Valuations & Acquisitions: Sharks Are Circling, Blood’s in the Water

On the face of it, there’s never been a better opportunity for buyers of multichannel merchants. The blood’s in the water.

While this past summer’s multiples have held steady for most marketers with sales of less than $75 million, the multiples have come down for the best-run companies, according to Stuart Rose, managing director of Wellesley, Mass.-based investment banking firm Tully & Holland. The fact that multiples have shrunk to eight times earnings, down from 10 times earnings, only bolsters the case for buyers. But the sharks aren’t biting — at least not yet.

As with the real estate market, prices for dream houses — or dream marketers throwing off plenty of cash flow, in this case — have come down considerably. But who can afford them? While that oceanfront home will cost you far less this year than last year, you’ll have difficulty qualifying for that mortgage. The same principle holds true in the current merger and acquisition climate, as the financing markets have evaporated fast. Only the most well-capitalized are getting the financing to do deals.

Limited M&A Excitement
Don’t get me wrong. Some deals are getting done, but they’re hardly exciting.

Virginia Beach, Va.-based personalized gifts cata-loger Lillian Vernon, operating in bankruptcy, was sold to Current USA, a subsidiary of Taylor Corp., on April 3 for $15.8 million. Quick question: How many do-overs can Lillian Vernon get and still be relevant? This could be its last chance. Lillian’s customers might not see its financial difficulties, but its creditors certainly do. Current may have great relations with its payors, but creditors have long memories. Then again, so does Lillian herself, and she can’t be terribly happy with what’s become of her once thriving start-up.

Perpetual loser RedEnvelope, also operating in Chapter 11, was sold to Provide Commerce, which agreed to acquire the troubled marketer’s assets on May 27. Yawn. Put it this way: Remember in “The Godfather, Part II” when Michael Corleone described adversary Hyman Roth as, “dying of the same heart attack for 20 years?” That rings true here. Haven’t we heard RedEnvelope’s tale of woe before?

In late May, another Chapter 11 hanger-on, The Sharper Image Corp., was acquired in a joint venture led by units of private investment firms Hilco Consumer Capital Corp. and Gordon Brothers Group. Let me see The Sharper Image come up with a few home run products before I get excited. It’s been a while since we’ve seen such hits as its Razor Scooter and the Ionic Breeze air filter.

The closest thing to excitement came this past July when Redcats sold its Missy division to private equity firm Monomoy Capital Partners. Granted, Chadwick’s has seen better days, but at least it wasn’t operating in Chapter 11, as were the aforementioned three. A little fresh attention couldn’t hurt Chadwick’s.

Damaged Goods Only
“There’s not much quality activity out there,” Rose says. “Only those that needed to sell, sold.” Watching all these damaged properties change hands makes me yearn for the wild and crazy days of Genesis Direct. Of course, the big difference there was Genesis was more damaged than the properties it was gobbling up.

So, as the opportunistic buyers bite into their low-hanging fruit, the mergers and acquisitions sharks are conspicuously absent. One such shark is Alex Tabibi, CEO of Hazelton, Pa.-based holding company Pets United. Tabibi, who built a $75 million empire by acquiring common pet URLs, such as Bird.com and Fish.com, is lying in wait. In fact, his acquisition plans are on hold, waiting until the market shakes out.

“It’s a good time to wait and see,” Tabibi says. “There will be many opportunities coming up shortly for mergers and acquisitions, particularly as catalog companies grapple with rising paper, postage and shipping costs.” What’s more, Tabibi predicts companies struggling online will go out of business. Ouch.

Tabibi reasons that huge technology investments are needed for some of these companies to survive. “The longer the wait, the lower their sales and valuations will be,” he says. It’s a simple matter of economics: Fewer sales means fewer profits means lower margins. And Tabibi predicts the economy will get worse, not better. That means it’s only a matter of time before he and the other sharks start their feeding frenzy.

Mark Del Franco has covered catalog/multichannel mergers and valuations for more than a decade. You can reach him at mark.delfranco@yahoo.com.