Buoyant market for buyouts?

The UK, having witnessed a glut of acquisition activity by domestic players, is now being scrutinised by foreign businesses. Clive Grant is a director at Corporate Intelligence on Retailing. He can be contacted on 0171-696 9006.

The very nature of retailing, where corporate advancement is driven by expansion, lends itself to growth through acquisition and merger. Acquisition is assuming a higher priority as the market matures, and becomes more concentrated and competitive.

Up to and during the Seventies, British retailers saw organic growth – opening more shops – as the best expansion route. For much of the Eighties, however, the sector was seized by acquisition fever. Takeover spending peaked in 1989 at 6.3bn (compared with 3.3bn in 1988, 5.0bn in 1987, 2.7bn in 1986 and 4.3bn in 1985). This surge of buying came to an abrupt end in 1990 (when acquisitions were valued at just 622m) and remained around that level until 1993.

The pattern of acquisitions in 1994 was a reflection of prevailing economic conditions. A partial return to pre-recession strategic take-overs – Tesco’s winning bid for William Low after a tussle with Sainsbury, for example – combined with rescues from receivership and corporate restructuring. Other substantial transactions in 1994 included Sainsbury’s expansion in the US and, in the wake of Argyll’s withdrawal from discounting, the disposal of its Lo-Cost chain. In all, the number of transactions exceeded 50 for the first time in three years and their combined value rose above 1bn for the first time since 1989.

Overseas acquisitions were of considerable significance – in percentage and absolute terms – between 1986 and 1988, when British retailers were scouting the US for prospects. Since then, there have been only a few of substance. But, as in 1992, when Kingfisher took on French electricals retailer Darty, they have accounted for a hefty slice of total transaction value. Sainsbury’s 1994 purchase of a stake in US grocery chain Giant Food followed that trend.

The strong acquisition trend in 1994 spilled over into 1995, Sainsbury’s again leading the way with the purchases of Texas Homecare (to consolidate its Homebase DIY chain) and of Nurdin & Peacock’s Cargo Club warehouses. Other acquisitions of note – and some surprise – included Thorn EMI’s purchase of the bookshop chain Dillons (from Pentos) and the sale of most of its Rumbelows chain to German computer company Escom.

In a move reminiscent of Eighties adventurism, Sheffield entrepreneur Stephen Hinchliffe, having taken Salisbury’s and Sock Shop on board in 1994, has continued building Facia, his fashion and accessories conglomerate. The latest additions are Red or Dead (fashion), Mayfair (luggage), Torq (jewellery), Oakland (a menswear chain from C&A), Contessa (lingerie from Courtaulds Textiles) and, most recently, the footwear chain, Freeman, Hardy & Willis (from Sears). By April 1995, Facia had 530 shops and annualised sales of 200m. The FHW acquisition adds a further 245 shops and 75m in sales.

The second half of the year has brought the long-awaited buyout of Gallaher’s Fourbouys CTN interests and the sale of Asprey to a company controlled by the Sultan of Brunei’s brother, for 245m. Meanwhile, Tesco has astutely expanded its lone British presence in the Eastern European grocery sector – a market German, Belgian, French and Austrian retailers entered early. The total of acquisitions by UK companies was running at 965m in early November and includes Merchant Retail finally disposing of Normans and Dewhurst’s receivers negotiating a buyout of the rump of a former national chain.

In most UK retail sectors, concentration has reached such a level that large-scale domestic acquisitions are in danger of rejection by the Monopolies & Mergers Commission. At the same time, government curbs on out-of-town retail developments – a motor for growth over the past ten years or more – could obstruct many retailers’ expansion plans.

Moreover, in the current, more price-led market, it seems certain that they will be under continued pressure to find new ways – or to improve on old ones – for sustaining profitability.

In such circumstances, many companies, subject to the size of war chests and borrowing profiles, may favour acquisitions again. On the home front, this could lead to a higher rate of small-scale takeovers, together with some of the more vulnerable larger groups coming under threat from smaller, but aspiring, challengers or from closer competitors where a chance of escaping MMC censorship is perceived. Susceptible sub-sectors include clothing, furniture, CTNs, sports goods and, inevitably, electricals. It is equally likely that larger retailers will diversify their activities on the one hand and intensify their searches for overseas opportunities on the other.

As the globalisation of retailing proceeds apace, the UK is certain to come under close scrutiny from foreign distribution groups. Many of these – from North America and the Far East, as well as Europe – have the resources and the will (as competitive pressures mount in their home markets) to consider any prize, regardless of its standing in the UK retail league table. In the past, foreign retailers – for example, Toys ‘R’ Us and Ikea – have tended to start from scratch in Britain. The rest of the decade may see a heightened foreign presence, the impact of which will be the greater since it will be achieved by acquisitions.


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