Despite an incredibly challenging trading environment and a difficult summer that has featured some high-profile casualties, there are green shoots of recovery in the retail sector. Amid all this, M&A activity in the industry appears to be strong – and not just as a result of high levels of distress.
According to recent figures from law firm RPC, dealmaking in the UK retail sector hit a five year high in the year to March 2023. What was most remarkable about these figures, however, was that very little of this activity was driven by distressed acquisitions – despite the issues facing many retailers and the high level of insolvencies.
While distress is, of course, a major theme in retail M&A and will continue to be for some time, new trends are beginning to emerge that demonstrate that, buyers in the sector are starting to look more towards the long term and how they can really solidify and develop their own operations, rather than just pouncing on the business, assets and brands of their distressed competitors.
So, as we move towards the final quarter of the year, what’s in store for the UK retail sector? And what are the factors that could drive dealmaking moving forward?
M&A activity strong in tough environmentSince early 2022, economic disruption and geopolitical turmoil has largely pushed M&A down across the majority of sectors, with buyers remaining cautious and funding conditions tighter for those seeking capital to make acquisitions.
Unexpected resilience of brick & mortarIn the wake of the COVID-19 pandemic, many forecast that retail had changed forever and that the physical in-store experience was on the way to being usurped by online and hybrid shopping models.
How has retail fared over the summer?While there are signs of promise, the retail sector is still under tremendous pressure. Even the most optimistic predictions for the industry are sounding a note of caution over how the next few months will play out.
Distress remains prominent, but is the focus moving to strategic M&A?Since COVID-19, distressed M&A has been a key theme in the retail sector, as buyers pounce on the assets of fallen counterparts – many of these deals have involved big names that were, potentially, too set in their ways or complacent to respond to a changing market, or to absorb the economic shocks caused by events like Brexit and the pandemic.
A major insolvency demonstrates ongoing vulnerabilityAs a bargain retailer with a strong presence both online as well as on the high street, extremely strong brand recognition (so strong, in fact, that it was able to rebrand to its colloquial nickname several years ago), and a huge product range spanning numerous segments, Wilko seems like a retailer that should be well placed to withstand economic shocks.
Could the shift to “beyond-trading” be the next big M&A trend?RPC has suggested that, with the face of retail changing so dramatically since the COVID-19 pandemic, retailers will begin using M&A more as a means of strategically repositioning their business and locking in cashflow, rather than relying on distressed acquisitions in order to pick up cheap assets.
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