Valuations & Acquisitions: Dealing With an October Surprise
An “October surprise” in political terms means unveiling an unflattering allegation against your rival just before the November election. Although that didn’t happen this year, catalogers, along with the rest of the world, experienced quite an October surprise with the world financial crisis.
So a mergers and acquisitions market that was extremely volatile to begin with is shaken to the core. It’s almost impossible for all but the most well-capitalized of marketers to get deals done. The sobering reality is that many will be forced to sell at bargain basement prices or, worse, close their doors.
Amid this bleak backdrop, Lee Helman, a partner with New York-based investment firm Financo, contends, with some caveats, that deals are still getting done; they just take more creativity to find completion.
They entail multichannel marketers shedding assets they consider to be noncore (read expendable), with the cash being put back into the business. Such was the case in September when multichannel teen apparel marketer dELiA*s sold extreme sports marketer CCS to Foot Locker for $102 million in cash. Although a stable business, dELiA*s considered CCS noncore and will use the proceeds to fund its retail strategy.
Small Deals Pose a Challenge
But suppose you don’t have noncore assets; you find it hard enough growing your core business. Sorry. Executing so-called small deals, defined as having $10 million or less in earnings before interest, taxes, depreciation and amortization, is difficult in the current economic climate.
To work today, deals must be more strategic than ever. Buyers need cash in hand to buy because banks are leery about doing deals financed with debt, which typically happens when private equity is involved. So for buyers, cash is king.
In fact, lenders are pulling out of providing debtor in possession (DIP) financing to bankrupt companies. DIP financing — which usually has priority over existing debt, equity and other claims — is arranged by a company while under Chapter 11 bankruptcy protection. To be considered for a cash flow loan, Helman says, there needs to be at least $20 million of cash flow, “and it needs to be relatively certain,” otherwise no deal.