With Retail Bankruptcies on the Rise, Opportunities for Distressed M&A Increase
While there were already a number of high profile retail bankruptcies in 2019, current economic conditions and pandemic-related market challenges have exacerbated an already difficult retail environment, which has led to a significant increase in bankruptcies in 2020. Year to date, more than 30 major retail and restaurant chains have filed for bankruptcy, which is more than in all of 2019. Furthermore, 2020 is on track to have the highest number of retail bankruptcies in 10 years. Although the Q4 holiday season often provides the strongest quarterly financial performance for many retailers, which may slow the pace of bankruptcy filings, projected holiday sales numbers may be uncertain this year, and additional bankruptcies are still likely to follow by year end.
Despite these bleak statistics, distressed companies may present attractive targets for strategic and private equity buyers with available cash or access to financing on favorable terms. Distressed M&A transactions may offer certain advantages that can be attractive to buyers, such as the potential to purchase at a discounted price or the ability to complete a transaction on an accelerated timetable. Already, the retail market has begun to see the reemergence under new ownership of some shuttered companies that were the targets of liquidation sales and distressed M&A transactions within the past two years. Some of these retailers have relaunched with modified business strategies, such as a significantly reduced number of brick and mortar locations or an exclusively online presence. The distressed M&A transaction opportunities resulting from existing market conditions will likely play an increasingly important role in overall M&A deal activity and could lead to a reshaping of the retail landscape in the near future.