No sale: Why Sax expert says retail sector is facing strong headwinds when it comes to deals

There’s something besides an increasing amount of merchandise that’s being stolen from retail establishments today. They’re also seeing mergers & acquisitions interest pilfered away.

Retailers have been reporting that shoplifting has been on the rise over the past few years, according to a survey run by the National Retail Federation.

It’s eating into profits. Kevin Moyer, a partner at Sax LLP and head of the Parsippany-based firm’s Transaction Strategy & Transformation group, said it’s also reducing the amount of retail-based transactions landing on the desks of M&A professionals.

“When you couple this trend with the issues of inflation, declining demand, foot traffic and competition from e-commerce — there just isn’t much movement in that area from an M&A perspective,” he said. “It’s just one more headwind. And, so, deals there are slow, if not totally nonexistent.”

Although Moyer said theft in the retail space would’ve always been accounted for historically, the amount of it that companies are battling today exceeds what a potential partner would expect. Retail establishments themselves are taking steps such as condensing their physical footprint and shifting operations out of certain locations, Moyer said.

The election factor

When Kevin Moyer starts seeing the first televised presidential debates airing, there’s usually no argument in his mind about it:

It’s going to mark a change in mergers & acquisitions work.

That’s because — to those handling business transactions — election years hold different prospects than just whose name is going to end up appearing on the most ballots.

Moyer, a partner at Sax LLP, said one of the most prominent examples of that is the greater volume of domestic companies sometimes rushing into purchases or merger agreements with companies in other countries.

“It’s always an interesting time for M&A, particular for cross-border interactions,” Moyer said. “As can be the case when you head into an election year, when it comes to business with places such as Europe or Latin America, you might see more velocity there.”

According to various reports, mergers & acquisitions tend to see an uptick during presidential campaigns. Less so, however, when there’s an incumbent president seeking a second term.

S&P Global Market Intelligence data points to the strongest period of M&A in the U.S. occurring during the 2012 presidential campaign, when more than $300 billion in deals took place between September and November of that year.

The day after the election is called? According to S&P Global, you can expect an immediate deal slowdown.

In other words: It’s not a good look for potential acquirers.

Moyer expects the bounce-back from this issue might not be as rapid as challenges associated with stock pullbacks that have come up recently in other sectors. He gives the tech industry’s recent struggles as an example of that.

“Those companies were hurt for a while, but venture capital firms are already starting to get comfortable again and you’re seeing a re-uptick in deals,” he said. “A lot of that is driven by excitement about the advancement of AI and the Internet of Things. As you look toward the next six to 12 months, you’re going to see a lot more activity in that sector as things pick back up, even if it’s not blockbuster deals.”

Other sectors, such as health care, prove more resilient to the ups and downs of the economy and everything that comes with that, Moyer said.

“Those sectors haven’t done anything to impress — you haven’t had a lot of big hospital deals as of late — but they also haven’t had too much trouble, either,” he said. “They’re just trucking along.”

If there’s ever a time for deals to have to make sense, Moyer said, it’s when the interest rates are rising and the lending landscape isn’t what would be described as loose.

Deals involving retail businesses have struggled to reach that threshold, especially as these businesses are still coping with the pressure from direct-to-consumer providers such as Amazon.

Foot traffic insight company reports that retail traffic was down 8.1% in March of this year compared to what it was in 2019. New Jersey, however, is one of the best performing states in that measure, according to the company’s data.

“The way I see it, in another five years, the sector of course is going to exist, but it’s going to be a much more drive-through based business,” Moyer said. “You’ll place an order, drive up to pick it up and go home.”

But, do retailers need the large square footage they currently have if that’s the case?

Moyer expects not. There’s going to have to be a readjustment, he said.

“And, again, these aren’t the sort of good indicators for business that an acquirer would find appealing,” he added. “Retailers are going to continue being under a lot of pressure.”