Michelle Napoli is editor of Net Lease forum, from which this article is excerpted.

New York City—The retail team at Fitch Ratings Inc. predicts continued merger and acquisition, leveraged buyout and real estate sales and strategy activity in 2007, all in what it describes as a challenging operating environment for retailers. That could be good news for sale-leaseback and net lease investors, a number of whom have been the buy-side beneficiaries of corporate deal-driven real estate transactions.

Potential sellers of real estate next year include Boise, ID-based Albertsons LLC and Rite Aid Corp. of Camp Hill, PA, Fitch anaylsts say. On the other hand, some retailers are expanding and could be buying, such as J.C. Penney Co. Inc. of Plano, TX, Kohl's Corp. of Menomonee, WI and Target Corp. of Minneapolis.

During a recent teleconference, New York City-based Fitch analyst Karen Ghaffari charcterized this as a period of intense competition for retailers. "M&A activity remains strong and will continue to alter the competitive landscape for years to come," she explains. Negative outlooks and watches for Fitch rated retailers outweigh those with positive outlooks by nine to three, she adds.

Philip M. Zahn, a Fitch anaylst based in Chicago, says a number of significant transactions this year have transformed the supermarket and drug segments. In addition, he notes, leveraged buyout activity has been brisk among specialty retailers, including Linens 'n Things Inc., Michaels Stores Inc. and the Sports Authority Inc.

"We anticipate additional merger and buyout activity in 2007 as the competitive landscape evolves and as private equity firms and hedge funds look to retailers for their cash flow and real estate assets," Zahn says. While both analysts say it is difficult to predict what companies will be the subject of leveraged buyouts, retailers that have significant assets that can be monetized are good candidates. "It could be broad-based across many of the sectors with retail," Ghaffari adds.

Other notes from the Fitch teleconference:

The supermarket sector saw "significant M&A and real estate trading that changed the competitive landscape in many markets," Ghaffari says. Going forward, the sector will continue to evolve, particularly with the reorganization of Winn-Dixie Stores Inc. and the breakup of Albertsons.
Another New York City-based Fitch analyst, Lauren Teevan, says "2007 will be a dynamic year for drug retailers given the level of M&A activity in the sector."
Chicago-based Fitch anaylst Tiffany Co says discounters and dollar stores will continue to compete for market share in 2007.

Instant Insights /

Fitch: More M&A, RE Sales in Retail

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