Consumer and retail M&A value back to pre-crisis levels

06 June 2017 7 min. read

According to professional service group A.T. Kearney, global Merger and Acquisitions (M&A) value in the consumer and retail sector hit a recent peak at $469 billion, on the back of growing mega deals in the sector. Europe saw the biggest increase in deals, largely on the back of the AB lnBev's $107 billion acquisition of SABMiller. The research meanwhile forecasts the yearly deal value to increase further in 2017, with strong fundamentals, such as consolidation and cheap capital, still in place.

Merger and Acquisition activity in 2016 remained high across the globe at $3.8 trillion, although it slipped slightly on the previous year’s $4.9 trillion total. In the latest edition of A.T. Kearney’s annual study exploring trends in M&A within the consumer and retail sector, the strategy consulting firm also focuses on key trends likely to impact on deal activity going into 2017. The report is based on analysis of more than 100,000 transactions between 2005 and 2016 in, among others, the food and beverages, grocery, pharmacy, and personal care – as well as 100 in-depth interviews with private equity firms and consumer retail companies.

Near record year

Bumper 2016

According to the new paper, titled ‘Consumer and Retail M&A in 2017: Off to New Peaks in Uncertain Times’, the consumer and retail M&A market has seen value continue to grow by 31% since 2015, passing the $460 billion mark for the first time since 2008. The market was in particular buoyed by mega-deals, with M&A volume remaining relatively stable at a 9% increase on the previous year.

Researchers found that the market has been relatively slow to pick up since the financial crisis, with value still below that of 2007. Partially this is due to a continued knock to deal volume, however the report shows that this market aspect actually grew 9% in 2016, the first such increase since 2010, while growth has been relatively steady over the past seven years at 12% annually, along with a relatively steady climb in M&A value.

Mega deals across past twelve years

One of the reason for the considerable up tick in value, even while volume has remained relatively lacklustre over the past seven years, is from mega-deals (those valued at over $1 billion). The number of such deals fell sharply in the years following the financial crisis, from 75 in 2007 to 25 in 2009 and 35 a year later. The last two years has seen numbers return to levels seen before the crisis, at 52 in 2015 and 58 last year.

The firm notes that a number of mega-deals dominated last year’s M&A activity, with the ten largest deals representing 50% of total deal value, and the biggest deal, Stella Artois brewer AB lnBev's $107 billion acquisition of SABMiller, representing nearly 25% of 2016's total deal value.

M&A transactions by region

Last year, A.T. Kearney’s previous edition of this report forecast bullish M&A global markets in the consumer and retail industry. Former respondents predicted regions enjoying the strongest performance in this aspect would be North America, where 48% in total expected some level of increase in activity, along with Western Europe, where 32% also expected an improvement.

Following on from last year’s survey, deal activity in Europe actually saw the biggest increase, accounting for 44% of all M&A activity last year – and the highest proportion of activity in more than a decade. Accounting for this, analysts pointed in part to the AB lnBev megadeal. However, they also suggested while 2016 may have been a year of economic and political instability in the region, the turmoil may actually have stimulated the M&A market, as European deal activity was buttressed by a weaker exchange rate, caused in part by the UK’s Brexit vote, making targets in the area more attractive to opportunistic over-seas bidders.

North American activity will have surprised a high number of last year’s respondents however, as having been projected by a majority for at least stability if not a rise, the region saw the biggest relative decrease, from 50% of all deals in 2015 to 30% last year – with the challenges of increasingly tightening borders and cooling international relations in the area resulting from the new White House administration threatening to further deter foreign investment in 2017.

Commenting on the volatility of projections among respondents this year, Bahige El-Rayes, A.T. Kearney Principal and co-author of the report, remarked that growing geo-political across the world will continue to present challenges continued growth in retail M&A. “Going forward, we see deal multiples springing back as a result of mounting global optimism, increased liquidity and the strong US dollar. To navigate the crosscurrents of shifts in market dynamics and political conditions, consumer and retail companies will need a strategic approach that accounts for the risk of economic nationalism in various parts of the world, starting with our own region, as well as a long-term view on the value created by M&A deals,” he concluded.

Executives are optimists about 2017 M&A outlook across geographies

2017 projections

According to the study, deal activity for the coming year is set to rise, with two thirds of executives across all regions saying that they will increase activity in 2017 compared to 2016. Asia based respondents are the most upbeat, at 88% saying that activity is to increase, while North American respondents are the most cautious, with 36% saying that they will keep activity in line with the previous year and 55% planning to increase activity.

The firm notes a number of factors whose continued presence in the market will be a factor in deal activity going forward into this year. Companies in the segment, particularly in the US, are looking to acquire innovative companies, as sales slump due to changing market conditions. Consolidation is also said to be a key factor for, among others, the more than $200 million in total mega deals already announced for completion in 2017. In addition, strong balance sheets among PE players, as well as continued cheap capital, means that PE firms remain in a position to acquire, while strategic buyers can continue to expand inorganically.

Thriving companies will be targets for 2017

However, while the future looks relatively bright, the research also found that there is likely to be a relative mix of investment between thriving and in distress companies across both strategic and financial investor buyers. Strategic buyers are slightly more likely to pick up a distressed company, at 35% of respondents, compared to a financial investor, at 17% of respondents.

Analysts noted that 2017 is also likely to see increased interest from Private Equity players for the segment, as increased economic nationalism and a changing geopolitical landscape stand to create uncertainty in the market.

A.T. Kearney Partner Bob Haas, leader of the firm’s global M&A Practice and co-author of the report, suggested that while a number of circumstances that saw M&A climb in 2016 will likely yield a similar level of deal making in 2017, several other factors have emerged that may disrupt the broader market. Haas state, "Increasing pressure on companies to grow revenues and profits has been matched by emerging political uncertainty, which will make cross-border transactions far more complex and potentially not as favourable as domestic and repatriation deals. At the same time, high multiples in developed countries will bring more balance in global growth."