Catalyst: Retail technology providers commanding double-digit multiples

Paul Vanstone, Director Catalyst Corporate Finance, discusses how digital transformation in the retail sector will boost technology companies and accelerate M&A activity across the sector. 

"Changes in consumer behaviour are disrupting the retail landscape with new technologies facilitating and enhancing the shopping experience. Behind the scenes it’s a technology arms race between brands to attract, convert and retain consumers. IT spend in the sector is growing faster than in any other. The sector is ripe for agile technology providers to innovate and grow and successful players will be highly prized by private equity investors and trade acquirers alike." -Paul Vanstone, Director Catalyst Corporate Finance.

Paul Vanstone

Technology is revolutionising the retail consumer experience. An omni-channel solution is now critical to a retailer’s success; however, significant implementation challenges exist for many. This presents an opportunity for agile retail technology companies to flourish. Consequently, we expect the high level of mergers and acquisitions (M&A) and private equity activity to continue and for quality assets to achieve high valuation multiples. 

Sector growth

The US$26trn retail sector is a significant and growing part of the global economy. Already accounting for some six per cent (US$177bn) of the global US$2.7trn IT spend, retail is the fast growing sector in terms of technology spend.

Omni-channel importance in an innovative sector

Although bricks and mortar still account for 90 per cent of sales, around 50 per cent of sales are web influenced and multi-channel shoppers typically spend considerably more than single channel customers. The failure to give consumers a consistent, technology enabled experience across a retailer’s various platforms can significantly impact a business.

Challenges for retailers are opportunities for technology providers

Omni-channel is a strategic priority for retailers. However, increasing system requirement complexity, coupled with slow-to-adapt legacy IT systems and cultural resistance to change can hamper innovation adoption. Sector consolidation also means a lack of third party choice in the market place. These challenges present an opportunity for innovative and flexible technology platform providers to flourish.

Compelling valuations

Double digit EBITDA multiples are common with both trade and private equity transactions buoyed by a compelling sector backdrop, corporate strategic drivers and asset scarcity.

High M&A volumes expected to continue

The growth in demand for IT systems has led to significant consolidation over the last fifteen years with over 50 brands being acquired by the larger players, including a number of recent mega deals. The retail technology sector is a growth area with multiple attractive investment characteristics and we expect M&A activity to continue for the foreseeable future.

Consumers now expect an omni-channel experience

The US$26trn retail sector is a significant part of the global economy and is growing at six per cent annually. Technology spend by the sector is considerable, accounting for some six per cent, or US$177bn, of the global US$2.7trn IT spend and is growing at five per cent per annum, the fastest of any sector. The retail landscape is being influenced by a number of trends, most notably:  

  • Multiple consumer platforms (store, online, mobile): Consumers are using a number of reference points to inform a purchasing decision. These often differ from where they make the end purchase with trends varying between retail verticals and geographies (see Figures 1 and 2). Whilst online sales are still, surprisingly, relatively modest, the web is an increasingly significant influencer of consumer decision making and the Amazonification of online retail is setting the channel standard.
  • Changing retail formats – the line between retail and hospitality is blurring: Retailers are fighting to maintain market share and increasingly offer complimentary products and services such as fuel, restaurants, dry cleaning, pharmacy and banking to increase their attractiveness. Conversely, hospitality formats such as restaurants, pubs, hotels and cinemas often include retail type offerings.
  • Technology innovations: increased capability and functionality linked to payment methods, delivery and collection options, digital engagement, self-scan, bring your own devices, beacons and social platforms are empowering the consumer and corporates 

Successful omni-channel strategy underpinning on-going growth 

The overriding theme in the industry today is creating an omni-channel consumer experience where a brand delivers a consistent consumer experience across its various platforms for a given geography. Multi-channel customers typically spend considerably more that single channel shoppers so getting it right is key. A number of retail brands have been clear leaders in the omni-channel arms race, with the likes of Argos, John Lewis/ Waitrose, Selfridges, Macy’s, Sears and House of Fraser often being cited as notable innovators.

An omni-channel strategy is often hard to implement but key to retailer strategy 

Retailers are under pressure to retain, and gain, market share and a successful omni-channel experience is vital to achieving this. Consequently, omnichannel themes are strategic priorities with “growing e-commerce sales” and an apparently competing “improving the in-store experience” leading retailers’ priorities, with other related objectives also prominent.

Legacy systems and cultural dynamics hinder omni-channel adoption 

Many corporates encounter significant obstacles when implementing an omni-channel strategy (see Figure 6). Individual systems and business units have often been built around the two main commercial platforms, the store and, more latterly, online models. As retailers grew and the market evolved, so did each platform’s complexity, inflexibility and maintenance cost. This is often compounded through internally developed platforms or heavily bespoke, off-the-shelf offerings from the (remaining) scale software providers. Consequently, many mid to large retailers are now operating on very expensive, deep-rooted and inflexible platforms that cannot communicate. 

A consolidated provider landscape 

The changing retail landscape has brought with it significant IT provider consolidation: since 2000, over 50 prominent brands have been acquired to create a limited pool of international scale players since 2000 (see Figure 7). Internal IT teams have also grown as retailers centralised their store management systems and moved into the online space. This legacy of consolidation and retailer internal IT team growth has left the tier 1 and mid-tier retailers without significant third party choice. A clear opportunity exists for agile technology providers to capitalise on market gaps, whether by organic growth, acquisitions or private equity investment. 

Strategic buyers are scaling up

Strategic acquirers are keen to build out new capabilities and expand geographic reach as a means to increase scale and secure long-term customer relationships.   

  • Apax-backed Aptos’s announced acquisition of BT Expedite (retail technology solutions) will expand Aptos’s European presence.   
  • US-based Diebold’s £1.5bn acquisition of Germany-based Wincorp Nixdorf (6.8x EBITDA) creates a group with 35 per cent global market share, ahead of the current leader. The combined business will focus on developing software, services and mobile apps.    
  • Oracle’s £6.9bn acquisition of Netsuit (£6.9bn, n.d.) gives it a solid cloudbased ERP/CRM platform and its £3.1bn acquisition of Micros (17.5x EBITDA) gives access to the hotels and restaurant space.   
  • SAP’s partnership-driven minority acquisition of GK Software. 

Financial investors are attracted to the high barriers to entry, limited competition at the mid-to-enterprise platform level, scalability (with some SaaS evolution at the SME/mid-tier level) and the ability to cross-sell supplementary services.   Notable deals include Silver Lake’s acquisition of the predominantly French retail software provider Cegid (£329m, 14.2x EBITDA), Searchlight Capital Partner’s £344m (6.6x EBITDA) acquisition of Harbourtech Payments (PoS systems) and the £593m combination of eBay Enterprise and Innotrac to become Radial, a major omnichannel commerce technology provider. There have also been a number of PE investments in the parallel hospitality space, most notably Riverside’s investment in Guestline and Insight Ventures Partners investment in Fourth Hospitality (£200m, 27.8x EBITDA), both leading hotel-centric platforms.