BDO survey: Retail ripe for M&A activity in 2015; increased focus on EBITDA
Chicago -- Expect another busy year of retail mergers and acquisitions, according to an annual survey of retail CFO’s by BDO USA. In the most bullish forecast for deal flow in the survey’s nine-year history, 16% of surveyed retail CFOs cite M&A activity as the growth tactic they are most heavily focused on for 2015, up from just 3% in 2014. Seventy-three percent of the CFOs expect the activity will take place primarily in the United States, and 15% expect Asia to see the most activity.
The 2015 BDO Retail Compass Survey of CFOs also revealed that while the market may still look at sales as the best performance indicator, a majority of CFOs (39%) say the financial metric they are most focused on is EBITDA. This year, only 20% of retailers say they are most focused on gross sales, down from 32% in 2014 and 35% in 2013.
Another 20% say they are watching free cash flow most closely, while 11% point to comparable store sales and 10% say return on equity as their most important financial metric.
As to what is driving the M&A activity, a majority of CFOs (56%) say strategic buyers will be the most acquisitive, while 44% point to financial buyers. Retail CFOs say strategic buyers will be primarily targeting market share (cited by 43%) and increased geographic coverage (cited 24%, up from just 8% in 2014).
Another 16% say increased revenue and profitability will be the top driver, 12% say technology assets and intellectual property, and 6% cite increased distribution channels as the top driver of strategic deals. CFOs expect buyers will pay an average EBITDA multiple of 5.2, up from 2014’s projected multiple of 4.2.
“Behind the uptick in retail deal flow is one simple truth,” said Ted Vaughan, partner in the consumer business practice at BDO. “Many traditional brick-and-mortar retailers have fewer opportunities for growth, and are turning to M&A to gain market share through consolidation or enter new markets to extend their brand and reach. On the other hand, we’re seeing more and more online-only retailers eyeing floor space to demo products and engage with consumers, and acquisitions can be an effective way to do so.”
Other major findings include:
• Retailers look to source closer to home. Amid ongoing labor issues at the West Coast ports, as well as congestion that will likely cause delays and increase transportation costs over the coming years, retailers are taking a close look at their sourcing strategy.
This year, 43% of retail CFOs said that North America was the most attractive sourcing option this year, with another 12% citing Central America, including Mexico, and 4% citing South America. And despite rising labor costs, 37% of CFOs still say Asia is the most attractive sourcing opportunity.
• Refinancing debt: As retailers look to liquidity to help fuel strategic initiatives, and given the positive market conditions, many may look to refinance debt. Just over two-thirds of retail CFOs (68%) expect to encounter some level of difficulty refinancing debt this year, down from 74% in 2014. Only 6% of CFOs expect it to be “very difficult.”
• Retail IPOs steady, but strong: Two-thirds of retail CFOs expect the number of retail and consumer products IPOs to stay about the same as 2014 levels, while 20% forecast an increase.
According to Renaissance Capital, 2014 saw 16 retail and consumer IPOs, down slightly from 2013 levels, but retail IPOs were among the top performers for the year. Positive returns from the IPO of PE-backed Michael’s in 2014 are an encouraging sign for both specialty retailers and PE-backed opportunities in the industry.
CFOs say strength of brand (cited by 37%) and the strength of the U.S. economy and stock market (cited by 31%) will be the top factors driving a company’s ability to go public this year.