M&A Was MIA in 2010

MULTICHANNEL MERGERS AND ACQUISITIONS ACTIVITY PROGRESSED from “pretty dead” in 2009, to “missing in action” in 2010.

Just five deals in the catalog segment were announced in the third quarter, according to Chris Kampe, managing director for investment firm Tully & Holland. Last year, eight deals were recorded, compared to a whopping 16 in 2008.

Financially speaking, the largest third-quarter deal saw Green Mountain Coffee Roasters acquire LJVH Holdings, the parent company of Canadian gourmet coffee brand Van Houtte, for $890 million. The deal was announced Sept. 14 in Green Mountain’s filing with the Securities and Exchange Commission.

Why was catalog deal volume so thin in the third quarter? “Weak activity was largely the byproduct of difficult conditions in 2009, which prompted would-be sellers to delay their sale plans until business had improved,” Kampe says.

Many of the catalog transactions that closed in 2010 were motivated by sellers seeking to get out of underperforming or noncore operations, he says. “These catalog targets were snapped up by strategic buyers in similar or complementary product categories, who hope to realize distribution and administrative synergies and exploit cross-fertilization of customer lists.”

The rapid growth of the Internet is driving M&A activity, as buyers in pure ecommerce aim to gain new technologies and market share, says David Solomon, co-CEO of investment firm Lazard Middle Market. “There have been few catalog/multichannel acquisitions, other than opportunistic purchases of companies in weak financial condition,” Solomon says.

Because of higher postage in recent years, many catalogers have decreased circulation in favor of increasing ecommerce marketing expenditures, Solomon says. “This reduced saturation of the mail box has actually allowed some larger and very efficient catalogers to expand their print circulations in 2010.”

While overall consumer retail expenditures increased in 2010, Solomon says spending by lower-income catalog consumers seemed to lag behind the recovery by middle-income and luxury consumers. This hurt the performance of lower-end catalogs, he notes.

But some healthy catalog consolidators have continued their growth, Solomon adds, noting Potpourri Group’s acquisition of Country Store in August.

So what’s in store for 2011?

Kampe predicts a “measurable increase” in catalog M&A activity. “In the past 90 days, we have seen a sizable increase in the number of new catalog sell-side opportunities we have been introduced to,” he says. “Increased interest on the part of sellers is being driven by improving company-specific performance during 2010, enabling owners to confidently sell on an up note.”

Two factors driving M&A in 2011 will be the supply of and demand for acquisitions, Solomon says. On the demand side, private equity has been increasingly active with $418 billion of committed, but unspent capital (according to Thomson Reuters), nearly $40 billion of which must be invested before it expires in 2011 (according to research firm Preqin). “Private equity has traditionally been attracted to multichannel retailers,” he says, and this trend will likely continue.

The supply of sellers is probably the most critical factor that determines M&A activity, Solomon says. “There is pent-up need to sell,” he says, and the multichannel sellers that were waiting for improved performance and market conditions may be ready to make a move in 2011.

3Q 2010 CATALOG INDUSTRY TRANSACTIONS

Company Market segment Buyer/investor Investment form Est. price (in millions)
JUL. HGI Holdings Specialty medical products Clayton, Dubilier & Rice/GS Capital Partners Acquisition NA
Personal Creations Personalized gifts Provide Commerce Acquisition NA
AUG. Country Store catalog Gifts Potpourri Group Acquisition NA
Whitney Automotive Group Aftermarket auto parts U.S. Auto Parts Acquisition $27.5
SEPT. Van Houtte Gourmet coffee Green Mountain Coffee Roasters Acquisition $890.0

Source: MCM

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