Retail M&A focuses on the essentials in 2020

Global retail M&A value increased year on year, as appetite for supermarket and convenience store assets resulted in big-ticket deals

The retail sector has been among the hardest hit by the COVID-19 pandemic. Governmental lockdowns across the globe have spelled disaster for brick-and-mortar retailers, with stores forced to close and mass layoffs a reality for many.

Yet despite the challenges facing the industry in 2020, the value of M&A deals targeting the retail sector increased 15% year on year. A total of US$66.1 billion in deal activity was recorded between Q1-Q3 2020.

Total M&A value in the retail sector reached US$40.7 billion in the third quarter—the highest quarterly total since Q2 2017. Volume, on the other hand, failed to register a yearly increase, with 115 transactions recorded in the same quarter. Although this was higher than the 98 deals recorded in Q2, the Q3 total represents the second lowest quarterly volume since Q1 2009.

Japanese interest drives US retail M&A

A large portion of global retail M&A value in the first three quarters of the year was achieved by the largest deal of the year: 7-Eleven’s US$21 billion acquisition of convenience store chain Speedway from oil & gas firm Marathon.

The deal, which is the largest in 7-Eleven’s history, enables the company to grow its presence in the US market through the acquisition of an estimated 3,900 Speedway stores across 35 states. The Japanese-owned firm is looking to cement its position in the global retail market as it experiences shrinking growth in its own home market.

This megadeal ensured that the US was the top country by value for M&A in the retail industry in the first three quarters. In fact, the Speedway deal was so large, it made up over 78% of total deal value for retail M&A in the US in the first three quarters of the year and helped ensure that total value for retail sector M&A in the US already exceeds the annual total for 2019 (US$13.9 billion).

It wasn’t only thanks to the Speedway deal that the US dominated dealmaking in the sector. The US also came in first place by volume, with 90 deals across the first three quarters—nearly triple the volume in the second-place country, Japan, which recorded 31 transactions.

Private equity bets on US supermarket potential

Supermarket sales have risen amid the pandemic, as consumers are spending more on essential items. Online groceries sales, in particular, have experienced a spike.

Apollo Global Management’s US$1.75 billion investment in US supermarket operator Albertsons Company has been received as a positive sign for the US supermarket industry. In April this year, Albertsons announced a 34% increase in sales year-on-year. According to Vivek Sankaran, President and Chief Executive Officer of Albertsons Companies: “The investment led by the Apollo Funds represents a vote of confidence in both our business and our long-term strategy.”

Asia sees healthy activity

The total value of M&A in the Asian retail sector in the first three quarters of 2020 was US$24.2 billion, a 54% increase on the same period the year before. Volume, on the other hand, fell 12% to 96 deals over the same period.

The largest deal in Asia was Tesco’s sale of its business in Thailand and Malaysia to Thai conglomerate Charoen Pokphand for US$10.6 billion. The deal, announced in early March, has been approved by Tesco shareholders and is awaiting approval by merger control authorities.

The acquisition—the largest conducted by a Thai buyer on Mergermarket record—marks a step away from the international stage by Tesco’s. Instead, the company has stated it will focus its activities within the UK, Ireland and central Europe, which it believes have increased potential during the pandemic.

Retail giants battle over India’s retail sector

In the third quarter, Reliance Retail Ventures announced its intention to purchase the retail, wholesale and logistics businesses from India’s second largest retailer, Future Group, for US$3.4 billion. The deal continues Reliance’s expansion into India’s rapidly growing retail sector, giving it control of an estimated third of bricks-and-mortar stores within the country.

It also marks the Indian retail giant’s intention to shift from an industrial to a consumer goods and telecoms conglomerate while making headway in India’s growing ecommerce industry. the transaction is facing hurdles, however, as it has been widely reported that Amazon—which acquired a stake in Future Group in 2019—has objected to the deal on the grounds of a breach of contract.

A shift in focus

Retail stores selling essential items—such as supermarkets, grocery and convenience stores—attracted the majority of dealmaker attention so far in 2020. This vote in confidence is evident in the top deals of the third quarter: Nine out of the top ten deals in the retail sector targeted supermarket, grocery or convenience store assets.

As consumers continue to rely on essential items, it is reasonable to expect that interest in such assets, among corporate and private equity firms alike, will continue to rise.

Looking ahead, global retailers will need to focus on catering to their customers’ spending behavior, radically altered by the COVID-19 pandemic. As the crisis rolls on into the winter months, consumers will be making an even greater share of their purchases online.

This shift will push companies to expand their online presence and omnichannel capabilities—a trend that had already been developing pace before the pandemic hit. Meanwhile, improving the in-store experience and health and safety facilities within physical stores will become even more critical to their survival.

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