Evidence suggests that the level of M&A activity in the sector has already slowed and we believe that it (and private equity investment, in particular) is likely to be more muted in the remainder of the year as what was previously feared has now become reality.

The resurgence this year of private equity investment activity in the retail sector was reported on in some detail in a recent edition of this magazine but it is also worth noting that some of the corporates have been busy too with Asda agreeing to acquire the 193 Netto stores in the UK, Waitrose seeking a market leading-position in the Channel Islands (where we advised the vendor), Halfords acquiring car servicing specialist Nationwide Autocentres and N Brown picking up online lingerie retailer Figleaves.com; and it is interesting too, that the latter three targets were all sold by private equity owners.

That the private equity industry is a seller of retail assets should not be a surprise - on our reckoning there are more than 120 such businesses sitting in private equity portfolios. Of these, almost 70 were acquired more than three years ago and their owners are probably thinking now about the form and timing of appropriate realisation plans - provided, of course, that the businesses were acquired on sensible terms and have performed to plan, or better, since then.

But does this really mean that the level of M&A activity is going to continue at the pace we have seen in the first half of the year?

We are not so sure, as we feel that one of the major catalysts for the high level of activity this year was the desire on the part of vendors to exit before the election to avoid the uncertainty created by the event itself, the prospect of higher capital gains tax and VAT and substantial cuts in public sector spending.

Indeed, the evidence suggests that the level of M&A activity in the sector has already slowed and we believe that it (and private equity investment, in particular) is likely to be more muted in the remainder of the year as what was previously feared has now become reality.

So, we think that it is unlikely that we will see a repetition of the frenzied auctions and sky-high pricing levels seen earlier in the year (such as of Pets at Home and HobbyCraft) but we do expect that there will be trade in some of the better quality, more defensive and higher growth businesses - and there are still some of them left in both private and private equity ownership and usually in areas where the grocery multiples do not really operate (yet).

In our view, private equity houses (and particularly any banks that they are using to provide debt) will mostly be cautious buyers of retail businesses until the economic outlook becomes clearer, but in the meantime the pressure will grow to invest their capital and to realise investments from earlier vintages and this should generate some M&A activity over the next six to 12 months; but we may also see further activity from the corporate buyers as they seek new areas of growth.

Clive Baker managing director, McQueen

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