International M&A: 2009 in review

With a total of 100 mergers and acquisitions amongst multichannel sellers in the US, UK and Germany, the number of transactions in the distance-selling industry edged slightly upwards compared with 2008. This was surprising as we expected a decrease in the number of transactions last year due to restrictive bank financing and the reluctance of successful entrepreneurs to sell their companies at depressed valuations.
 
However, delving deeper quickly reveals the true reason for the increase in transactions. The proportion of companies that were acquired out of bankruptcy proceedings or were about to go bankrupt was at a record high—accounting for 38 percent of all transactions compared with 25 percent in the previous year. In addition, we suspect that the number of unknown bankruptcy or prebankruptcy-stage cases was even higher and would have added to the count.
 
 
Development of the Number of M&A Transactions in the US, UK and Germany*

 * Exclusively majority stake, 100% or asset deal transactions, announced transactions
 
As expected, the number of deals with private equity or financial investor participation decreased significantly from 25 in 2008 to 20 transactions last year. There were hardly any surprises in this segment. The majority of transactions were turnaround cases or acquisitions with small transaction sizes that required little financing. Noteworthy activity in this segment were the acquisitions of apparel cataloguers J.Jill and Eddie Bauer by investment firm Golden Gate Capital in the US—a move that saved J. Jill and Eddie Bauer from demise. Further, the acquisition of TV shopping business Sit-Up by private equity firm Aurelius and the acquisition of HSE24, Arcandor’s home shopping network, by AXA Private Equity were also meaningful transactions in the financial investor segment.
 
A closer look
When looking at the geographic segments, the US significantly decreased its total share of all transactions. Conversely, the UK, Germany and the cross-border segments all increased their number of transactions and relative share. In practical terms, we can observe how the economic cycle works in the USA, UK and Germany: while the US suffered the majority of bankruptcies in 2008, the UK and Germany laboured over a staggering number of cases last year. The UK was most affected in the first six months of 2009 and Germany in the second half of the year.
 
Taking a closer look at each segment, we can see that in the US, the number of M&A activity decreased significantly from 56 transactions in 2008 to 33 transactions last year. The reasons for this development may be manifold: on the one hand, the US had its bankruptcy shake-out in the previous year. On the other, there was a combination of a tight credit market and unsatisfactory financial results of possible acquisition prospects. Finally, serial acquirers such as Airgas (a multichannel seller of industrial gases and supplies that acquired 10 businesses in 2008) could not keep up the pace last year (“just” two acquisitions in 2009).
 
Development of M&A Transactions Segmented by Region – Germany, UK, US, Cross-Border  

 

In the UK, the number of transactions increased 23 percent from 20 to 26 transactions in 2009. Of these transactions, 18 or almost 70 percent of all transactions were bankruptcy or prebankruptcy cases. In particular, the first six months counted 14 bankruptcy-implied cases while the second part of the year was a lot calmer with only four bankruptcy-implied cases.
 
In Germany, the number of transactions more than doubled last year from 8 to 19. Mirroring the UK market, the German transaction count was heavily influenced by bankruptcy-related cases with 11 out of 19 transactions. In the second half, we counted the most bankruptcy-related cases with the Arcandor group dominating statistics accounting for five transactions in the distance-selling segment.
 
The number of cross-border transactions—those in which only the seller or the buyer was located in the UK, the US, or Germany—doubled from last year and were back to the levels seen in 2007. Traditionally, the cross-border segment is dominated by the business-to-business sector, and this year was no exception with b-to-b acquisitions accounting for more than half of the transactions in the cross-border segment last year. Moreover, there are several well-positioned multinational corporations in the b-to-b segment that were chasing bargains last year, take for instance Brady’s acquisition of Welco in October 2009.
 
The Otto Group could also further cement its prime position in the market with four acquisitions last year: In Germany, Otto bought Limango, a type of private-sales website for families and acquired three cataloguers out of bankruptcy; Venus Swimwear in the US, major assets of Quelle Germany and the operations of Quelle Russia.
 
The largest and most significant transaction was the acquisition of Zappos by Amazon for £850 million (£544.1 million). The main motivation for this transaction was to eliminate a future major competitor from the market.
 
A ground-breaking transaction was the purchase of Retail Convergence consisting of private-sales website Rue La La and online retailer SmartBargains by GSI Commerce in the US. With this combination, GSI Commerce becomes a services provider and retailer at the same time.
 
For the current year, we expect a decreasing number of bankruptcy-related transactions because the market shake-out has already taken place in the US and the UK. A special case remains the Arcandor Group, for which we expect several interesting transactions taking place successively over the next few years.
 
Furthermore, we expect entrepreneurs to continue to be reluctant to sell their companies as the financial crisis has not been overcome in Europe, particularly in the business-to-business segment. The bright spot will likely be the US, where the market for corporate bonds has already ignited a growing number of M&A transactions.

Danielle Budde and Patrice Freytag are partners at BBR Associates, a Germany-based corporate and business development consultancy.

M&A at a glance

Among the year’s most noteworthy industry mergers and acquisitions:

• German media corporation Bertelsmann sold UK mail order bookseller Book Club Associates to private equity firm and turnaround specialist Aurelius. Later in the year Aurelius bought TV-shopping business Sit-Up from Virgin Media.

• Following the collapse of German media and retail group Arcandor in June, Quelle Russia as well as the rights to the Quelle brand and related brands for Germany and other Central and Eastern European were snapped up by Otto Group.

• A busy year for Otto: it announced in July that its Bonprix division had acquired US manufacturer/cataloguer Venus Swimwear.

• US investment firm Golden Gate Capital added apparel cataloguers J.Jill and Eddie Bauer to its portfolio in July and August respectively.

• Speciality women’s fashion cataloguer/retailer Long Tall Sally acquired the US website and 10 Canadian stores of retailer Tall Girls in October.

• Online giant Amazon bought online footwear superstore Zappos.com. Amazon paid 10 million shares of its stock, worth more than $800 million (£487 million), plus another $40 million (£24.3 million) in cash and other stock.

• Brady Corp, the US-based parent company of workplace supplier Seton, acquired Welco, after its parent company Welconstruct fell into administration.

• In November, US merchant Retail Convergence, the operator of members-only ecommerce site Rue La La, was acquired by ecommerce provider GSI Commerce.

• In 2009, Airgas, a US multichannel seller of industrial gases and supplies, acquired Fitch Industrial & Welding Supply and Tri-Tech, a distributor of industrial, medical, and speciality gases and supplies. More activity is in the pipeline: as of 11th February, Airgas confirmed it was reviewing an unsolicited offer from Air Products & Chemicals to buy the business for $60 (£38) a share.