Cheap and Deep: Retail’s Perfect Acquisition Storm

Posted by Carol Spieckerman on April 19, 2011

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Wall Street analysts are giddy anticipating the next wave of retail mergers, acquisitions, and buyouts. After a brutal couple of years in retail, money is cheap as the Fed attempts to spark economic recovery with lower interest rates. War chests are deep as lean-running companies make acquisition opportunism a top priority.

Recent deals, such as Walgreens’ purchase of and Nordstrom’s purchase of, have pundits speculating about who’s ripe for the picking and where all of the money, burning a hole in investors’ and retailers’ pockets, will go. Leonard Green & Partners’ acquisition of J. Crew ($3 billion) and Jo-Ann Stores late last year and Bain Capital’s $1.8 billion buyout of Gymboree have prompted a few retailers, such as B.J.s, Delia’s, and Big Lots, to float “for sale” signs, and 99 Cent Only Stores and Family Dollar Stores are entertaining private equity suitors.

Even though the valuations and multiples on these deals were attractive from a pure financial standpoint, in the coming months, they won’t be the only factors driving blockbuster deals.

So, what will? I’m keeping an eye on these three primary deal drivers:

Brands Deliver Differentiation

In an environment in which media fragmentation, price transparency, and category blurs are the rule — not the exception — brands become a critical point of differentiation. It’s no wonder both retailers and investors are more determined than ever to build deep and compelling brand portfolios.

In recent months, luxury brands have been among the most acquisitive as wealthier consumers have decided to, once again, open their wallets. In March, LVMH solidified its portfolio with a $6 billion bid for Bulgari and increased its stake in Hermes up to 20 percent. With summer IPOs pending, Ferragamo and Prada (valuations of $2 billion and $11 billion, respectively), are showing that it they aren’t faint of heart when it comes to propelling their brands into new categories and markets.

Buy Beats Build

As I’ve previously reported in this blog, physical formats are the new retail battleground; however, retailers aren’t always willing to take the time required to build from the ground up. In fact, they often can’t afford to. In December 2010, Walgreens acquired Duane Reade for $618 million, thereby securing a highly optimized, living and breathing urban blueprint. Overnight, this deal upped the ante for Walgreens’ competitors and put the retail giant in the catbird’s seat above Target, Walmart, and CVS Caremark in highly coveted urban markets.

Buy-versus-build speculation surrounds multiple retailers that already have tremendous scale. This includes Walmart — will they augment their Walmart Express small format “build” strategy with a “buy” of an existing small format retailer? — and Walgreens — could they digest a rival drug retailer?

Global Expands Options

Global players have set their sights on major acquisitions to solidify their international footprint and bolster new business models. Increasingly, foreign interests are entering the U.S. market, as when Bahrain-based Arcapital Bank took a majority stake in retailer J. Jill this past March.

In recent years, Li & Fung, the leading player in global sourcing, has been quietly building its own brand portfolio, including last year’s purchase of Jimlar footwear, which owns the Frye brand. With a rumored $1 billion at the ready for additional acquisitions, Li & Fung promises to make a substantial impact in the already-heady M&A marketplace.

Bottom line:

  • The recent acceleration in brand acquisition activity also points to a renewed focus on return-on-brand investment. I see marketing dollars loosening up, particularly for recently-acquired brands.
  • Licensing will be a natural brand growth vehicle as investors seek to realize an exponential ROI
  • Limiting brand discussion and brand potential to the U.S. market will limit your brand value.
  • Customizing brand propositions in the context of specific retail environments (not just specific retailers) will be a key differentiator.

With its multi-faceted business model and sheer size, Li & Fung has as much potential as anyone out there to be a brand game-changer. Rick Darling, President of LF USA, the subsidiary of Hong Kong-headquartered Li & Fung Limited, who has led the company’s effort to build its portfolio of consumer and fashion brands, promises to give a thought provoking keynote speech to kick off Licensing International Expo June 14 in Las Vegas. Take advantage of the chance to hear from one of the people who’s shaping the global marketplace. Click here for free registration to the keynote session.