Cowen Sees New Cycle for Retail M&A in 2016
In an extensive research report on the Retail sector Wednesday, multiple Cowen analysts including John Kernan, Oliver Chen, and Jerry Gray discussed a new cycle of M&A in the retail sector starting in 2016. The analysts said sector dislocation and valuation contraction creates opportunities for M&A and LBOs in retail. Meanwhile, they believe the market is under-appreciating the opportunity for a select number of companies expected to participate.
Cowen highlights that the group now trades at an average of 9x FY1 EV/EBITDA versus 11x FY1 EV/EBITDA in January 2015 This has rendered valuations more palatable, and the group trades on average at slight discounts to historical transactional M&A and LBO comparables.
"Based on our analysis of prior M&A and LBO history in retail, the characteristics of successful acquisitions have revolved around 1) sensitivity to valuation relative to growth and risk, 2) acquiring smaller brands operating below peak levels of productivity, and 3) credible cost and revenue synergies," the analysts commented.
Analysts sees HanesBrands (NYSE: HBI) remaining the top deal maker in the apparel sector. "We estimate HBI can source $1.7B in deals through 2019 without altering its current mix of net debt and equity given our expectation for $600MM in 2016 free cash flow," they said.
Commenting on attractive takeover targets, the firm highlighted : (A) smaller market cap attractive brands that could fit as tuck-in acquisitions including LULU, KORS, RH, KATE, TUMI, and MOV, and (B) retailers with core competencies/advantages that have depressed valuations vs. historical peaks such as AEO, FOSL, TIF, and URBN.
The firm's top deal-maker/executor pick for specialty retail is Outperform-rated Signet Jewelers (NYSE: SIG) given its strong track record of acquisitions and strong integration execution of Zale, which should deliver DD+ earnings growth.
In the food space, Hain Celestial (NASDAQ: HAIN) is seen as the best deal maker. "Hain is our top pick in the Food sector, given the company's strong track record of successfully identifying and integrating new brands, having invested nearly $1B in acquisitions over the past 4 years. Acquisitions have contributed to a 25% sales CAGR since 2011, and we look for the company to continue to use its balance sheet to finance new deals given a 3-year low leverage of 2.3x debt to EBITDA at the end of FY15."