Retail M&A hits 5-year high, but distressed deals fall

Mergers and acquisitions in the UK’s retail sector have increased to their highest level in five years, despite a surprise decrease in the number of distressed acquisitions. Over the past year, dealmaking in the sector has been boosted by strong operators undertaking strategic M&A as they seek to adjust to changing market trends through both acquisitions and divestments.

According to new figures from law firm RPC, there has been a 23 per cent increase in M&A deals involving UK retail businesses over the past year, with 38 deals in the year ending March 2023, compared to 31 in the year ending March 2022.

During the year to March 2023, the sector saw a number of high-profile deals, including the acquisition of Matalan by several of its investors in January 2023, Next’s acquisition of clothing retailer Joules out of administration in December 2022 and the takeover of Cambridge Satchel Company by French firm Chargeurs in August 2022.

Karen Hendy, RPC retail group partner and co-head, commented: "Retailers with strong balance sheets are looking past the peak in interest rates and making strategic acquisitions for the long term.”

Hendy added that acquirers were increasingly able “to break into some very specific consumer demographics and new areas of the market” due to the broader range of assets that were being brought to market.

She continued: "One of the drivers for M&A is weakening demand as consumers cut back on discretionary spending. Some retailers misjudged how demand was going to be impacted by the turn in the interest rate cycle. Carve-outs and disposing of non-core assets enables retailers to raise capital, and strengthen their balance sheets. as well as focusing on efficiencies and tighter inventory management."

However, despite the issues facing UK retailers, RPC’s data showed an unexpected drop in the number of deals involving distressed targets. In the third quarter of 2022, 50 per cent of acquisitions involved distressed companies, a figure that dropped to 33 per cent in Q1 2023.

Distressed M&A has previously been widely tipped to increase in the retail sector, which is among the worst affected by the UK’s rising insolvency levels due to its exposure to declining consumer confidence amid rising inflation.

The new data, however, suggests that buyers are increasingly seeking to acquire more robust businesses, reflecting a wider shift towards strategic M&A aimed at long-term investments and expansion into new market segments.

Read about rising UK insolvencies.

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