By and  on September 19, 2005

NEW YORK — With the mergers and acquisitions market brimming with more than $100 billion in private equity funds — and investors looking to spend it in the retail sector — this is one of the rare moments in business when perhaps having too much money can be a bad thing.

"There is still a lot of private equity money out there right now, and they are looking at retail," said Ken Wasik, director of the consumer products group at Houlihan Lokey Howard & Zukin. But this is a seller's market, and there are few good target companies to buy, which "is making [the private equity players] very aggressive. And this is driving up valuations."

Case in point is one of the most talked about M&A deals this year: the acquisition of Neiman Marcus Group by Texas Pacific Group/Warburg Pincus LLC. At $100 a share, the acquisition offered a premium of more than 35 percent to shareholders holding the stock when Neiman Marcus first said it was "exploring strategic options" earlier this year.

During Financo Inc.'s Annual Merchandising Equity Investors Conference last Thursday, William Susman, president and chief operating officer of the M&A advisory and consulting firm, said retail is highly attractive to investors, especially the private equity players. "[Retail] offers attractive returns on invested capital, and it is a strong cash generator," Susman said.

The conference, held at the Harmonie Club here, included a keynote speech by Kip Tindell, president and chief executive officer of The Container Store. There was a also a panel discussion with executives from Tumi, FreshDirect, Apollo Diamon and Anne Fontaine. All of these companies are being eyed by the private equity investment community, and nearly all the attendees at the conference were private equity investors. Susman estimated there was $50 billion worth of funds represented in the room.

One attendee, a private equity investor who previously had been a Wall Street analyst, lamented over the current state of business. "When we go to make a bid at a fair multiple [of pretax earnings], someone comes in quick, offering a higher multiple. It is a very difficult, challenging market," she said.Wasik said there are several trends shaping the M&A retail landscape, including a robust economy. "The public markets are also rewarding companies for making acquisitions, which was not happening before. [Wall Street] is saying to public companies: 'Buy, buy, buy.'"

But private investment firms are asking: Where, where, where? The private equity investor at the Financo conference said "there are so few worthwhile targets out there right now." She said the ones worth chasing are just too pricy. Wasik said this is because retailers are taking advantage of the peak of the M&A cycle. "They know it's a good time to sell," he said.

This partly explains why the board of Saks Inc. is turning down low bids for its northern department store group and Club Libby Lu, as reported by WWD. The company is looking to sell its assets for a premium. The Saks board might also be feeling pressure from the institutional investors who hold about 70 percent of the common shares.

Another hurdle faced by the private equity players is a lack of information in the market. Several fund managers and private equity investors say public retailers, due to regulatory requirements, are much more tight-lipped than they used to be. Sure, investors can crunch numbers, analyzing past income statements and balance sheets, but it's hard to get a true read on a company's direction and current business condition.

Still, that hasn't stopped the financial buyers from swooping into the retail sector. Susman said about 40 percent of the M&A deals so far this year involved some sort of private equity funding.

Again, the attraction of the sector is the amount of cash generated by retailers as well as the high investment returns. Exit strategies and investment models of the private equity firms often call for returns of 25 to 30 percent.

Susman said successful deals with robust returns is not just about the money. "It's about fit," he said. "The key to any partnership with a financial buyer will be the relationship between the company and the financial firm, as well as their shared vision," he said.

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