growth in Internet retailing continues to outpace other retail channels, we expect both consumer product companies and brick-and-mortar retailers to make acquisitions in e-commerce,” the investment bank said.

Billabong International Ltd. bought Swell Inc. in November and Beverly Hills acquired StuffedAnimals.com in December.

Transactions in the second half of last year generally involved strategic buyers acquiring privately held retailers. Tully & Holland said the deals were motivated by a variety of rationales in addition to expanding direct e-commerce sales, including brand acquisition, access to new channels of distribution and acquisition of complementary new growth vehicles.

The report also cited GSI Commerce’s acquisition in October of Retail Convergence, which operates Rue La La and SmartBargains, as noteworthy due to its lofty valuation.

Last month, Sanyo Shokai Ltd. said it would buy apparel retailer Kailani, the report noted.

With the consumer recovery slowly under way, more than a dozen retailers raised capital through private placements during the last six months of 2009, according to the report. Among those transactions were GEI LP’s investment in Second Time Around, a chain of luxury brand consignment shops, and Rho Ventures VI’s investment in Bluefly Inc.

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