[February 26, 2013]

Retail M&A Activity Will Continue to Rebound in 2013, BDO USA Survey Finds

The retail industry is poised for another year of heavy deal flow. According to a new survey from BDO USA, LLP, nearly all retail CFOs (94 percent) expect merger and acquisition (M&A) activity will increase or remain steady in 2013. CFOs' bullish forecasts follow $324.6 billion in global retail and consumer M&A activity in 2012, which was up 33 percent over 2011 and the busiest year since 2007, according to Dealogic. A majority of CFOs (68 percent) expect the U.S. markets to see a majority of deal volume, followed by the Asia-Pacific market (20 percent) and Latin America market (7 percent).

Retail CFOs also forecast robust IPO activity in 2013. Following 13 U.S. retail public offerings in 2012 (according to Intrepid Investment Bankers), a vast majority of CFOs (83 percent) expect to see more or about the same number of retail IPOs this year. When asked what the biggest driver of a company's ability to go public in 2013 is, CFOs point to the strength of the U.S. economy and stock market (42 percent), as well as strength of brand (24 percent) as top factors.

"In terms of overall M&A transactions, we've seen the fastest start to the year since 2005, and retail looks to be a bright spot for deal-making this year," says Stephen Wyss, partner in the Retail and Consumer Products practice at BDO USA, LLP. "Steadier markets, renewed interest in international growth and the desire for omni-channel capabilities are fueling the investment rebound in retail and consumer businesses."

These findings are from the seventh-annual BDO Retail Compass (News - Alert) Survey of CFOs, which examined the opinions of 100 chief financial officers at leading retailers located throughout the country. The retailers in the study were among the largest in the country. The survey was conducted in January and February of 2013.

Other major findigs of the 2013 BDO Retail Compass Survey of CFOs:

E-commerce sector to drive IPO activity. Despite a handful of lackluster IPOs in 2012, there is still significant interest in the e-commerce sector. Two-thirds of retail CFOs think e-commerce will see the most IPO activity in 2013, and a few companies have already taken strides to go public this year by hiring experienced executives and focusing on profitability and predictability of financials. Outside of e-commerce, successful IPOs from Bloomin' Brands, Chuy's and Del Frisco's last year are likely influencing the 22 percent of retail CFOs who expect the food & beverage and restaurant categories to see the most IPOs in 2013.

Retailers give slight edge to strategic buyers. While deal flow in 2012 was driven by both financial and strategic buyers, CFOs are more bullish on strategic deals in 2013. With retailers looking to grow omni-channel capabilities and reach new markets overseas through acquisitions, 59 percent of CFOs say strategic buyers will be the primary driver of M&A activity. Still, private equity has been playing an important role, fueling many of the restaurant deals in particular, and 41 percent of CFOs say financial buyers will be the biggest driver of deals this year. CFOs expect to see an EBITDA (earnings before interest, taxes, depreciation and amortization) multiple of 5.2 on average for an acquisition in the retail and consumer product space.

"Private equity investments in the retail and consumer products sector have waned in recent years as retailers worked to navigate the ebb and flow of consumer spending," said Lee Duran, partner and Private Equity practice leader at BDO. "Still, many private equity funds continue to find compelling investment opportunities in the sector, providing capital to companies with strong value propositions to fuel their expansion into new merchandising channels and markets overseas."

Sales and EBITDA are priority financial metrics. Sales results are the most common way that shareholders, investors and the industry measure a retailer's performance, so it's no surprise that 53 percent of retail CFOs say sales are their primary financial metric. Over one-third (35 percent) say they are most focused on gross sales and 18 percent say they are most focused on comparable store sales. Another 33 percent say they are most focused on EBITDA, a leading indicator of recurring cash flows. Although sales metrics are often looked to first, margins are a key metric in assessing a retailer's performance, especially in a challenging economic climate. Margin deterioration can be an indicator of poor performance even as sales remain healthy.

CFOs are fairly optimistic on credit markets. Retailers looking to refinance debt in order to lower interest expense may have better luck finding financing at attractive rates this year. A majority of CFOs (55 percent) feel that there is sufficient capacity and appetite in the credit markets and say they expect it will be not challenging (19 percent) or only slightly challenging (36 percent) for retail and consumer product companies to refinance debt in 2013. Still, 19 percent expect it will be very challenging, a sign that some retailers may have greater access than others.

The BDO Retail Compass Survey of CFOs is a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, whose executive interviewers spoke directly to chief financial officers using a telephone survey conducted within a scientifically developed, pure random sample of the nation's retailers.

About BDO

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 45 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,204 offices in 138 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: www.bdo.com.

Material discussed in this release is meant to provide general information and should not be acted on without professional advice tailored to your firm's individual needs.

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