Private equity portfolios are glutted with aging investments in the retail sector that could present attractive buying opportunities, a Buyouts analysis has found.
Of the 86 retail companies U.S.-based sponsors backed in 2006, 45, or more than half, are still under the same ownership, the analysis found. These include big-name companies easily recognizable by mall shoppers, including mattress retailer Mattress Giant, backed by
Theoretically, these companies should be ripe for a sale or an initial public offering, considering that private equity firms typically hold their investments three to five years. Further, many of these owners need to provide liquidity to investors as they prepare to raise new funds—CCMP Capital, for example, is preparing to raise its next fund, seeking $3.5 billion. Meanwhile, potential buyers loom, as buyout firms still sit on mounds of capital, much of it raised in the boom years, that they need to put to work.
Recent data suggests appetite for retail deals among sponsors may be on the rise, if still somewhat depressed. As of Dec. 5, U.S.-based sponsors had invested in 45 companies globally in the retail sector this year, compared with just 27 in all of 2009 and 2010 combined. Consumer confidence, meanwhile, is strengthening: Private research firm The Conference Board said its consumer confidence index climbed 15 points in November—its largest gain since 2003—to 56.0, though it is still far below 90, the level that suggests an economy is growing at a healthy pace. And finally, several companies have sold this year at multiples in excess of 9x EBITDA, according to a banking source, including Sur Le Table, which Freeman Spogli sold to
“I actually believe we are entering a good cycle for retail M&A,” Steve Tricarico, a managing director and head of retail and apparel investment banking at Jefferies & Co., told Buyouts in an e-mail. “Consumer spending remains good despite [the] macro economy.”
Food & Beverage
Of the 45 vintage-2006 retail companies still owned by the same sponsor or sponsor group, the food & beverage category accounted for almost half, with 21 companies.
Long holds in this sector could be attributed to several factors, said John Howard, CEO of
Notable companies bought in 2006 in this sub-sector include Schlotzsky’s Ltd., the deli-restaurant chain backed by
Other food and beverage assets from 2006 include Orchid Pubs Ltd. The sixth largest pub-and-restaurant chain in the United Kingdom has completed several divestitures and add-on acquisitions since
The there’s Checkers Drive In Restaurants Inc. Backed by
Ranking sponsors by their holdings of vintage-2006 retail companies, Boca Raton, Fla-based turnaround firm
Scott Edwards, a principal with Sun Capital, said sales at three of the companies above are up since the firm bought it—one has tripled its sales under Sun Capital ownership, he said—while sales at one are flat. (He declined to attribute the numbers to specific companies or to comment on when Sun Capital might try to exit them). The market for selling retail companies is a lot better than it was a few years ago, he added. “We tend to have longer hold periods,” Edwards said. “First, we need to prove out a turnaround. Once we do that, we hold it long enough to prove we can grow the company.”
Other firms still holding a few retail companies from 2006 include
Stock Market Chill
One reason sponsors are holding retail companies longer, sources said, stems from turmoil in the equity markets, which makes it hard to lock-down a solid IPO price.
“Right now, the IPO environment—which for us was one way to exit—is so volatile. We don’t feel enough market stability to take these companies public at this time,” Peter Nolan, a managing director with Leonard Green, told Buyouts. “It’s creating buying opportunities, but it makes predicting exits challenging.”
Case in point: In October, NRDC Equity-backed Hudson’s Bay Trading Co., the parent of Lord & Taylor and other retailers, postponed plans for an IPO in part because of volatile global equity markets, according to reports.
That said, Tricarico, of Jefferies, said the IPO market is open for retail companies that have a differentiated niche; the ability to grow their store base 10 to 15 percent a year; that can drive earnings in excess of 20 percent over the next five years; and that wouldn’t carry debt in excess of 3.5x EBITDA as a public company.
Shares in women’s apparel boutique Francesca’s Holdings Corp., for example, backed by CCMP Capital, had popped 63 percent after a week of trading following its July 22 debut at $17 a share (though it has since come back to Earth, closing at $15.36 a share on Dec. 1). The company reportedly plans to expand its base of boutique stores by about 900 in the United States over the next decade.
Shares in nutritional product retailer GNC Holdings Inc., backed by
Continued love shown retailers by the public equity markets would be sure to signal a return to a healthy exit market for sponsor-backed retailers.