Has the time come for corporate marriages in food retailing?

Mergers and acquisitions in crisis

Specialists polled by Wall-Street say they expect a major turnaround of M&A sector in retail, both in the midst of recessionary times and at the end of the downturn, when strategic and financial investors would think distressed-asset problem is solved.

“It is possible to see even more appealing offers in crisis. Because as we all know, good deals are made in crisis. Therefore, prices can become favorable to buyers, and offers will be more interesting accordingly”, Andi Dumitrescu, managing director at GfK Romania.

As he noted, the local retail industry is in full process of maturing, and a round of M&A deals would speed up the process. “In 2004-2006 there was a high M&A activity (by the entry of Carrefour, Julius Meinl, Edeka or Delhaize). Even if not at the same alert pace, this M&A process is likely to be continued, given the maturity of the market”, GfK’s representative said.

But as any acquisition process calls for long negotiation (sometimes more than a year), Dumitrescu forecasts major deals in food retail industry by as soon as year-end.

“The preferred acquisition route will go to local retailers”, said Flavian Pandele (photo), managing director of integrated advisor for retail, IMS Retail Bucharest. Furthermore, as Pandele continued, retailers will extend their own chains, on falling land prices.

High interest, limited offer

Although there are both interest and demand, the existent offer is not much diversified, said Guy Verduystert the former financial advisory director of Deloitte and current principal of The Counsel. “There will always be an interest in good acquisition targets irrespective of the economic cycle. Second, the food (and food retail) sector is more recession proof than many other sectors. Therefore the logical deduction would be that there would be an interest from both financial and strategic investors to pursue further acquisitions in this sector. There are few opportunities left in food retailing for players that have ran into problems. Also I believe it is unlikely that for example Delhaize (Mega Image) would exit now”, said Verduystert, adding that a revival of M&A was more likely to come at the end of this year.

Considering that food retailing is still a profitable business in Romania, and more so than in other more mature markets where competition amongst the main food retailers is very fierce, the general trend in food retailing is focused on building large-surface food outlets rather than on acquisitions.

“The general trend in food retailing is focused on building large surface food outlets out-of-town (super and hypermarkets), which is done through green-field rather than acquisitions”, Verduystert added.

An international player may anytime enter Romania, he continued, as the market still offers excellent prospects for retailers in general. “The consumer market is large enough and still relatively under developed to justify a presence. Add on that there is less (but on the increase) competition and thereby profit margins are healthier in Romania than in other more mature markets. Food retailing will continue to expand and once the economic recession wanes, I believe other non-food retailers like electronics, furniture and DIY chains will either further develop or enter this market”.

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