Retail therapy: Kroger’s Albertsons deal underpins robust M&A outlook

Data InsightDealspeak 8 November

Retail therapy: Kroger’s Albertsons deal underpins robust M&A outlook

In a year when the dollar value of M&A transactions has dropped 44% in North America, the retail sector is an exception.

Deals involving North American targets reached USD 32.3bn in the year to date (7 November), already besting the USD 29.2bn in all of 2021, according to Dealogic.

But one transaction had almost total dominance: Kroger’s [NYSE:KR] USD 24.8bn acquisition of Albertsons [NYSE:ACI].

That deal is the biggest supermarket transaction ever, dwarfing Albertsons’ buyout by a Cerberus-led consortium for USD 17.4bn in 2006, Amazon.com’s [NASDAQ:AMZN] USD 13.7bn deal for Whole Foods Market in 2017, and the USD 13.5bn acquisition of Fred Meyer by Kroger in 1998.

Runaway inflation, soaring interest rates, and the specter of recession has still dampened the number of retail deals being done: the 150 transactions signed in 2022 YTD is some way off from 2021’s total of 231.

Cost-cutting consolidation

The combination of the US’s top two supermarket operators will give Kroger/Albertsons greater scale and negotiating leverage with suppliers. That should help it better compete with Walmart [NYSE:WMT], Costco [NASDAQ:COST] and Amazon, says one grocery executive.

“Retail is a lower-margin business,” says the executive. “Consolidation in a mature industry like supermarkets is usually cost related.”

Grocery M&A is typically only a small part of overall retailer consolidation, however. Since 1995, non-supermarket M&A activity has eclipsed supermarket dealmaking by a factor of 3:1 in aggregate dollars and by 9:1 in number of transactions, according to Dealogic data.  This year will be the first time ever that supermarket M&A takes the lion’s share of retail M&A dollars.

More deals ahead

A reversion to the mean should happen in 2023. Despite a quiet 2022, consolidation involving retailers of apparel, home décor or beauty products is expected to increase for two reasons: First, sellers’ valuation expectations have dropped to align more closely with buyers. Sellers were asking for 10x to 12x EBITDA or 2x to 3x revenue last year but are now asking for 5x to 8x EBITDA or 1x to 1.5x revenues, says the CEO of one apparel retailer, who is hoping to take advantage of the discount.

Some owners will want to ride out the downturn, but others are wary of doing so as the rising need to market across several distinct digital channels, such as TikTok, Facebook and Instagram, leads to mushrooming costs.

The second reason for expecting more M&A is that many founder-run retailers – who survived Covid only to be faced by a looming recession – are feeling “a ton of fatigue,” the CEO adds. In addition, many private-equity firms are looking to sell their retail holdings, he notes.                                                                                                                                   

PE-owned retailers identified by Dealogic’s LTI algorithm, which predicts what sponsor-backed companies will most likely have a liquidity event in the next 12-plus months, include Club Champion, Savers, Stanton Carpet Group, Augusta Sportswear and Belk.

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