The vultures are already circling as Covid-19 leaves weaker companies in distress.
Last week, when Boohoo, a British online fast-fashion retailer, reported stronger-than-expected earnings, it noted it had its eye on struggling rivals. “It is likely many opportunities will arise in the coming weeks and we will take a look at those and make an assessment on whether we can add value,” said Neil Catto, the company’s finance director.
It won’t be the last company looking to pounce. Covid-19 has disrupted dealmaking as it has roiled financial markets and left firms trying to stabilize their businesses. But once the situation settles, it could unleash a wave of mergers and acquisitions as larger, well-capitalized players and private-equity groups use the opportunity to grab up companies left vulnerable by the crisis at bargain prices.
The scenario seems especially likely in retail, where the crisis has hit many companies hard and is exacerbating the gap between winners and losers (Quartz member exclusive). “This is going to be a very tough year for the industry where many brands will disappear or will change hands,” Javier Seara, sector leader for fashion and luxury at Boston Consulting Group, told Quartz.
A report this month from McKinsey and fashion-trade publication Business of Fashion estimated 34% of publicly traded fashion companies in Europe and North America were showing signs of financial distress before the pandemic. With two or three months of store closures, that number could rise above 80%, it said. The report predicted in order to survive many companies will have to find aid, file for bankruptcy, or “become targets for stronger players or private equity firms.”
Companies may look to take over direct competitors to combine their strengths and streamline their costs. They may look to pad weak points in their offerings, as Gap did when it bought activewear maker Athleta in 2008, during another economic crisis. They could seek out companies with different business models, or know-how they don’t possess. For those with strong balance sheets, opportunities of all sorts will be available.
Among those likely to go shopping are private equity firms. In recent years they’ve made some high-profile purchases, such as Carlyle Group buying half of streetwear powerhouse Supreme in 2017 and Permira acquiring a controlling stake in cool-girl outfitter Reformation last July. As of last June, private equity had nearly $1.5 trillion in ready capital at its disposal, according to a recent report by Preqin, a data and research firm for finance professionals. “Fund managers with massive stockpiles of dry powder to use up will be in a good position to generate strong returns,” it noted.
Big-box retailers like Walmart and Target and e-commerce giant Amazon could also find opportunities. They’re among the few retailers that could actually come out of the crisis stronger and will be well-positioned to expand.
It could take time before the deals get moving. The crisis has disrupted the normal flow of business, even threatening to cancel transactions in the works. Retail group L Brands and private-equity firm Sycamore Partners are currently in a legal battle after Sycamore tried to wriggle out of its agreement to take over Victoria’s Secret.
But the next few months should see action starting. Elsa Berry, founder of Vendôme Global Partners, an advisory firm for luxury M&A, told Business of Fashion (paywall) it’s getting ready. “Buyers are mapping out their ideal acquisition targets right now,” she said.