Deal or no deal: Consolidations to change course

Acquisition and merger activity in the apparel sector is expected to slow down over the next year as investors focus on building synergies within their existing portfolio, according to a leading industry report.

The 2008 PriceWaterhouseCoopers Retail and Consumer Outlook claimed tighter economic conditions would force buyers to "go back to basics" in their valuation process, placing greater importance on maintainable earnings than aggressive or unproven growth opportunities.

"During periods of tighter monetary policy and widening credit spreads, it is common to see a decline in activity," the report noted. "This is particularly true at the big end of town where deals are valued at more than $1 billion."

The report noted that while the mergers and acquisition market was "hot" in 2007 - the period that included Wesfarmers' $18 billion takeover of the Coles Group - the global credit squeeze had affected the balance of power among deal makers.

The outlook remained positive, however, for small-to-medium deals that offered textile, clothing and footwear businesses clear strategic advantages. RCG Corporation, an investment holding company that operates sports footwear chain The Athletes Foot, is one retailer currently evaluating acquisition opportunities in its sector. Director Hilton Brett said the corporation was looking to bring in "synergetic businesses".

"Our goal is to deliver a lot more than just a 'product and price' offering. As a result we are evaluating businesses that are in the sports, fitness and active lifestyle and wellness sector and can achieve synergies with The Athlete's Foot and future acquisitions."

Australian Centre for Retail Studies program director Andrew Cavanagh confirmed the sector could expect more of these "bolt on" acquisitions.

"We have [already] seen preparation for this sort of activity in the apparel sector," he said. "Miller Fashion sold off its strategically unaligned Go-Lo business and [went on to] purchase other existing apparel chains. This sort of consolidation makes sense."

Cavanagh said strategic mergers and acquisitions could help maximise supply chain efficiencies, supplier rationalisation and production capabilities.

"The consolidated business will then be able to more easily meet minimum order quantities with off-shore factories thus allowing them to get bester cost prices and improved margins."

Cavanagh said small retailers in particular could benefit from consolidations that bolstered the scale of their operations.

"If small players are going to survive the coming retail squeeze, they have to be able to operate with a much lower cost base for their product and their business as a whole. Retailers which have to get better and more efficient at reaching their identified target customers and scale is one significant mechanism for allowing this to occur."

By Assia Benmedjdoub