September 11, 2013 / 10:30 PM / 4 years ago

Dealmakers expect more M&A despite higher interest rates

Stefan Selig, executive vice chairman of global corporate and investment banking at Bank of America Merrill Lynch, speaks at the Reuters Consumer and Retail Summit in New York, September 11, 2013. REUTERS/Mike Segar

NEW YORK (Reuters) - Boosted by recent high profile retail deals including Hudson’s Bay Co’s (HBC.TO) acquisition of Saks Inc SKS.N and Neiman Marcus’s sale to a new private equity group, merger activity in the sector has climbed this year, and top dealmakers expect more to come despite potentially higher interest rates.

U.S. retail and consumer M&A saw an uptick of 25.4 percent as deal values rose to $88.7 billion so far this year, according to Thomson Reuters data.

The likelihood of rising interest rates, as the U.S. Federal Reserve looks to scale back its monetary easing policy, means it will be more costly for companies to issue debt. But this could also mean that companies may accelerate their merger plans in order to finance deals at more favorable rates, bankers said on Wednesday at the Reuters Global Consumer and Retail Summit in New York.

Rising rates would also signal that the economy is improving, which may help to mitigate the downside of rate hikes.

“If the economy is doing well, CEOs and boards probably feel a little better,” said Robin Rankin, global co-head of the retail & consumer products group at Credit Suisse.

Following in the footsteps of large deals announced in 2013 including OfficeMax Inc’s OMX.N merger with Office Depot Inc ODP.N and Kroger Co’s (KR.N) acquisition of Harris Teeter Supermarkets Inc HTSI.N, M&A activity in retail will continue to be driven largely by corporations as opposed to private equity firms, bankers say.

“Strategic activity is as strong as it has been in a very long time and that is going to be buttressed by some level of sponsor activity, mostly in the mid market with some large deals like the Neiman Marcus deal,” said Stefan Selig, executive vice chairman of global corporate & investment banking at Bank of America (BAC.N). “It is going to be strong but consistent with what we have seen in the first eight months of this year.”

Dealmakers also expect the retail sector to continue to be ripe for activism, although the segment may not be as attractive as it once was as share prices for retail companies have rallied so far this year.

The teen retail space, however, continues to be picked over by the activist community, where recent targets have included Abercrombie & Fitch Co (ANF.N) and Wet Seal Inc WTSL.O.

Most of these companies “are in the small to mid cap space so they’re of a size where the activists can have a more prominent role in trying to impact M&A activity there,” said David Shiffman, co-head of the global retail group at Peter J. Solomon Co.

Activists are investors who take a stake in a company with hopes to affect change.

Despite the overall performance in the sector, retail company boards are wising up to the risk of activists. “If people fall down or trip, they should be very wary because there is a huge activist community,” Rankin said.

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Reporting by Olivia Oran; additional reporting by Nadia Damouni, Phil Wahba and Dhanya Skariachan in New York; Editing by Phil Berlowitz

Our Standards:The Thomson Reuters Trust Principles.
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