Online retail sector sees spike in private equity deals

Online retail has been a hotbed of M&A activity in recent weeks, with a spell of investments made by private equity firms or venture capital funds. Deals have ranged from acquisitions of listed companies such as TV-shopping business Ideal Shopping Direct, which was acquired for £78.3 million in April by private equity firm Inflexion, to smaller investments, such as the £1.5 million raised by London-based luxury-accessories etailer Boticca from France-based ISAI in May.

Further, gourmet-meats purveyor Donald Russell has confirmed it has appointed Cavendish Corporate Finance to handle unsolicited bid approaches for the business. While Brand Alley, an online retailer of discounted designer goods, has appointed Merrill Lynch to raise €100 million (£87 million) in order to fund its acquisition strategy.

“This is an active space and I expect it to remain active for some time,” says Raf Goovaerts of The Business Growth Fund, a new £2.5 billion equity investment fund established to help small and midsized UK businesses. “Online retail is particularly attractive to private equity because of its growth potential. The exit opportunities are also attractive, either through an eventual float or sale to a trade buyer.”

Knowing your niche
According to Rory Stirling, investment manager at MMC Ventures, which recently invested in childrenswear etailer AlexandAlexa.com, the businesses that are attracting private equity interest are innovative market leaders in a particular niche or product category.

Cornwall-based apparel cataloguer Celtic Sheepskin specialises in sheepskin products and ethical clothing. It sold a minority stake to private equity firm Piper in May. The investment sees the £8 million company through its next stage of growth, which will include introducing an additional catalogue for autumn/winter and recruiting more staff, including a managing director. “We’ve been growing at 20 to 24 percent for the last few years,” says Nick Whitworth, who cofounded the business with his wife Kath. “We know we’ve got the potential to grow faster, but as a ‘two-man band’ we were running out of hours in the day”. Whitworth says growing past £8 million is a challenge for a small team, which is why, with the help of Piper, Celtic Sheepskin is now seeking the advice of a marketing and a manufacturing and production consultant to help streamline operations and introduce more efficient processes.

The other draw of online retail, particularly for early-stage investors, says Stirling, is the opportunity to be multinational from the start. Whitworth has put the wheels in motion for overseas expansion at Celtic Sheepskin and says the business will test a multilanguage website within a year’s time. In two to three years the business will test a country-specific offer with local customer service, delivery and returns. However, the UK remains a focus for the business, which aims to double turnover within the next three to five years.
 
Alternative to banks
For the retailer, the attraction of private equity is obvious—the investment allows businesses to take advantage of expert advice, benefit from an immediate cash injection and grow without the need for heavy borrowings from the bank.
JoJo Maman Bébé, a retailer/cataloguer selling maternity and nursery products, sold a minority stake to Magenta Partners in May after reporting a 50 percent increase in sales from £18 million in 2009 to a projected £27 million in the year to June 2011, and profits of 8 percent—or £2.16 million. It, like Celtic Sheepskin, had also grown steadily through the recession, but founder Laura Tenison says that despite growing organically, bank funding was very difficult to secure. A partnership with Magenta, says Tenison, will allow JoJo to go ahead with all its expansion plans, including international growth. Following the launch of a multicurrency website in mid-May, JoJo is analysing where orders are coming from and will follow up with small, country-specific campaigns such as affiliates and PR before full rollout.

Bright spots
A Grant Thornton study found that this resurgence in M&A activity will also mean many firms exiting their investments this year as opportunities become more attractive. This will inevitably lead to many more deals in the coming months. UK private equity firms “are encouraged by improving exit conditions, with strategic investors increasingly prepared to outbid private equity players,” says Mo Merali, head of private equity at the financial adviser. “This was the case with Kiddicare, where we ran a highly competitive sales process and received around 20 initial offers from a mix of private equity and trade players with Morrisons tabling the best offer.”
Yet, what Raf Goovaerts, Rory Stirling and Magenta partner Tom Matthews all agree on is that although there has been a perceived improvement in consumer spending—certainly compared with the last couple of years—trading in the UK will continue to be tough. The “rays of hope”, as Matthews puts it, are “innovations online and international expansion”.

To look to the US for a clue to where the market is heading, consider ShoeDazzle. Cofounded by celebrity Kim Kardashian, ShoeDazzle is a fashion website delivering personalised recommendations for shoes, accessories and handbags to subscribers for $39.95 a month. In May it completed series D funding, taking the total investment raised to $60 million. Part of the investment will be used to expand the shoe subscription model to a UK audience.