Harnessing growth potential Consumer Products M&A Insights January 2019 Harnessing growth potential | Contents Contents Foreword 03 Economic backdrop – UK 05 Consumer M&A trends analysis 06 Consumer Products M&A Market trend analysis 08 M&A Market – by sector Food sector 12 Beverage sector 14 Personal, Household, Apparel and Other (“PHAO”) sectors 16 Tobacco sector 18 Agriculture and Livestock sector 20 Our Consumer Products M&A specialists 22 Notes 25 02 Harnessing growth potential | Foreword Foreword The desire to harness M&A as a long term • PepsiCo’s acquisition of SodaStream earnings growth strategy remains high, with (€2.7 billion) several sectors being particularly active, most • Heineken’s acquisition of a 40% stake in China noticeably in the personal, household products Resources (€2.7 billion) and apparel sector. This potentially reflects a greater focus of dealmakers in an area that • Ferrero’s purchase of Nestle’s North taps into the health and wellness spending American confectionery business (€2.5 billion) trends of consumers. Elsewhere, the agriculture • Sunshine Investments’ (PAI Partners/bcIMC) sector saw a megadeal in Bayer’s purchase buyout of Refresco soft drinks (€2.5 billion) of Monsanto, as well as some bold portfolio realignment in the food and beverage space. • Unilever’s acquisition of Carver Korea There were thirteen megadeals (deal size over (€2.2 billion) For many businesses, a mixed economic €2 billion) with a deal value totaling over €107 environment, unease over tariff introductions billion, in the year to September 2018: Announced and completed deals > €200m - rolling annual activity and Brexit uncertainty may be rightfully • Bayer’s merger with Monsanto (€56.5 billion) 60 €350 viewed as causes for concern. However, bigger ticket European merger and acquisition • Glaxo SmithKline’s buyout of the Novartis 50 €300 (M&A) volumes appear to be holding up share of their consumer health product joint remarkably well. venture (€10.5 billion) €250 40 s ) th • KKR’s purchase of Unilever’s spreads In this, our 13 Consumer Products M&A al €200 business (€7.1 billion) De 30 lue (€ Insights report, we highlight several fresh . €150 Va trends driving the largest activity, which • International Flavors and Fragrance’s No remains strong in spite of a backdrop of total acquisition of Frutarom (€5.9 billion) 20 €100 annual deal volumes falling by over 10% from • Anta Sports/FountainVest’s acquisition of their September 2015 high of 1,500 to now 10 Amer Sports (€4.6 billion) €50 around 1,100 on a rolling four quarter basis. • Barcardi’s acquisition of Patron (€4.2 billion) - €0 Over the year to September 2018, there Sep-15 Jun-16 Sep-16 Jun-17 Sep-17 Jun-18 Sep-18 • Procter & Gamble’s acquisition of the Merck were 45 deals above the €200 million mark consumer health business (€3.4 billion) (announced and/or completed), and 20 topped No. Deals Value (€bn) €1 billion in size, highlighting the continued • Coca Cola’s acquisition of Coca Cola Beverage appetite of major players to do deals despite Africa (€3.0 billion) the overall downward trend. 03 Harnessing growth potential | Foreword Key drivers As a result, many large companies have also assets once they come to market, as well as the UK. As such, we continue to expect several This year, across the spectrum of deal sizes, actively sought to divest low growth or non- elevated vendor pricing expectations. This ‘deal corridors’ to grow further, including those M&A has been driven by a number of factors. core assets, providing notable opportunities for may have led potential acquirers to push hard between Europe, Asia and North America. Clearly amongst the most pressing has been a buyers. Novartis sold its share of a consumer on initial valuations, factoring in future target growing desire to drive economies of scale or to healthcare joint venture back to GSK, recouping performance improvement, but ultimately We also expect that divestment activity will capture control of leading brands to generate around €11 billion in the process. Meanwhile, becoming less sure they would fully realise increase, driven by mounting pressure from earnings growth. Unilever trimmed its own product portfolio with such benefits. activists. There is equally a desire by corporates the divestment of its spreads business to KKR to reallocate capital for higher growth A strong focus on consolidation remains in for approximately €7 billion. At a broader level, macroeconomic challenges opportunities, such as with Diageo’s sale of 19 evidence among firms in multiple subsectors, have dampened confidence among some brands to Sazerac, Unilever’s sale of its spreads not least in the agriculture space, where Bayer Whilst the number of large deals is in part companies, but we do not necessarily business and Mondelez’s recent divestment of undertook the year’s largest acquisition with testament to the strong cash reserves on