Mergers have a bad name, often connected to cronyism, monopolies and redundancies – but done well a good merger can reignite an ailing business.
When you see mergers in mainstream news, it’s almost always framed in a bad way, suggesting a lack of competition that will drive up price for consumers and put people out of work. It’s no wonder so many people view them with suspicion. But mergers play an important role in the business community, allowing SME growth where finances are problematic; letting larger businesses carve off historical chapters to refocus on their core purpose; and in many cases revitalising stores with a good name but poor performance.
Handled sensitively, with good communication and acknowledgement of the core values of the acquired company, a merger can be good for industry, the consumer and the employees.
What are mergers?
There are, in fact, several different types of business mergers, with most major mergers private negotiations that are unregulated.
“An agreement for purchase of shares, or of business and assets is most typical,” says Matt Yates, partner at Duncan Cotterill. “Then when you get into larger listed companies with more than 50 shareholders, you start looking at takeovers under the takeovers code and schemes of arrangement.”
Kylie Dunn, partner at Russell McVeagh, says she deals mainly with three types of merger.
“An asset sale, where the assets (both physical and intangible) of a business are sold; a share sale, where the shares (some or all) of a business are sold by the shareholder(s); andan amalgamation, where two business are combined at law to form an amalgamated entity,” she says.
“Unfortunately for the lawyers, we don’t see too many hostile takeovers these days,” says Yates. “The most recent one was Briscoe’s attempt to takeover Kathmandu – that didn’t get over the line, and Kathmandu’s subsequent performance suggests its directors were right.”
Yates says hostile takeovers, where the shareholders become the target and the management of the company are cut out of the picture, are difficult to pull off because you don’t get access for due diligence which can result in a shaky offer.
“Last year, for example, Mercury and Infratil tried to take over Tilt – insufficient shareholders accepted it. The independent directors said the offer wasn’t good enough, that Mercury and Infratil had undervalued the company; it was a great example of good governance given they were already majority Tilt shareholders.”
Mergers are smoother and more successful if the purchaser courts the senior team of the target company, allowing for a more seamless transition. But Katrina Hammon, partner at Duncan Cotterill, notes that even when a merger has been mutually agreed, the process can be disarming for employees.
“This is why consultation is so important. The vendor and purchaser should think about their coal face employees, put themselves in their shoes and consider what they need,” Katrina Hammon says. “A good relationship and clear communication between the two negotiating parties is key to a smooth handover and happy informed employees.”
In terms of what the consumer will notice, these days the answer is increasingly, not a lot.
“We are seeing a lot of global brands rolling up retailers and bringing them under an umbrella,” says Hammon. “They continue to operate under their known local brand but share back of house services, purchasing power, and offer service bundles. This makes the acquisition less visible from a consumer perspective.”
A good example of this is pet stores with added services like vets, doggy daycare, and puppy training.
“Larger brands are becoming more active at picking up regional and smaller independent retailers,” says Hammon. “They’re small transactions but the cumulative effect is a large footprint. If a company seems to be accumulating too much power, the Commerce Commission get interested and may prevent a deal from going ahead, as with the attempted Vodafone and Sky merger.”
More mergers happen than we think. According to Russell McVeagh, there were 176 NZ mergers and acquisitions in the nine months to the 30th September 2018, worth $7.126 billion. Let’s take a look at a few, and see what the benefits for the merged business might be.
Pumpkin Patch and EziBuy
Both these businesses have at one time been acquired by Aussie investment company Alceon Group: EziBuy in 2017, and Pumpkin Patch more recently in 2018. Both Kiwi businesses were in bad shape when Alceon took them on – so what was the attraction?
“EziBuy is an iconic New Zealand brand with a good presence in Australia that had underperformed under Woolworths’ ownership,” says Richard Facioni, executive director at Alceon Group, Sydney.
“We saw the opportunity to bring back a more entrepreneurial culture, restore the business to profitability and then grow it. We are making good progress on that journey and plan to relaunch EziBuy later this year, which is very exciting. We see huge potential for the brand, particularly in Australia.”
Pumpkin Patch, says Facioni, is another iconic Kiwi brand that got into trouble by over extending itself.
“Following administration, it was acquired by an owner [Catch Group] who really didn’t have the right infrastructure to return it to market,” says Facioni. Unfortunately, the tangible assets were sold off piecemeal, and really what Alceon has bought is the right to use the name.
“We believe it still has fantastic brand equity – everyone I speak to still knows Pumpkin Patch and loves it, even though all the stores were closed a couple of years ago,” he says. “We’ve been selling new product through EziBuy, but plan to relaunch Pumpkin Patch as a stand-alone over the coming months.”
After such a dire departure from the High Street, it’s exciting to think that Pumpkin Patch could make a full, bricks and mortar return. If Alceon pulls it off – using EziBuy as a spring board for re-launch - it’s a good example of the revitalisation of ailing brands through a merger situation that increases reach by engaging a secondary audience.
“At the moment, the Pumpkin Patch team is housed at EziBuy, although as it grows it will likely find its own home,” says Facioni. “They both benefit from synergies such as shared services, shared infrastructure, sourcing and group buying. It will always be a close partnership.”
Culturally, Facioni believes they are a good fit, with the customer base of each brand at different stages of life, but complementary.
