What Happens if M&A Activity Eases?

The retail sector looks set to face even tougher times, says Fiona Shaikh on Reuters.co.uk, as the housing market continues to slump and consumers feel increasingly fragile due to the "growing mountain of debt". Retail metrics group SPSL said that following a spending spree that lasted some 10 years, customer numbers had fallen in comparison to 2004 every month so far this year bar June. According to the group, customer footfall or the number of shoppers in central London were down 21% on Saturday compared to the same weekend last year, although these figures are likely to be distorted by the bombings in London on Thursday.

Yet at the same time the Confederation of British Industry said that June retail sales were the worst for 22 years. The struggling sector is likely to impact on more than merely the high street stores: indices are also likely to suffer as M&A activity, driven to date by private equity firms offering leveraged bids for retailers, is likely to ease up, says Camilla Palladino on Breakingviews.com.

These private equity firms have largely "snapped up" the retailers by taking the properties that the retailer owns and either mortgaging them or doing sale and leaseback deals. This makes the most of two trends: "high property prices and low interest rates".

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Yet property-backed financing reduces flexibility: the retailer has to pay the interest on its debts, having to pay for the use of property whether it uses it or not. So if things go wrong, it's more likely "to go bust". Now banks who were willing to lend up to 90% of the value of the property portfolio in the past could think twice in the face of the retail slowdown, or demand higher compensation for doing so.

Not good news, then, if indices start to rely on M&A activity for their strength.