A widespread global recovery in mergers and acquisitions (M&A) activity in the food, drink, consumer goods and retail sectors has been slowed in the second half of 2011 by low consumer confidence and uncertainty over the euro zone financial crisis. But companies worldwide remain eager to grow, enter new markets and consolidate, and are preparing to come back strongly when confidence returns in 2012 and 2013, according to a new report from KPMG International.
These are the main conclusions of a global study of consumer markets M&A activity, Consumer Markets M&A Outlook: Pursuing Growth in an Uncertain World. Drawing on trends for the past two years of activity, and interviews with KPMG M&A professionals in 23 countries, and supplemented by comments from private equity (PE) executives, the study shows that the fundamental drivers for growth remain in place in most countries. It also shows, however, that companies are wary of entering into large deals while the euro zone crisis remains unresolved and consumers continue to adjust to changing economic conditions.
Although debt financing remains difficult, especially for deals US$135 million or more, the report indicates that financing is available for good quality mid-range deals, where target companies have strong customer bases.
In some markets relatively unaffected by the euro zone, notably Norway, banks are starting to compete to put together structured financing deals for the right assets. The study says that lenders in these markets are even coming under pressure to keep terms reasonable.
The food and drink sector is particularly active, with more than 900 transactions either announced or completed during 2011, more than all other FDCG sectors put together.
The 23 countries covered in the report are:
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· Brazil
· Canada
· Mexico
· US
· Australia
· China & Hong Kong
· Japan
· India
· Philippines
· Singapore
· Belgium
· France
· Germany
· Italy
· Netherlands
· Norway
· Poland
· Russia
· South Africa
· Spain
· Sweden
· Switzerland
· UK
“In many of these countries, the US, Mexico, Poland, Japan and South Africa, for example, we are seeing reasonable levels of consumer M&A activity today, as domestic companies consolidate to gain economies of scale, or foreign acquirers look for routes into big new markets like Russia, China or the African nations,” said Willy Kruh, KPMG’s Global Chairman, Consumer Markets.
“But in Europe, the widespread recovery we saw in the first half of 2011 has stalled as the full impact of the problems in the euro zone become clear. We are hearing that businesspeople have positive expectations of the new governments in Greece, Italy and Spain, but what companies really want is a Europe-wide resolution to the crisis, giving a clear set of parameters around which they can plan.”
“Consumer deals in India have witnessed high valuations, thereby creating a barrier of sorts in the market. Sellers have significant expectations about values, especially privately-owned businesses. Scarcity value is also driving valuations up” said Nandini Chopra, Partner, KPMG India.
While temporary issues of confidence may be forcing companies to be cautious, there are some deep-rooted and very powerful factors urging them to make strategic plans for expansion.
Interviewees from several countries report that fragmented domestic markets and rising commodity prices continue to lead companies to seek economies of scale and improved logistics through mergers with local rivals. Internationally, the long-standing attraction of large, high growth markets in China, Brazil, India and Russia is leading cash-rich acquirers from the US and Japan to do mid-sized deals now to gain a foothold while prices are relatively low.
The report notes the emergence of brand-driven acquisitions, particularly by Mexican companies wanting to take advantage of brand familiarity among the large Hispanic population in the US to build a new market for their goods.
There are also some signs of a re-emergence of the private equity houses as buyers. They are interested mainly in middle market deals involving high quality assets, since these are the projects most likely to be financed by the banks.
One PE practitioner told KPMG that they were not sure whether they are peering over the edge of a precipice or whether they have hit the bottom and the market is going to trundle along for the next three to five years. “If a quality asset comes along,” he said, “it can command exceptional pricing because there are just so few of them.”
Despite this residual uncertainty, KPMG’s M&A leaders agree that the consumer markets will recover their confidence and resume a more normal level of M&A activity.
“What we don’t know is how long this will take,” said Mr. Kruh. “Some of our consumer markets sectors believe they will have to consolidate to make sure they are offering a wide range of products for consumers, at competitive prices on which they can make a profit. These are market fundamentals which will apply no matter how fast or slowly consumer and business confidence returns.”
