Exploring The Disruptive Force of Retail M&A: Michael Johns
Exploring The Disruptive Force of Retail M&A: Michael Johns
Exploring The Disruptive Force of Retail M&A: Michael Johns
Michael Johns
BMO Managing Director
Executive Summary
“Traditional” Grocery Adaptation Current Industry Tailwinds Stronger Than Headwinds
U.S. consumer is aging and becoming more diverse Only the strongest survive
Improvements in the supply chain Near term deflation – long term inflation
Lesser threat from Walmart “Fresh” supply chain and food safety
1
Current Themes in Retail
KEY FACTORS INFLUENCING RETAILERS
2
Where Food Consumers Are Spending
FOOD AWAY FROM HOME VS. FOOD AT HOME
50%
`
40%
1986 1998 2010 2022P
2014-2022P CAGR
Overall Food Expenditures 3.9%
At Home Away from Home 2022
Food At Home 3.2%
$1,950
Food Away from Home 4.6%
Gross Spending (in millions)
2014
$1,047,700
$1,300
$731,300
$650
$950,600
$727,800
$0
1986 1998 2010 2022P
Source: Willard Bishop June 2015 and June 2010 - The Future of Food Retailing and USDA
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Retailers Must Adapt to an Older and More Diverse American Consumer
INCREASINGLY DIVERSE U.S. CUSTOMER BASE
15.4% 15.7% 16.1% 16.4% 16.8% 17.2% 17.6% 18.1% 18.5% 18.9%
5.1% 5.5% 5.8% 6.2% 6.5% 6.8% 7.1% 7.4% 7.7% 7.9%
17.8% 19.1% 20.5% 21.9% 23.4% 25.0% 26.5% 28.0% 29.3% 30.6%
61.8% 59.7% 57.6% 55.5% 53.3% 51.0% 48.8% 46.6% 44.5% 42.6%
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
AGING U.S. POPULATION
25% 25.5%
20% 20.2%
15%
10%
5% 4.3%
0%
1980 1990 2000 2010 2020P 2030P 2040P 2050P
TODAY
Specialty
-4.9%
3 YEARS
AGO
Conventional +1.0%
-0.2%
Value
1996 1997 1998 1999 2006 2012 2013 2014 2015 2016+
SELECTED EV/LTM EBITDA VALUATIONS HAVE TRENDED DOWN OVERALL, BUT STILL EXHIBIT PEAKS RELATED TO PERIODS OF HIGH M&A ACTIVITY
13.0x
8.0x
3.0x
Jan-95 Jan-02 Jan-09 Jan-16
Source: Capital IQ
6
Specialty Grocery Valuations Have Fallen
National Grocer Index Regional Grocer Index N&O / Specialty Grocer Index S&P 500
115
97
93
90
92
65
54
40
Mar-15 Jul-15 Nov-15 Mar-16
EV / NTM EBITDA
National Grocer Index Regional Grocer Index N&O / Specialty Grocer Index
13.5x
11.0x
8.5x 8.5x
7.8x
7.0x
6.0x
Mar-15 Jun-15 Sep-15 Dec-15 Mar-16
12.8x
11.3x
10.7x 10.7x
10.1x 9.9x
9.2x
Great
AB New
Whole Atlantic & Morgan Spartan Berkshire Acquirer Acquirer Spartan
Acquirer Metro Apollo Empire Loblaws Yucaipa BI-LO Acquisiti- Sobey's Kroger Albert- TPG Albertson's Kroger
Foods Pacific Stanley Stores Partners A B Stores
on son's
Tea
EV $1,524 $806 $664 $1,279 $1,060 $310 $102 $225 $400 $400 NA $464 $300 $3,300 $5,800 $2,469 $771 $385 $369 $9,067 $823
Year 2005 2007 2007 2007 2007 2007 2008 2009 2009 2009 2011 2012 2012 2013 2013 2013 2013 2013 2013 2014 2015
Traditional Food Retail Mean: 7.3x Specialty Food Retail Mean: 10.0x
Traditional Food Retail Median: 6.8x Specialty Food Retail Median: 10.1x
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Capital Markets Volatility Is a Near-Term Headwind
Equity Capital Markets EQUITY MARKET VOLATILITY
The VIX has subsided after hitting nearly 4 year CBOE Market Volatility Index (VIX)
highs in late 2015 45
10%
99.0 9%
97.0 (46)
Yield
8% bps
97.0
7%
87
95.0 6% bps
5%
93.0 4%
Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16
