ABI Journal

Private Equity Has a Retail Problem

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4 ABI Journal – January 2018 changed since this flurry of deals happened. This cohort of 2007-08 buyouts generally has not fared well; "top of the market" transactions rarely do. Approximately 33 percent of retail LBOs happened in 2011-13, as credit markets thawed and buyouts could get done again, and as it appeared that the U.S. consumer economy was coming back to life. Purchase price multiples for retail LBOs contracted to a more reasonable 8.3 times EBITDA in this period, but in retrospect, a consumer spending revival did not materialize as expected, and the disruption of the online channel started to gain critical mass. PE sponsors targeting retailers in this period likely underestimated the full-spectrum impact of online shopping — particularly, the huge popularity of mobile/online shopping and the attendant diminished pricing power of most retailers. Retail buyouts in this period have generally had dis- appointing performances despite more reasonably priced deals and lower-leverage multiples than pre-crisis transactions. Several likely reorganizations in 2018-19 are retail buyouts done in this post-recession period. Only 14 percent of retail LBOs were done in 2015-17, as flagging same-store sales and deteriorating operating performance metrics throughout the retail sector discouraged sponsors and lenders from com- mitting to transactions in the sector. Several transactions were bottom-fishing deals, with certain sponsors opportunistically buying into highly distressed situations or taking control of reorganizing retailers. PE sponsors recognized wrenching structural changes impacting nearly all retailers, and new deal activity in the sector slowed considerably despite rock-bottom valuations for many public retailers and a more robust consumer economy since 2016. The $8 billion buyout of Staples in mid-2017 was a standout exception to the dour market mood for retail plays and demonstrates that a large (and risky) retail deal can still get through as long as credit market conditions remain benign, but new retail LBOs were sparse despite stronger buyout activity generally, especially in 2017. A Respite or Retreat from Retail? It seems doubtful that sponsors and capital markets will support going-private transactions of retail- ers as they once did until there are better optics around the industrywide dislocations caused by the migration of sales from stores to online. Recession-like market valuations for many public retailers did not spur deal activity in 2017 for this very reason. Few retail executives can honestly say that they have strong convictions about what their business will look like in five years. Such opacity is not conducive to leveraged deal-making. Several months ago, the Nordstrom family that controls the eponymous chain said that it was con- sidering taking the company private — only to see such intentions soon put on the backburner when it

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