Private equity firms and other opportunistic companies are eying possible acquisition targets that may not make it through the COVID-19 pandemic.
Recently, British online fast-fashion retailer Boohoo announced stronger-than-expected earnings—and stated that it was looking to grab some of its struggling rivals. “It is likely many opportunities will arise in the coming weeks and we will take a look at those and make an assessment on whether we can add value,” said Neil Catto, the company’s finance director.
Boohoo won’t be alone in the quest to take advantage of acquisition targets that are suffering financially. While the coronavirus has interrupted deal-making and inflicted damage on financial markets everywhere, many companies are desperately trying to keep their businesses afloat. However, in the aftermath of the coronavirus pandemic, some industry observers expect a rash of mergers and acquisitions, with bigger and well-capitalized players and private equity groups using the opportunity to gobble up companies who became vulnerable in the crisis at bargain prices.
The odds of this happening look especially good in retail, where the crisis has significantly impacted many chains and is intensifying the difference between winners and losers—or more accurately, the hunters and the prey.
An April report by McKinsey and fashion-trade publication Business of Fashion showed that roughly 34% of publicly traded fashion companies in Europe and North America were showing signs of financial distress before the pandemic. Add in three months or more of shuttered retail outlets, and they expect that number to possibly increase to 80% or higher. The report anticipates that to continue, many companies will have to seek financial relief, file for bankruptcy, or become acquisition targets for stronger companies or private equity firms.
Experts say that viable companies may want to acquire their direct competitors in an effort to combine their strengths and streamline their costs. Or companies may seek to bolster their weak spots. For example, the Gap acquired activewear maker Athleta in 2008, during another economic crisis.
Another option for these companies and cash-laden private equity firms is to try to target companies with different business models or technology they don’t have. In this case, there would be plenty of opportunities for acquiring companies with strong holdings.
Private equity firms will definitely be out shopping when the crisis dissipates. These investors have made several high-profile purchases in recent years. For example, the Carlyle Group purchased a 50% stake in the streetwear giant Supreme in 2017, and Permira acquired a controlling stake in cool-girl outfitter Reformation in July of 2019. Estimates as of last June say that private equity had nearly $1.5 trillion in ready capital, according to a report by Preqin, a data and research firm for finance professionals.
Also, big-box retailers such as Walmart and Target—along with e-commerce kingpin Amazon—may too uncover worthwhile opportunities. The three are among the few retailers that have the financial bandwidth to actually come out of the crisis stronger and in a good position to expand via acquisition targets.
No doubt, like the world’s economy, it will take some time before M&A deals get going once again.
The COVID-19 crisis has upset the normal flow of business, and some deals have been put on hold for the duration or quashed altogether. One transaction has gone to court. Retail group L Brands and private-equity firm Sycamore Partners are fighting over their proposed deal as Sycamore is said to have attempted to back out of the $525M transaction due to the coronavirus pandemic. The deal would have had Sycamore take over 55% of Victoria’s Secret Lingerie, Victoria’s Secret Beauty, and the Pink fashion brand—valued at $1 billion.
But for those ready for action, they’re looking for possible acquisition targets now to be ready to move when the smoke of the pandemic has cleared.
Image attribution: World Archery.