M&A in consumer goods and retail to hover around $400 billion mark

Consumer goods and retailers are continuing to pick up companies globally through M&A, topping $392 billion last year. Acquisitions are driven by various motives, including access to changing customer demand, new product lines as well as new geographies, among others. This year is expected to see similar levels of activity, although high debt cost levels could see investors take a more cautious approach.

Growth in the consumer goods and retail industry have, in recent years, relied on a multi-pronged approach of organic and inorganic expansion. The latter has been used to access new products, enter new geographies and target more discerning consumer tastes. The M&A market has thereby picked up.

To understand M&A trends in the landscape, A.T. Kearney analysed more than 100,000 transactions closed between 2006 and Q1 2018 covering consumer goods and retail in, among others, food and beverage, grocery, pharmacy, and personal care. The results have been captured in the firm's ‘Can M&A reignite growth in consumer and retail?’ study. 

M&A activity

M&A activity in the consumer goods and retail segments saw slight decline on the year previous, falling 16% in total, from $468 billion to $392 billion. The difference was however, largely the result of mega deals >$30 billion, which fell by almost 50% to $64 billion, while <$30 billion deals saw a decline of 2% in the same period. Overall deal activity, excluding mega-deals, was slightly above the longer-term average or around $300 billion.

The relative stability of the overall consumer and retail market activity, excluding mega-deals, reflects wider softening of valuations affecting almost all regions – with Asia pacific the only region to see relatively stronger activity in light of demographic changes.

Large deal activity saw slight slowdown, with consolidation and convergence driving the largest deals – including the America Tabaco deal (which accounted for all of the mega-deals this year, at $64 billion). In total there were 59 deals in excess of $1 billion.

Private equity firms hold almost unprecedented levels of dry powder, almost $1 trillion, which institutional investors continue to leverage the segment as a means of diversifying their portfolios. 2017 saw strategic buyers lose out slightly to financial investors, with market share shifting by around 15% in favour of investors to a 30% versus 70% split, from 84% in favour of strategic buyers the year previous. The deployment of considerable reserves saw rivate equity firms take a $120 billion investment in the segment.

Interestingly, rivate equity firms last year were found to be paying a premium relative to strategic buyers for targets, at median deal multiples of around 14.1 compared to 10.4 for strategic buyers. China was the main target for private equity firms, at around 25% of total investments, with the region demanding higher overall multiples.

2018 projection

Going into 2018, few respondents to the survey see there to be a significant downturn this year – with just 11% saying that they expect a market downturn this year, while 5% expect strong divestiture as a driver for M&A. By and large, top-line growth is seen as the key driver for M&A activity this year, aimed at expanding portfolios of products, accessing new geographies and new customers. 71% of the surveyed companies believe M&A is creating value for their companies.

Consumer packaged goods (CPG) companies remain flush with cash, to the tune of $1 trillion, however, on the other side of the equation there is around $2.2 trillion in debt. Access to financing has been relatively cheap in recent decades, while corporate bonds have provided access to finance outside of traditional capital markets. The study notes that the debt to EBITDA ratio of publicly traded firms stood at 2.4 for CPG and 2.5 for retail – slightly up on previous years. The continued low interest environment and high cash holdings are unlikely to result in companies paying down debt, thus unlikely to negatively affect M&A in 2018.