Have cash, must shop: Deals are back

By Parija Kavilanz, senior writer


NEW YORK (CNNMoney.com) -- After cutting back on expenses and making some hard choices in the recession, it looks like it's time to go shopping.

At least that's the attitude of the nation's merchants. After a long dry spell, and restructuring moves that left them rich with cash and itching to bag some bargains, stores and sellers are shopping around for their rivals.

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And by trimming the roster of companies selling goods, consumers stand to benefit by getting better products and better stores, according to industry experts.

"These deals will help the better retailers become more innovative ... and in tune with what consumers want," said Love Goel, CEO of GVG Capital Group, a private equity firm that focuses on retail.

Retailers took the spotlight this month when No. 1 mall operator Simon Property Group (SPG) made a $10 billion all-cash bid for its troubled rival, No. 2 mall operator General Growth Properties (GGP). General Growth spurned Simon's bid, but that hasn't deterred Simon's interest.

In addition, Walgreens (WAG, Fortune 500), the largest U.S. drugstore chain, announced it was buying New York City-based rival Duane Reade in an all-cash offer of $1.1 billion.

Cathy Jaros, managing director of Amherst Partners, an investment banking firm, noticed a pick up in merger and acquisitions (M&A) late last year, including Kraft Foods' (KFT, Fortune 500) nearly $20 billion deal with Cadbury.

"Companies have decided to get their head out of the sand and that life goes on," said Cathy Jaros, managing director of Amherst Partners, an investment banking firm.

Spotting targets

Ken Lee, who heads the M&A practice at consulting firm A.T. Kearney, said the recent recession has created two buckets of retailers -- those who restructured their business to thrive and those who restructured to survive.

"Those who restructured to thrive are in a better position to grow and to do it through acquisitions," he said. The survivors, he said, are more vulnerable to being acquired.

Industry experts also say that cash-rich retailers aren't as reliant on private equity firms, as they have been in recent years to fund the mega-deals.

"Some corporations are coming out of the recession with stronger balance sheets and the cash to make strategic acquisitions on their own," said Justin MacFarlane, director in the retail practice at AlixPartners, a global business advisory firm.

MacFarlane expects the biggest volume of deals will happen among "middle market" retailers, or companies with sales of up to $2 billion.

GVG Capital's Goel highlighted four trends that could drive deals.

He said "orphan" divisions in large conglomerates, "divisions that have fallen out of favor with their parent company," are good targets.

InterActive Corp., headed by CEO Barry Diller, could likely shed some of its retail assets, Goel said.

"There are also companies that should not be public," he said. "These buyout targets typically have cash flow of less than $25 million (and) have growth potential, but are spending too much money just to remain public."

He cited Bluefly (BFLY), an online seller of designer clothing and accessories, and teen clothing chain Delia's (DLIA) as examples.

"A private equity partner could provide the money and expertise to grow these chains," he said.

Another target group is well-run, private companies that need more money to support their growth.

"These are companies with $100 million to $1 billion in sales," he said, including Dots, an Ohio-based clothing chain with 400 stores, and Bluestem Brands, an Eden Prairie, Minn.-based merchant and online seller.

Goel also said companies that simply have too much debt, typically owned by private equity firms, are prime takeover candidates.

"Companies like Brookstone and Oriental Trading have strong brands but their businesses have suffered from unrealistic expectations and too much overhang," he said.

Looking at her sectors, Amherst Partners' Jaros said many large companies are looking at ways to attain national distribution of their goods.

"Refrigerated foods companies tend to be regional players. So a big foods company can acquire these type of regional players to get a national footprint," she said.

Better for shoppers

"Through mergers and acquisitions, companies can cull overlapping stores and underperforming stores from their portfolio," AlixPartners' MacFarlane said.

What's left are better-funded stores that have a reason to exist and are selling things that consumers want to buy.

If these deals help consolidate the U.S. retailing industry, Goel and others say it's a positive for consumers.

"The bad retailers are already dying. The economy has killed them," he said.  To top of page

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