Amazon ‘roll-ups’ in ‘cycle of survival’ talks to boost balance sheets

Start-ups that collectively raised billions to buy up brands which sell on Amazon are in a “cycle of survival”, with companies in discussions about possible mergers and deals to bolster their balance sheets.

Ecommerce businesses that “roll up” independent Amazon merchants raised more than $16bn amid the pandemic-driven boom in consumer spending, according to Marketplace Pulse, which tracks the sector.

But concerns have grown this year among founders, financiers and analysts about the financial health of the debt-laden groups.

Some have breached lending covenants, with others looking to boost revenues and profitability by acquiring rivals and improving economies of scale, industry insiders said.

Meanwhile, other investors, such as family offices, are eyeing the sector for opportunities to snap up individual brands owned by aggregators at cut prices.

Last year’s downturn in consumer spending as interest rates rose left some groups with excessive inventory and higher storage expenses, even as the cost of advertising products on Amazon rose. 

Two of the largest aggregators, Razor Group and SellerX, acquired rivals The Stryze and Elevate Brands, respectively, this year.

Juozas Kaziukenas, founder of Marketplace Pulse, said the aggregators market was in a “cycle of survival”. 

“Many of these firms entered the space when the hype cycle was at its peak,” he said. “It’s either figure out a way to survive, or give up and find a way to get out.”

One person close to some of the talks said there were “just too many players in the space”.

“Every one of these smaller players would like to be bought but there are only a few people that can buy,” they said.

“All the CEOs know one another. Everyone’s trying to see how businesses and portfolios fit together,” said another person involved in discussions, adding that term sheets were starting to be negotiated and signed.

The merging of Amazon aggregators — each of which might own dozens of brands — is proving extremely complex: the numerous equity and debt stakeholders involved and buyers holding out for more favourable terms had slowed dealmaking, people close to the talks said.

The groups — many of which have common investors, such as CoVenture and Victory Park — hoovered up consumer brands sold on Amazon in the expectation that the growth in online sales would continue after coronavirus lockdowns were lifted.

Some aggregators also bought up Shopify stores, which allow brands to build and sell via their own online stores, rather than selling on Amazon or other marketplaces. Others — such as Shop Circle, which raised $120mn this year — started aggregating ecommerce software companies.

That fuelled anxiety about the prospect of companies breaching lending covenants or going bankrupt, as happened to aggregator Benitago in August. 

Some deal talks were being “forced” by lenders, two people said. Aggregators polled by the ecommerce investment bank Fortia Group between June and September said the main drivers of merger talks included the potential for “cost synergies” and the groups’ “creditors.”

The websites for several smaller aggregators appear to have stopped working, including Negotiatore, which has sought to sell its brands according to correspondence seen by the FT. The company could not be reached for comment.

Analysts said other potential buyers, such as family offices and groups that handled sales on behalf of consumer brands, were becoming interested in snapping up brands owned by aggregators at low prices. These include groups such as Inversal, which specialises in “ecommerce turnarounds” for companies “in distressed situations”, including small aggregators.

Taliesen Hollywood, chief executive of M&A advisory group Hahnbeck, said there were “substantial numbers of buyers coming to us looking for distressed assets, looking for bargains.”

Sam Baldwin, founder of consultancy eVenturing, predicted that there would be a “race to the bottom” among buyers looking to “hoover up that entire unloved market at a cut price.”