Mergers Seen Accelerating

MARK HAMSTRA

ELMWOOD PARK, N.J. — Industry merger and acquisition activity is poised to pick up during the next few years after a lull in 2009, according to a webinar by The Food Institute here.

The projections of increased activity come as talk surfaced in recent weeks about the possibility of a buyout offer for Supervalu, Minneapolis, and as that company reportedly continues to seek buyers for some of its assets.

From 2004 through 2007, large food retailers “pruned” many of the excess stores they had previously acquired, but that process slowed in 2009 amid restricted access to capital for buyers, according to presenters at the webinar.

“We think that will trend up during the next 36 months,” said David Schoeder, a principal in The Food Partners, Washington, which assists in industry mergers and acquisitions.

In addition, he said, he expects more smaller retailers to exit the market, as many lament that the pressures have become too intense — independent operators are saying, “We're not having fun any more,” Schoeder said.

Some operators also are exiting the business “because they believe the capital gains tax will increase, and they want to take advantage of the tax situation in the near term,” he added.

He noted that the financial multiples that are used in valuating companies for acquisition have not changed in the last two years, despite the economic downturn. Instead, the input numbers have changed.

“We used to figure a 2%-4% increase in sales [at the company being acquired],” Schoeder explained. “Now we are looking at flat sales,” and more pressure on margins, leading to reduced outlook for EBITDA.

Large supermarket companies will continue to focus on in-market strategic acquisitions (see comments from Kroger on this page), while financial buyers will focus on buying distressed assets at bargain prices or on niche opportunities.

The requirements for financing have also changed, he noted.

“In the old days, meaning 2007, if you were buying a company, you could pay with almost all debt, and with very little equity down,” he said. In 2009, banks became more stringent with lending and would only finance about 3.4 times the acquired company's cash flow. That meant buyers needed to come up with 2.6 times cash flow in equity, for example, if they were paying six times cash flow to acquire the company.

“Retail grocery is at a disadvantage because it is a cash-flow business, and the companies don't have the collateral base to borrow sufficient capital,” Schoeder said.