As we previously reported in Looking Back: Retail Antitrust Enforcement in 2015, last year was a booming year for consumer products mergers (and the antitrust review of those mergers). With a robust market and incentives strongly in favor of further acquisitions, we expect the trend to continue in 2016.
First, interest rates remain historically low, which keeps credit flowing and allows debt-funded transactions to continue in the hopes of converting efficiency and cost-cutting strategies to profits. As the benchmark rates are expected to rise in the coming years, both established industry stalwarts and private equity buyers are expected to take advantage of the currently low rates to push through more deals over the next 12 months.
Second, sagging, once-great brands which still have strong recognition must evolve to compete in a dynamic marketplace. To do so, strategic acquisitions (or sales) may be critical to profitability and survival. As consumers’ retail habits, ecommerce and brand awareness have changed, many older brands risk losing their competitive edge and may seek a deal to remain relevant. In the past few years we have witnessed Men’s Wearhouse (Joseph A. Bank), Safeway (Albertson’s) and Sears (Kmart) buying lackluster brands in a changing market in attempts to reinvent themselves and the brand they acquired. This year, we expect this trend to continue, especially as brands like American Apparel and Sports Authority (rumored) head to bankruptcy and look for suitors to maintain their brand.
In fact, rumored mergers and announced deals in progress are strong evidence that last years’ acquisition surge is likely to continue. Newell-Rubbermaid and Jarden announced in mid-December that they reached a $13.2 billion deal to merge and create Newell Brands. Hasbro and Mattel are reportedly in talks to combine into a $20 billion toy conglomerate. But ripe market conditions for transactions may mean a perfect storm for antitrust agency scrutiny. Emboldened by recent victories, such as Sysco/US Foods, Electrolux/GE Appliances and Jostens/American Achievement, the U.S. antitrust agencies have shown a willingness to define markets creatively and examine the competitive impact of a deal closely. We expect increased agency scrutiny and broad enforcement efforts as consolidation continues in 2016.
Acquiring firms are looking at potential targets with the antitrust review process in mind. Often, potentially problematic deals face close antitrust scrutiny but escape an effort to block the transaction by offering strategic divestitures that serve both the parties’ interests and quell the agencies’ fears. Recognizing the overlaps likely to pique a regulator’s interest, understanding the deal may not survive review in the same form originally proposed, and strategically accepting divestitures have allowed transactions to reap efficiency benefits and avoid a crippling antitrust challenge.
Third, despite a downward trend in private equity transactions, private equity buyers remain significant players mainly through the availability of inexpensive financing. Department stores, grocery stores and food and beverage retailers have recently been targets of private equity firms seeing opportunities to reduce costs and turn around fledgling brands such as Belk. Importantly, most private equity acquisitions raise little antitrust concern because the private equity buyers are almost never competitors in the market already, so the potential anticompetitive effects from higher concentration, fewer competitors and increased chances of collusion are rarely implicated. This makes the regulatory review process faster and more certain.
Cheap financing, private equity resources, reinvention of once-great brands and savvy, strategic divestitures to ward off antitrust agency challenges will continue to drive retail industry transactions throughout 2016.