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Specialty Retail Shows Signs of M&A Recovery

Study shows rise in specialty retail mergers and acquisitions activity in the second quarter of 2009.

Two groups are in a bidding war for Filene’s Basement.

After a slowdown that began in the fourth quarter of last year, positive trends are beginning to emerge in specialty retail mergers and acquisitions activity, according to a new study.

The report by investment banking firm Tully & Holland cites a rebound in retail valuations and a more than 50 percent rise in the S&P Retail Index since March as key elements in the shift.

A dozen transactions were announced in the second quarter of this year, double the volume during the first quarter and at about the same level as the second quarter last year, the study said.

About two-thirds of the activity this year has involved distressed sales, and most acquirers were strategic buyers.

Christopher Kempe, managing director at Tully, noted that off-price retailers, discounters and warehouse club stores are benefiting from the change in consumer buying habits triggered by the recession, but said it has left mall-based specialty chains, midtier department stores and luxury retailers with double-digit comparable-store sales declines.

Transactions in the second quarter include: New Deal buying Against All Odds; Levi Strauss & Co. acquiring Levi’s Docker’s outlets; Golden Gate Capital getting J. Jill Group Inc.; Jimmy Khezrie purchasing Man Alive; Syms Inc. buying Filene’s Basement and Dress Barn acquiring Tween Brands Inc.

Third-quarter activity includes: Amazon.com purchasing Zappos.com; a consortium led by Diamond Capital buying 16-door general merchandise retailer Baskins Department Stores; Golden Gate Capital acquiring Eddie Bauer Holdings Inc.; Tresalia Capital’s taking a minority stake in Tory Burch and Advent International getting Charlotte Russe Holding Inc.

The study cited two other positive signs in August: the initial public offering filing by Dollar General Corp., owned by private equity firm KKR, and the receipt of $11 million in private placement funding by online apparel retailer MyShape.

Tully & Holland noted valuations for three recent transactions were within historical retail valuation norms: Tween Brands Inc. sold at 5.6 times earnings before interest, taxes, depreciation and amortization; Eddie Bauer at 5.9 times EBITDA and Charlotte Russe at 6.6 times EBITDA.