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Resuming the Binge

The wave of private equity takeouts that swiped dozens of retailers in 2005 and 2006 perked up again with a flurry of activity in June. Within a span of 10 days, Friendly's Ice Cream Corp. announced that it had reached a deal to be acquired by Sun Capital Partners, Inc., and Home Depot agreed to sell one of its supply businesses. Jones Apparel Group reached a deal to sell the Barneys New York chain to Istithmar, a Dubai-based private equity firm backed by the Dubai government, for $825 million. Meanwhile, Wendy's International Inc. put itself up for sale.

“I think retailers still provide great opportunities — they tend to have very stable cash flows and the ownership of real estate in some cases provides opportunities for structured financing,” says Robert Filek, partner in the transaction services group with PricewaterhouseCoopers.

So was the previous lull in activity a fluke or a sign that the current LBO era is coming to a close? Industry experts say private equity players are still targeting retailers, but the rising interest rates and doubts regarding consumer resilience are making them negotiate harder on pricing.

On a global scale, retail sector mergers and acquisitions activity had slowed down by about 12 percent in the first quarter of 2007, according to Dealogic, to $24.9 billion in 173 deals from $28.2 billion in 196 deals during the same period in 2006. Of that amount, financial sponsor-backed buyouts in the United States represented only $9.5 billion in eight deals, a 24 percent drop in volume since 2006.

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