Consumer Products M&A Insights Summer 2014 To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. Contents Foreword 1 Economic outlook – UK 2 Corporate risk appetite 6 Consumer Products M&A Market trend analysis 14 M&A market – By sector 22 Global M&A drivers 32 Deloitte view 34 Our Consumer Business M&A specialists 35 To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. Foreword Welcome to our new Consumer Products M&A Insights However, as has been highlighted previously in our reviews review, that looks to capture both the latest macro- of completed deal activity in the sector, completed deals economic and Consumer Products M&A trends, alongside tend to lag general economic activity – given that deal our perspectives of the M&A environment and the key processes tend to take anywhere between six to nine months factors driving deals within the sector. to complete. In addition, from our analysis, there can be delays of anything up to six months before such deals are Last Summer, in our Consumer Products M&A survey registered, effectively suppressing deal activity in the most (“The return of the feel good factor?”), there were clear recent quarters. So it is only in the next few quarters that we signs that consumer confidence was on the up and that will really see the extent to which the economic upturn in there had been a strong shift in the sentiment of business much of Europe has translated into deals. leaders towards more positive expansionary strategies. With that in mind, this review looks to address some of the So it may, initially at least, come as a surprise to some that key drivers for future deal activity, namely: the improving completed deal activity in the period since that time does economic outlook for the UK, the broader sentiment of not, at first glance, seem to present such a favourable CFOs across the UK, the factors behind the growing US picture. Barring a few major deals, the apparent trend in appetite for investment into Europe; and finally some recent completed deal activity over the twelve months to June deal announcements that reinforce the view that doing 2014 appears to be broadly downward. deals is back in vogue. Kind regards Conor Cahill Partner, Corporate Finance Consumer Products M&A Insights Summer 2014 1 To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. Economic outlook – UK • The UK economy made major strides at the start of 2014 growing • However, an improvement in consumer confidence is yet to at 0.8% in the first three months and matching pre-recession translate into significant growth in consumer expenditure, which growth rates. Annual GDP growth of 3% in March 2014 also slowed down from 2.4% in Q3 2013 to 2.1% in Q1 2014. The surpassed pre-recession growth of 2.8% (March 2007), with the UK prospect of an interest rate hike remains a potential impediment expected to emerge as the fastest growing economy among the to consumer expenditure growth, which could significantly impact developed nations. the UK recovery story in 2014. Such concerns appear to have been flagged in the slight fall in consumer confidence reported for July • Consumer appetite for major purchases showed consistent 2014, the first decline for six months. improvement with the ‘UK GfK Major Purchases Index’ increasing for the fifth consecutive month in June 2014, reaching -2 points • The disparity between consumer confidence and spending sets from -11 points in February 2014, and staging the longest the scene for an ongoing battle in the UK retail sector as retailers improvement since 2008. With the ‘Major Purchases Index’ edging compete to woo reluctant consumers. Food & non-alcoholic towards positive territory, consumer confidence seems to be getting beverages and clothing & footwear categories saw the largest closer to the pre-recession level. decline in prices during May 2013 to May 2014, as supermarkets and discount retailers focus on competitive pricing to attract consumers. • Whilst Consumer Price inflation fell to 1.5% in May 2014 (the lowest since October 2009), the unexpected climb to 1.9% in June 2014 is • The unemployment rate in the UK declined further to 6.6% in the still below the Bank of England target of 2%. Whilst this has eased three months to April 2014 from 6.8% in the previous period, the pressure on real income and shopping budgets, the spectre comparable to Germany’s unemployment rate of 6.5%, although of a future interest rate increase may stretch household finances perhaps not subsequently buoyed as much by the national team’s further. Declines in global commodity prices and the strengthening performance in the World Cup. However, real income growth of sterling in the first half of 2014, along with pricing competition remains stubbornly subdued, impacting living standards and amongst UK retailers, offers some check to future inflation rate putting a significant squeeze on consumer budgets, thus widening growth. the disparity between consumer confidence and spending. 2 To start a new section, hold down the apple+shift keys and click to release this object and type the section title in the box below. • The corporate sector remains optimistic about the UK economy, • The top priority for UK CFOs is introducing new products and with 51% of CFOs rating the level of financial and economic services or expanding into new markets, thus reflecting the uncertainty facing their business as normal or below normal – corporate optimism about the UK economy. The proportion of the most favourable level for four years, as highlighted in the corporates following defensive strategies, namely reducing costs latest Deloitte CFO Survey (Q2 2014). The decline in economic and tightly managing cash flow, hit a four-year low in the second and financial uncertainty coincides with a surge in corporate risk quarter of 2014. Expansionary strategies are now rated higher appetite, with 65% of CFOs saying that ‘now is a good time to take than defensive strategies for the fourth consecutive quarter, greater risk onto their balance sheets’, according to the survey. with companies focusing on increasing capital expenditure and inorganic growth. • As corporates become more optimistic about their profitability, CFO expectations of a rise in revenues and operating margins have hit four-year highs, albeit optimism about financial prospects for their respective companies continues to be tempered by several economic and political uncertainties; however, it remains well above the long-term average. • More CFOs are reporting that the cost of credit has fallen and credit availability has increased in the second quarter of 2014. This coincides with the first increase in bank lending to corporates for five years. Accordingly, the Bank of England’s Credit Conditions Survey reveals that mergers and acquisitions, investment into commercial real estate and capital expenditure have been major drivers of corporate demand for loans. Consumer Products M&A Insights Summer 2014 3 Economic outlook –UK outlook Economic 4 -5 -4 -3 -2 -1 -45 -40 -35 -30 -25 -20 -1 -1 Sour C 10 20 30 Sour C -5 hart 1.GfKConsumerConfidence 0 0 0 0 0 0 hart 2.Climateformajorpur 5 0 0 5 ce: Gfk ce: Gfk Sep-04 Sep-04 Dec-04 Dec-04 Mar-05 Mar-05 Jun-05 Jun-05 Sep-05 Sep-05 Dec-05 Dec-05 Mar-06 Mar-06 Jun-06 Jun-06 To Sep-06start a new section, hold down the apple+shiftSep-06 keys and click Dec-06 to release this object and type the section titleDec-0 in the6 box below. Mar-07 Mar-07 Jun-07 chases –Isthistherighttime? 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