Look for another year of consolidation and strategic dealing in the Consumer sector as global players continue the drive for sales growth and solid earnings progression in 2018 amid unprecedented transformative change and complexity.
According to the M&A Predictor, corporate appetite for M&A deals in the Consumer Discretionary sector, as measured by forward P/E ratios, is expected to rise by 8 percent in 2018, while deals in the Consumer Staples sector are expected to increase by 7 percent versus 2017. The capacity of corporates to fund M&A growth is expected to rise by 17 percent for Consumer Discretionary and 12 percent for Consumer Staples.
“We’re still seeing significant activity being driven by increased strategic focus that is resulting in divestments, like Unilever’s US$8 billion sale of its spreads business to KKR, or demergers similar to Whitbread’s separation of Costa Coffee from Premier Inn. While corporate balance sheets are healthy and access to capital is encouraging, buyers remain disciplined, although valuations have been creeping up over the past 12 months,” says James Murray, Global Head Consumer M&A.
“Consumer consumption remains positive across the board, if not exciting. A number of categories are demonstrating strong growth, such as sports nutrition, hydration drinks, healthy snacks, meat substitutes, pet products and beverage mixers. All of these have very exciting prospects and we expect to see more deals in these areas.”
Looking at the first quarter of 2018, however, deal volume dropped to 1,899 deals from 2,483 in Q1 2017 and deal value declined to US$126 billion from US$130.9 billion, boosting average deal size to US$66 million.
“The pursuit of growth remains very much top of the agenda,” James says. “I think we're going to see more large-cap companies taking action to exit businesses or to run them very differently - reshaping portfolios to make them more relevant to the current consumer environment. The ongoing rationalization and consolidation of portfolios, similar to Nestlé's sale of its US confectionary business to Ferrero, will continue in 2018.”
The trend toward a longer-term view in dealings is also expected to continue, along with a willingness to pay a premium for consumer businesses in high-growth markets, James adds. “The model of private capital ownership with parties such as JAB Holdings and 3G Capital is something we expect to see more of in the consumer market, a longer-term ownership model, versus private equity.”
Consumer sector deal activity remained healthy in 2017 following a strong 2016, with a number of mega-deals contributing to an overall 6-percent increase in volume to 9,326.
However, the overall value of deals declined 22 percent to US$501 billion from US$640 billion. This is in line with our 2017 M&A Predictor, which anticipated decreases in predicted appetite of 2 percent and 4 percent for Consumer Discretionary and Consumer Basics, respectively.
“We would be consider last year a top performing year when you look at the last two decades. Particularly in Europe and especially when we consider deal volume. Europe managed to remain the most active in terms of deal volume despite the backdrop of economic and consumer uncertainty,” says James.
The US, UK and Germany posted the most deals, followed by Canada and France, while the US, Italy and the Russian Federation posted the highest total value of deals, followed by France and China.