In the spotlight: CD&R's B&M deal could fire up discount competition

By Michelle Russell | 4 December 2012

CD&Rs move suggests private-equity firms are spotting the value in a UK discount sector

CD&R's move suggests private-equity firms are spotting the value in a UK discount sector

Private-equity firm Clayton, Dubilier & Rice's acquisition of a majority stake in UK cut-price retailer B&M Retail may see competition heat up further in the country's fast-growing discount channel.

CD&R's move suggests private-equity firms are spotting the value in a UK discount sector that has benefited from the belt-tightening of local consumers.

The Liverpool-based retailer sells a range of products including food, toys and furniture, attracting around 2m customers a week, according to its website. Food brands include Weetabix, Kellogg, Cadbury and McVities.

Terms of the deal were not disclosed but CD&R said it had acquired a "significant" stake in the business. The Financial Times revealed the private-equity firm secured a 60% stake from the Arora family, giving the company an enterprise value of close to GBP1bn.

The deal, according to Verdict Research analyst Andy Stevens, is "significant" given the retailer's growth.

"B&M has risen from relative insignificance to being quite a serious presence on the high street so it is quite a significant move for it to be acquired in that way and it values it at quite a lot as well," he told just-food.

The business was acquired by the Aroras when it had just 21 stores in Lancashire and Greater Manchester. The brothers, however, took advantage of the collapse of other retailers such as Woolworths to rent shops in UK high streets and expanded quickly. B&M operates around 300 stores in the north of England, Scotland, Northern Ireland and Wales. The largest concentration of its stores, however, are in the north of the UK.

The significance of the deal, however, may carry more weight as a result of the appointment of former Tesco boss Sir Terry Leahy as chairman of the retailer as part of the agreement.

He will be joined on the board by Vindi Banga, the former president of foods, home and personal care and member of the Unilever executive board.

Leahy is an adviser to CD&R and his role as chairman of B&M will be his first significant management position since stepping down as chief executive of Tesco last year, which suggests the retailer has major plans to grow the business.

B&M's northern focus means it has found itself competing with Morrisons, the UK's fourth-largest retailer, which has the bulk of its stores in that part of the country. News of the investment in B&M hit Morrisons' shares today, which fell 1.4% to 262.5 pence.

However, it is not clear, and B&M could not confirm, what percentage of sales food accounts for and therefore it is not difficult to judge the impact the deal could have on Morrisons, which has found the going tough in recent months with successive quarters of falling underlying sales.

Stevens believes B&M's main competition at present is from the discount chains of Poundland, 99p Stores and Poundstretcher. However, that could change depending on how CD&R plans to grow the firm.

Furthermore, it appears the private-equity group is not content on having just a British presence. The firm has its eye firmly on international sales.

CD&R partner David Novak has said the company wants to widen B&M's market presence outside of the UK and continue building the B&M brand.

"We believe the value based general merchandise retail model could have significant appeal in overseas markets," he said, without elaborating.

This may then likely put B&M into the path of Lidl and Aldi, both of which have a strong European presence.

"Depending on where they go, B&M will be up against the likes of Aldi and Lidl," Stevens told just-food. "I'm not overly sure of the landscape of the general merchandise discount market across Europe ... there might be more non-food value specialists to come up against than in the UK. It really depends which stores they take abroad with them."

The decision on where the business goes may lie ultimately with CD&R, but the Aroras brothers who bought the business in 2005 will also sit on the board.

"B&M benefited very well throughout the downturn and in the past four or five years sales have rocketed and they've opened a lot of stores. It's down to the fact they know what they're doing, who their target customers are and they know what they want and obviously that's going to help them a lot," Stevens said.

Sectors: Mergers & acquisitions, Retail

Companies: Morrisons, Tesco, Weetabix, Kellogg, Cadbury, Unilever, Lidl, Aldi, Poundland

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