M&A Predictor 2018: Consumer Markets | KPMG | AU
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M&A Predictor 2018: Consumer Markets

M&A Predictor 2018: Consumer Markets

Consumer markets is expected to remain an active M&A market in Australia in 2018, driven by a continuation of themes that were also in play in 2017. This includes continued investment appetite from Asia for food and agriculture assets, private equity interest in the branded food and beverage space, sluggish deal activity in specialty retail and strong mid-market volumes.

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Australian outlook – Consumer markets show mixed fortunes

We saw a number of key themes emerge in Mergers and Acquisitions (M&A) activity in consumer markets over 2017, and these have continued in 2018.

Broadly speaking, consumer markets continues to be a strong sector for M&A and we see minimal change in 2018.

Asia driving demand for land, grazing, nutrition assets

In the agribusiness sector we have seen sustained interest from Asia in land and grazing assets, extending into processing assets within the protein supply chain. There are several reasonably-sized transactions on foot in this area.

These assets commonly play into the value chain of exportable products and link to the macro theme of food security in Asia.

Inbound interest in the area remains strong, and we see no sign of this diminishing through 2018, although activity may become more targeted.

Interest from Asia is also driving activity around nutritionals – another area of considerable inbound interest targeting the provenance of Australian product.

Private equity circling strategic food and beverage brands

The packaged food and branded products space is another area to note. Private equity activity remains strong when it comes to brands and strategic assets in the food and beverage sector, across the processing value chain through to retail.

Activity in this space has been notable in the mid-market, with strong privately held brands seeking exits or capital to scale businesses for further growth.

Products and brands that have built trust as part of 'brand Australia' remain a pocket of strong activity, and are starting to cycle out on the sell side.

Retail M&A activity subdued

Turning to retail, the story is less upbeat. The downturn in the sector has been well publicised and most M&A activity in the specialty or apparel retail sector relates to activity focused on businesses which need capital for turnaround or are in, or close to, administration. This, in turn, is creating challenges for successful businesses to achieve targeted valuations and has diluted private equity interest in the sector.

The quick service restaurant segment also remains challenged. We believe that while there are good brands that still have a growth runway, the competition for a share of the consumer wallet has increased significantly.

Pick-up in health and wellness sector

By contrast, health services has seen really strong market growth. As a result the sector is witnessing a lot of interest from private equity and capital raising to accelerate growth.

In particular, activity and interest has been very strong in cosmetic brands, related health and beauty services, spas, and laser clinics.

We predict the strong market growth in the segment to continue through the rest of the year.

Multinationals reassessing Australian portfolios

Another key theme is multinationals looking to divest local brands that don’t have global reach. For instance, we have recently seen Mondelez sell off Vegemite and several other domestic Australian brands.

We expect this trend may continue as multinationals rationalise and reinvest into higher growth economies through global brands.

Global outlook

"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.

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.

"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 rationalisation 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."

For additional insights into consumer and retails trends for 2018 read KPMG's report Capturing new growth opportunities: Global Consumer and Retail M&A trends 2018.

Reviewing 2017

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.

Source: Dealogic, KPMG analysis

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.

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