Source: FactSet, AMG Data, Bloomberg, High Yield Prospect News, Standard & Poor’s Leveraged Commentary and Data, AdvantageData
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Volatility in the Capital Markets Is Impacting Retail Balance Sheets
ALBERTSONS’ IPO POSTPONED NEIMAN MARCUS IPO POSTPONED
~$2 billion October 2015 IPO delayed following disappointing Delayed due to “jitters in the stock market”
Walmart outlook
Bond prices have declined by over 30%
Not expected to price until markets improve
BELK OFFERS SIGNIFICANT TLB DISCOUNT KKR SELF-ISSUES FOR RETAIL DEAL
Widened discount to 89 cents on proposed $1.5 billion first- KKR unable to find bank financing for LBO of Mills Fleet Farm
lien term loan to finance Sycamore’s ~$3 billion buyout
Issued and underwrote over $700 million of debt, and used its
own capital markets desk to syndicate the debt
One of the biggest discounts of the year
SVU TL 2019 ABS TL due 2019 ABS TL due 2019 ABS TL due 2021 ABS TL due 2022
104
102
Bid Price
100
98
96
94
Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16
SVU 6.75% due 2021 SVU 7.75% due 2022 ABS 7.75% due 2022 ABS 7.75% due 2026
ABS 6.625% due 2028 ABS 7.45% due 2029 ABS 8.70% due 2030 ABS 8.00% due 2031
15.0%
13.0%
Yield-To-Worst
11.0%
9.0%
7.0%
5.0%
Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16
Appendix
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APPENDIX
5.0x 4.8x
8.2x
Regional Grocers 7.3x 6.9x 6.8x 6.6x 6.4x
n.a. n.a.
$3 $100
$50
$0 $0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
CY 2013 CY 2014 CY 2015 CY 2013 CY 2014 CY 2015
Safeway Kroger SuperValu Roundy's Ingles Safeway Kroger SuperValu Roundy's Ingles
6.0% 130.0%
4.0%
110.0%
2.0%
0.0% 90.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-2.0% 70.0%
-4.0%
50.0%
-6.0%
-8.0% 30.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
CY 2013 CY 2014 CY 2015 CY 2013 CY 2014 CY 2015
Whole Foods Vitamin Cottage Sprouts Whole Foods Vitamin Cottage Sprouts
Fairway The Fresh Market
$18 $350 Fairway The Fresh Market
$15 $300
$12 $250
$200
$9
$150
$6
$100
$3
$50
$0 $0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
CY 2013 CY 2014 CY 2015 CY 2013 CY 2014 CY 2015
Whole Foods Vitamin Cottage Sprouts Whole Foods Vitamin Cottage Sprouts
Fairway The Fresh Market Fairway The Fresh Market
15.0% 200.0%
10.0% 170.0%
5.0% 140.0%
0.0% 110.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-5.0% 80.0%
-10.0% 50.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
CY 2013 CY 2014 CY 2015 CY 2013 CY 2014 CY 2015
Safeway Kroger SuperValu Roundy's Ingles Safeway Kroger SuperValu Roundy's Ingles
7.0% 5.0%
6.0% 4.0%
5.0%
3.0%
4.0%
2.0%
3.0%
1.0%
2.0%
1.0% 0.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
0.0% -1.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Safeway Kroger SuperValu Roundy's Ingles Safeway Kroger SuperValu Roundy's Ingles
6.0% 1.8x
1.6x
5.0% 1.4x
4.0% 1.2x
1.0x
3.0% 0.8x
0.6x
2.0%
0.4x
1.0% 0.2x
0.0x
0.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Whole Foods Vitamin Cottage Sprouts Whole Foods Vitamin Cottage Sprouts
Fairway The Fresh Market Fairway The Fresh Market
15.0% 10.0%
10.0% 5.0%
5.0% 0.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
0.0% -5.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-5.0% -10.0%
-10.0% -15.0%
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