Deal making stumbles

Jun 01, 2008 9:30 PM  By

You might think that the grim economy would prompt a flurry of mergers and acquisitions. But not so, or perhaps more accurately, not yet. The level of catalog industry deals is going down, not up.

Two years ago, there were 11 deals during the first quarter. Last year, the number fell to seven for the same period. And this year? Six.

Last year at this time industry experts extolled the dominance of private equity firms in the deal market, but warned that the market is more disciplined now than in the 1990s.

What’s more, one industry expert predicted last year that not many catalogers are making strategic acquisitions because “it’s tougher now to make money in your core business, and the postal increase will make that even tougher on catalogers.”

David Solomon, co-CEO of New York-based investment firm Lazard Middle Market, which tracks transactions for Multichannel Merchant, says that potential acquirers don’t have the money to play with. “The recent credit crunch is another key ingredient affecting the dearth of deals.”

Systemax acquires CompUSA

When: January The facts: Systemax bought the CompUSA brand, trademarks, and e-commerce business for approximately $30 million. Systemax plans to run CompUSA as a complementary business to its TigerDirect operation and launch a CompUSA catalog. Although it will no longer operate TigerDirect-branded stores, Systemax will continue to run the TigerDirect Website and catalog.

Solomon says Systemax is a $2.8 billion business, which carries about $128 million in cash on the balance sheet. “It’s not highly profitable,” he says. “But, this is a great way to acquire customers through retail and use them later in direct.”

Why does a company like CompUSA fail where Best Buy continues to do well? “CompUSA is operating in a very competitive market,” Solomon says. “People will shop aggressively and find the cheapest price. TigerDirect operates in that same world, and it’s designed to handle that level of competition more efficiently through different sourcing and being able to cope in this narrow margin world.” The skinny: Systemax wants to beef up the retail side of its business, Solomon says. “They paid about $1 million per store and they’re more than doubling their store base. They’re aggregating where they already have stores.”

Harry & David gobbles up Wolferman’s

When: January The facts: Fruit gifts mailer Harry & David Holdings acquired breakfast foods cataloger Wolferman’s from Williams Foods, a privately held producer of dry seasonings and direct marketer of specialty food gifts. Terms of the deal were not originally disclosed, but Solomon says the deal was worth about $22.5 million.

The parent company decided to sell Wolferman’s, “and we were on the list that might be interested,” says Bill Williams, president/CEO of Harry & David Holdings. Wolferman’s sales were about $28 million in 2007, an increase in the “mid-single digit” range compared with 2006, Williams says.

Harry & David Holdings, formerly known as Bear Creek Corp., was itself sold by Yamanouchi Pharmaceutical Co., to private equity investor Wasserstein & Co. in 2004. “It’s a small deal for Harry & David,” Solomon says. “For Wolferman’s, it gives them a lot of resources. The companies are pretty well aligned.” He says the average order for Harry & David customers is $140. For Wolferman’s, it’s $60. The skinny: It gives Harry & David an authority in baked goods, Solomon says of the deal. “And Harry & David will be able to leverage the brand.”

ATD-American buys Adirondack Direct

When: January The facts: ATD-American, a direct merchant of business and institutional furniture and equipment, announced Jan. 31 that it acquired a similar business-to-business cataloger, Adirondack Direct, for an undisclosed sum. ATD officials say Adirondack Direct will still be run as a separate catalog title.

Solomon says the two companies have similar customer files. ATD focuses on schools, government and businesses, and has a catalog tailored for each of those branches. Founded in 1926, Adirondack Direct has a heavier government client base than ATD; it also markets school, church office, and institutional furniture. The skinny: “It’s a nice small deal,” Solomon says. “ATD will pick up customers and gain a broader SKU reach.”

1Q 2008 CATALOG INDUSTRY TRANSACTIONS
Company Market segment Buyer/investor Investment form Est. price (in millions)
JAN. CompUSA.com Computers/electronics Systemax Acquisition $30
IAC/InterActiveCorp General merchandise Liberty Media Corp. Acquisition $339.5
Wolferman’s Specialty foods Harry & David Holdings Acquisition $22.5
Adirondack Direct Furniture ATD-American Co. Acquisition NA
MAR. Petals Decorative Accents Flowers, plants, home decor Total Luxury Group Acquisition NA
Cortz Swimming pool accessories Audax Group Acquisition NA
Source: Lazard Middle Market