The outlook on retail acquisitions

August 1, 2004 By    

Assessing the future of acquisitions is like asking someone to predict the

At a meeting in New England one year, I heard a speaker from the National Weather Service talk about giving an outlook. “It is impossible to predict the
weather more than 48 hours in advance,” he stated. When news reporters
would ask him if he expected a cold winter, he’d reply, “Well, I guess;
it usually does get cold in the winter.” They would then ask if he expected
much snow. Again, he would reply, “Well, it usually does snow in the winter.”

The next morning’s newspaper headlines would read: Extremely Cold Winter with Heavier than Normal Snow Fall Expected.

What do I see in acquisitions? I see more coming. If I owned a retail plant,
I would be searching for a buyer.

Three things would concern me: The first is John Kerry. If elected, your tax rate on a sale will likely double (he has almost promised as much).

Second, oil prices are very high. The resulting higher price of propane increases your working capital needs and either sucks up more of your equity or increases your bank borrowings. Either would worry me.

Finally, the lid has blown off the top and the price of steel continues to

Oil prices cannot stay at $40 per barrel too long. OPEC has always held these
prices between $22 and $27. Oil should settle in around $28 to $32, but will
not stay at $40.

I have heard people say that crude could go to $100 per barrel. These folks
are like Chicken Little who ran around and cried, “The sky is falling.”
The run up in the price of crude is attributable to the fellows who OPEC nations call “Wall Street refiners.” They are paper producers. In the same
way that reporters embellished the weather, Wall Street refiners exaggerate
information about crude oil. OPEC countries have to sell crude to cover the
cost of their imports, and the United States and China must buy it. Basic market fundamentals should bring crude down to the $28-$32 range, but the higher cost does adversely affect your working capital.

As for steel, I would turn you over to a tank manufacturer. The cost of steel
is Chinese to me right now. It clearly has a negative impact on your working
capital, however.

Unlike the high-flying days of yester- year, there are four types of buyers
in today’s market. The first is the large, been around a long time and outgrown their venture capital restrictions type of master limited partnerships. They can, do and pay anything they want.

The second is the new MLP that still have to deal with venture capital restrictions.

For instance, they may not be able to do a stock purchase or pay more than a
six multiple.

The third type of buyer is a large, regional retailer that uses bank financing
but has sufficient equity to pay a six multiple. They do not really want to,
but can.

The fourth is the new regional that uses bank financing with some equity behind them. They can have trouble with the bank by paying more than a five multiple.

These buyers have learned from the excesses of the 1990s and so should stay
around awhile.

In acquisitions, a deal is not always a deal and all buyers are not pure in
intent. There are some ugly things in the acquisition market, and they will

There is the “11th hour tactic” where, having agreed on a price, the buyer performs due diligence and prepares the contract. You believe you are ready to close and the buyer calls and informs you that, for some unexplained reason, they are unable to pay the agreed upon price. They offer you 10-15 percent less.

There is the “assessing the market” tactic. A buyer looks at your business under the premise of being interested, but is making an offer on a cross-town competitor and wants to assess your pricing strategies. They are just working on their offer, not on buying you.

If you are selling, keep your eyes open.

What is in the long-term future?

Many acquisitions and a continuing consolidation of the industry should occur. Will it be quick? No, a seller only sells when he believes his time is done. There will be only so many per year.

Should future sellers plan for their sale? Planning is an important part of
a business. If they plan to sell in the next few years, they should get a valuation of their business now and a look at what they might do to increase their value in the future.

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