Private Equity Firms Are Hungry for Retailers, But Only the Best of Them

With plenty of cheap debt available and new capital gains tax regulations scheduled to go into effect next year, private equity firms have once again become bullish on retail acquisitions. After the initial thaw in acquisition activity in 2010 and 2011, 2012 has brought with it a frenzy of negotiations for leveraged buyouts in the retail sector, according to a panel of executives speaking at Argyle Executive Forum’s “2012 Leadership in Retail and Consumer Products” event, which took place in New York City on Sept. 20.

Year-to-date, leveraged buyouts of U.S. retail companies have reached 27 transactions valued at $7.66 billion, including acquisitions of both majority and minority stakes, according to Dealogic, a global research and consulting firm. This is far short of year-to-date volume in 2006, which marked the peak for leveraged retail acquisitions, but still represents a significant improvement over full-year figures for 2008, when private equity firms bought 28 retailers valued at only $1.16 billion. The numbers are also ahead of year-to-date volume in 2011, which included 29 acquisitions valued at approximately $4.45 billion.

This time around, however, experienced private equity players want to stick with only the healthiest retailers and are not willing to pay top dollar for firms whose performance through the recession has been only okay. In today’s market, companies that have become the stars of the sector often get priced at multiples of 9 to 11 times their Ebidta, according to Ben Geiger, partner with Freeman Spogli & Co., a private equity investment firm that in recent years owned stakes in Petco, hhgregg, Sur La Table and El Pollo Loco. That has driven up expectations of mediocre retailers, even though from the buyers’ point of view they should be looking at valuations of about 7.5 to 8.5 times their Ebidta.

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