US leisure and retail M&A roars back

Investors are finding businesses showing resilience

Healthy deal activity has returned to the leisure and retail sectors—areas of the economy that were among the worst affected by the pandemic.

Together, the leisure and retail sectors saw M&A value reach US$41.7 billion in the first half of 2021, a more than fourfold increase on H1 2020. Volume rose by 59% year on year to 154 transactions.

Many of these deals were in direct reaction to COVID-19, as investors flocked to businesses that proved resilient or showed strong signs of a quick post-pandemic bounce back.

H1 retail recovers with a vengeance

Retail M&A activity in the US came to US$16.1 billion in the first six months of 2021—more than four times the total value in H1 2020. The number of deals rose by 43% to 86.

The influence of the COVID-19 pandemic appears in the top deals of H1 2021, with investors—especially the cash-rich private equity industry—betting that businesses that received a boost during lockdowns would be able to take advantage of their momentum as the economy transitions out of the pandemic. The top three deals of the sector all involved PE groups.

The largest retail sector deal in the US, the US$4.4 billion take-private of crafting materials and home decor retailer Michaels to PE investor Apollo, is a key example. Michaels benefited from a boost in sales during the pandemic as consumers took up home-based hobbies like crafting, and redecorated their living spaces.

The transaction is seen as a bet that Michaels can continue to capitalize on the momentum generated by the pandemic. Apollo also plans to enhance the company’s omnichannel sales capacities—building on the rise in online sales Michaels experienced during lockdowns.

The second-largest retail deal in the US in H1 2021 shared many of the same characteristics as the Apollo/Michaels transaction. The US$4.2 billion transaction similarly saw a PE firm, Hellman & Friedman, take private a listed home decor retailer, At Home Group.

The third-largest deal targeted yet another home decor firm. In a US$1.6 billion deal, Blackstone acquired Interior Logic Group, which provides technology-enabled interior design services. The deal is not only an endorsement in the future of the home decor market post-pandemic, but also in the US housing market and the continued spread of digitalization to pockets of the economy that have resisted digitalization until now.

The return of leisure 

Fueled by confidence that restaurant dining and travel was returning in the US, leisure sector M&A in the country totaled US$25.6 billion in the first six months of 2021—more than in any H1 period since the financial crisis of 2008. Volume rose 83% year on year to a total of 68 transactions in H1 2021.

The largest of these was a SPAC deal: Fertitta Entertainment, the parent company of hospitality group Landry’s and Las Vegas-based casino Golden Nugget, announced its intention to combine with New York Stock Exchange-listed FAST Acquisition Corp. Announced in February, the deal was revised at the end of June to include more assets owned by Fertitta’s owner, Tilman Fertitta—which now gives the transaction an enterprise value of US$8.6 billion.

FAST was founded by restaurant industry veterans Doug Jacob and Sandy Beall in June last year to take advantage of opportunities in the restaurant industry in the wake of the pandemic. According to the investor presentation, once the merger is complete Fertitta plans to pursue M&A opportunities to acquire distressed assets post-COVID.

Travel comes back 

Greater confidence in the hospitality sector has extended to the hotel industry.

In March, Blackstone and Starwood Capital announced the US$5.6 billion acquisition of Extended Stay America, a chain of economy apartment hotels. Extended Stay proved more resilient throughout the pandemic than other hotel chains, as it provided accommodation to essential workers and others needing temporary housing. The transaction was the second largest of H1 in the US leisure sector.

But activity in the hotel segment also included deals that served as bets on the return of tourism and vacations. The second-largest US leisure sector transaction of the first half of the year, Hilton Grand Vacations’ acquisition of Diamond Resorts, is a prime example. The US$3 billion combination will create a leading timeshare operator in the US market, doubling the number of options for its respective membership bases.

How to  handle continued uncertainty 

Although overall M&A in the US witnessed a reassuring H1 2021, the retail and leisure sectors still face considerable uncertainty. While COVID-related restrictions have been eased or entirely lifted in most jurisdictions across the US, the retail and leisure sector is still vulnerable to renewed disruption from variant strains of COVID and related reimplementation of restrictions.

Investors and dealmakers interested in these industries will have to keep these potential headwinds in mind as they search for deals. Savvy investors should still be able to identify resilient businesses and take advantage of the opportunities that have presented themselves as a result of disruptions, ensuring a steady flow of deals in H2.

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