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Deals, it seems, go through cycles.
Some years the market is hot and other times – well, things are crashing. Or change one way or another. For example, 2020 launched a wave of initial public offerings. Jhey reached a 20-year high, with a total of 12 IPOs in the retail segment. The following year saw a blizzard of special purpose acquisition companies, or SPACs, which were used as vehicle to publicize.
This year, Retail Dive was offer follow-up in many forms, including equity investments, sales and spin-offs. And while a handful of mergers and acquisitions have taken place, a number of deals have gone awry. Financial transactions did not necessarily collapse, rather they went in a different direction than many analysts and observers expected.
Traders are currently concerned about the rising cost of capital, according to Mark Williams, chief revenue officer at Datasite Americas. “Uncertain valuations have a significant impact on mergers and acquisitions as a whole, including the suspension of acquisitions and larger merger processes, particularly among private equity and corporate dealmakers,” Williams said in comments by e-mail.
Overall, consumer transaction volume in the Americas, which includes retail, was down 31% in the first half of this year compared to 2021, according to Datasite research.
According to Kirthi Kalyanam, professor of marketing and executive director of the Retail Management Institute at Santa Clara University’s Leavey School of Business, different factors have affected deal conditions this year. The retail industry is changing, putting many business models under pressure. Additionally, macroeconomic headwinds and the proliferation of new retailers that have yet to demonstrate profitability are also impacting the deal market.
The current trading environment is due to “a misalignment between management and what investors want,” Kalyanam said.
Here are three deals made so far in 2022 that have had different outcomes than originally expected.
1. Kohl’s and franchise group
Kohl’s had a dramatic year, perhaps peaking with the rejection of a takeover bid of the franchise group. The holding company, which owns brands including The Vitamin Shoppe, Pet Supplies Plus and Buddy’s Home Furnishings, offered the department store $53 per share, down from a previous offer of $60.
“Despite a concerted effort from both sides, the current financing and retail environment has created significant hurdles to reaching an acceptable and fully enforceable agreement,” said Kohl’s Chairman of the Board, Peter Boneparth, in a statement at the time.
According to several analysts, this may be the best deal the retailer will ever get.
“They had a pretty good offer,” Kalyanam said. “And they refused that offer. And then they’ve spent about $900 million so far on shareholder-related dividends and buyouts… Kohl’s behavior to me is a puzzle.
But, the retailer may never have wanted the potential deal from the start. “Kohl’s management never really wanted to sell the business, preferring instead to follow their own strategic plans,” GlobalData chief executive Neil Saunders said at the time of the takeover bid. “They entertained Franchise Group as it was the least worst option and would have kept the business intact and some of the current management in place, but they are unlikely to mourn the end of the talks.”
2. ODP and Staples
In the world of office supplies, ODP Corp. and Staples have been the remarkable will-they-or-won’t-they relationship.
ODP, owner of Office Depot and OfficeMax, decided this summer to reject all suitors and stay independent. The move came after a lengthy process in which Staples was pursuing a takeover that began in early 2021 in an offer of $40 per share or $2.1 billion. (ODP said that in addition to Staples, the company also rejected another offer made by an anonymous party.)
ODP has also given up on a spin-off of its consumer business. The company had been work on the plan for more than a year which, if sued, would have spun off its business-to-business and retail units into two independent, publicly traded companies.
“They have a B2B business, a B2C business – the two are aligned. Breaking it results in performance deterioration,” Kalyanam said of the ODP. “I can sympathize with management…because if you sell one part of the business, it affects the other part of the business. Supply chains are therefore intertwined. There are a lot of related issues. So you say, ‘No, no no. If I do this, I will hurt myself.
But the dance between Staples and Office Depot goes back even further. In 2015, Staples announced it would acquire rival Office Depot for $6.3 billion, only to thwart it a year later when the Federal Trade Commission canceled the deal over fears the combined company would exert too much power and influence in the space of commercial contracts, and thus hamper competition.
3. Buyout of Blue Nile by Signet
At the start of the summer, it looked like jewelry retailer DTC Blue Nile was going re-enter the public markets through a SPAC agreement with Mudrick Capital Acquisition Corporation II. The deal involved an enterprise value of approximately $683 million.
“As the pioneer and category leader of fine jewelry online, Blue Nile is well positioned to win as the go-to e-commerce destination in the space,” said Jason Mudrick, Founder and Chief Investment Officer of Mudrick. Capital, in a release on time.
Blue Nile’s SPAC deal earlier this year was expected to close in the fourth quarter, resulting in the company’s combined Nasdaq listing.
However, a month after announcing its intention to go public, Signet Jewelers said it had reached an agreement to acquire DTC for $360 million in cash. Signet, which is the parent company of Kay Jewelers, Zales and Jared, among others, said bringing Blue Nile under its umbrella has brought, “an attractive, younger, more affluent and ethnically diverse customer base, which will expand our customer acquisition funnel.” (It also followed the decision of the retailer acquisition of Diamonds Direct for $490 million.)
At the same time Signet revealed its agreement to buy Blue Nile, it dropped its sales and operating income forecast for the year, saying customers were cutting spending due to increased inflation.
An urge to go public but ultimately go for an acquisition illustrates a broader trend, with PwC saying 2022 is “the quietest year for U.S.-based IPOs this century.”
A number of factors, including high inflation, rising interest rates and a potential recession, have slowed IPO activity, with over 60% of IPOs. having been withdrawn this year so far, according to PwC research.
“The IPO market is not closed, but the current focus by investors on scale, profitability and an attractive valuation is challenging for most companies in the pipeline,” said David Ethridge , co-head of IPO services with PwC US, in a statement.
What’s planned for 2023
What happens in the fourth quarter will impact financial transactions next year. “If this holiday season doesn’t go well, then you’re probably going to see more mergers and acquisitions talk,” said Gautham Vadakkepatt, director of the Center for Retail Transformation at George Mason University, adding that smaller retailers could see consolidations. even bankruptcies.
Datasite, which facilitates more than 13,000 transactions a year, has seen an increase in distressed assets on its platform in recent weeks. Moreover, tThe median time to launch and close a new deal on Datasite’s platform increased 8% from January to September, year-over-year. “Activity for next year doesn’t look as bad, although it’s still expected to be subdued,” Datasite’s Williams said.
What could really come to the fore next year, however, are retailers looking for a way to cash in financially or keep their brand intact, albeit under an umbrella company.
“As market conditions get tougher and you actually see a separation of winners and losers in retail, you’re likely to see more mergers and deals – just on the basis of an exit option Everyone thought the COVID bump you saw, the surge in demand was going to persist,” Vadakkepatt said.