“There’s a lot of value in acquiring brands, because they tend to come with strong customer loyalty and they tell a story about the product. Today’s consumers are not just buying the product, they are also buying the story and we need to be telling it otherwise you end up just competing on price, which becomes a race to the bottom.”
Facioni is confident that mergers and acquisitions like this can breathe new life into older brands, and can help grow the smaller ones.
“Whether it’s through access to shared services and infrastructure, working capital, improved sourcing, talent or group buying benefits, being part of a larger group can be hugely beneficial.”
Barkers and Max Fashions
Barkers has an interesting story in its own right. A centre of style since Raymond Barker opened his first store in 1972, it bucked the trend by selling clothes under its own brand. Raymond rocked the street-facing sound system and custom novelty fit out long before Hollister hit the scene. Barkers was part of a retail movement that got the law changed to allow weekend trading, and of course, the launchpad for that track pant craze of the 1990s. But after the business was sold in 2002 it drifted, changing hands with no clear leadership until Jamie Whiting came on board in 2008, returning it to its roots. Whiting has good experience of turning brands back into the sun.
Max Fashions is over 10 years younger than Barkers, having launched in 1986, but just as iconic. It’s also bigger, with 40 nationwide stores to Barkers’ 30. When it was acquired by Australian firm Catalyst in 2009, who also owned EziBuy at the time, Catalyst intended to leverage that relationship in much the same way as Alceon hope to bond EziBuy and Pumpkin Patch together. It looked like the firm could be on to a good thing, but Catalyst sold EziBuy in 2013 without exploiting the full potential of the Max marriage. It could be argued Max has been coasting since – and Catalyst recognized this.
"We didn't think we'd be the best owners of the Max business going forward and were interested in passing on the baton of Max to a new owner," Simon West, Max Fashions director and chief executive said at the time of the sale. The willingness of Catalyst to sell to a well-positioned business like Barkers enabled a smooth handover with minimal politics, priming the two businesses for success.
The acquisition by Barkers offers a few important points to consider. Firstly, in terms of being a good place to work (Max already scores highly among former and current employees on Indeed) it brings the company back to being 100 percent Kiwi owned, offering better opportunities for staff progression into the upper echelons. The improved career path should allow the group to attract a high calibre of staff.
Another key issue is buying power. Barkers’ core focus is on quality, and by more than doubling its size, it should hopefully be able to command better prices across a range of products.
In terms of what the customer sees, little will change, we are told – although I am hopeful that some of the innovative store design from Barkers might creep into Max. But the ability to share back office operations and management offers a cost saving that will allow further investment into the businesses, and efficiencies that will leverage profit.
It’s easy to see the stores are a good fit from the consumer perspective. I regularly shop in Max, and my husband is a Barkers’ fan boy – there are a lot of couples across New Zealand like us.
"Barkers and Max brands have quite a natural fit in the market in terms of their positioning and customer demographic,” Whiting said in October 2018. “When the opportunity for Max came up we just felt like it would be a natural fit for the brands in terms of synergies, cultures and the way we run the businesses.”
It will be exciting to see how the relationship unfolds.
Briscoe Group and Kathmandu
Longtime majority shareholder of Briscoes, Living & Giving and Rebel Sport holding company Briscoe Group, Rod Duke, attempted a coup d’état on Kathmandu in 2017 – but was thwarted.
"A couple of years ago, we attempted to buy Kathmandu. We ended up with 20 per cent, I would have loved 100 per cent but I am not in the habit of just paying a ridiculous price because someone thought it was worth it. But that said, I regret not getting Kathmandu," he told Stuff earlier this year.
Unlike the merger between Barkers and Max, which is obviously complementary, Duke wanted Kathmandu because it was nothing like his existing business. He wanted to acquire a company that wouldn’t compete with Briscoe Group brands, but with the right investment and management could become “a $100m business real quick."
At the time, Kathmandu was struggling, and Duke obviously felt he was making the shareholders a good offer – but unable to win them all over, he walked away with just a fifth of the company he had hoped to sweep up.
“The offer that we put at that time, when Kathmandu were not performing well, was based on expertise inside the retail market,” Duke told me over the phone. “We had non-conflicting categories of merchandise – no cannibalising. All three categories could live together. There were also some operating cost efficiencies.”
The attraction for Duke was clear – the chance to expand.
“Kathmandu could have offered us scale. We could have increased our business by 30 to 50 per cent,” he said. So, is he still beating that drum, even though Kathmandu is now performing well?
“I haven’t gone back and studied Kathmandu in detail, so I’m not in a position to say whether the benefits still stand. But I’m not a stock seller, if that’s what you’re asking,” says Duke. “If you look at the food industry there were three dominant retailers in the country all doing well, and then they turned into two. I don’t think a business has to be suffering to be part of a successful merger.”
However, strong personal reasons notwithstanding, shareholders are less likely to give up their chunk of a well-performing business unless there’s a very good offer on the table. Duke would not be drawn on whether this is a space to be watched, but his experience of attempting to acquire Kathmandu certainly illustrates Yates’ earlier point about the difficulties relating to hostile takeovers – and that smoothing the path with the target is a more palatable strategy.
This story originally appeared in NZ Retail issue 762 June/July 2019.
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