expect this to slow major acquisitions or its cheese business to Arla. its €56 billion purchase of Monsanto to create corporate balance sheets, the big deal divestments. Debt, the fuel for a large number a seed and chemicals giant. Similarly, IFF’s landscape is also shaped in part by private of acquisitions, remains relatively accessible, Whilst the outlook for the broader economic acquisition of Fruitarom looked to secure its equity, where dry powder was at a record though there are long term access risks environment remains mixed, many leading position in the taste, scent and nutrition $1.1 trillion in September, according to Preqin. linked to any potential major disruption to the organisations continue to view M&A as space, and Pepsi’s acquisition of SodaStream Private Equity firms have been active on economic cycle and a growing central bank being among their best tools for driving the gives it a significant presence in the home a number of major deals, including KKR’s wariness with levels of leveraged loans. implementation of longer term visions and drinks market. Unilever spreads business acquisition, and the strategies. We expect to see a continuing PAI Partners-bcIMC consortium’s €2.2 billion Looking ahead healthy pipeline of M&A activity in the Elsewhere, Bacardi’s €4.2 billion move on purchase of bottler Refresco. Despite continued uncertainty, we believe consumer products sector. Patron grows the spirits giant’s presence that 2019 will see the number and value of further in the premium drinks sector. Unilever’s High interest levels among buyers based in deals sustained. M&A is inherently a long term Kind regards, €2.2 billion purchase of Carver emphasises its Japan and China have contributed strongly strategy, and we are witnessing a strong desire significant expansion ambitions in the Asian to rising deal volumes. Those buyers have among companies to harness that potential in skin care market. made notable moves in luxury assets and order to pursue growth, enter new markets, Conor Cahill food markets, as with the shoemaker Bally, or to shore up their competitive position. The Partner, Financial Advisory Companies also remain under pressure to the French margarine producer St Hubert and large cash reserves of many corporates and jettison less well performing assets, with the UK-based crisp company Seabrook Crisps. the record levels of private equity funds to be activist shareholders taking a growing role in Meanwhile, US capital continues to flow into deployed will also motivate activity. pushing for divestments that refine corporate Europe, with multibillion deals including the focus, add to acquisition firepower or unlock Merck deal, and acquisitions of Versace and The Brexit outcome and impact remains a further dividends. Neovia Group. continued ‘known unknown’. For many global operators it is one of a large number of factors In the last 12 months alone, across a range of Nevertheless, dealmakers undoubtedly still to be considered when plotting their path industry sectors, over 40 large cap companies face some substantial hurdles in the current to sustainable earnings growth. For more have been targeted by activists, which have climate. Several sizeable deals have run domestically-focused companies, a potential nearly $80 billion of funds deployed, according almost the full course of their process but Brexit outcome that feeds into weaker sterling to Deloitte analysis of Activist Insight data. have failed to complete. This perhaps reflects may well spur overseas acquirers to take a the significant competition for attractive closer look at affordable opportunities to buy in 04 Harnessing growth potential | Economic backdrop – UK Economic backdrop – UK The picture for the UK • A recovery in the broader Eurozone economy • Lower confidence is also likely to have played Many of these factors are likely to remain economy is mixed, with following a decline in growth from 0.7% through to falling consumer credit levels, in 2019. However, as seen by some of the a year ago to 0.2% in the third quarter, which sunk to a three-year low in September larger transaction activity in the last year, Brexit looming large and providing a positive potential backdrop to 2018. Loans and advances more than halved major players continue to cut through this sharply contrasting forces at continental consumers. year-on-year to £300 million, and the Bank of economic turbulence and are deploying England has warned that tightened lending some of the significant war chests that they • The US, whilst buffeted by recent midterm play for potential acquirers conditions could slow the supply of consumer have accumulated elections, continues to generate positive credit heading into 2019. and sellers of consumer jobs data and economic expansion. Its solid products businesses. growth, combined with tax breaks, has • UK inflation has started to converge on the provided significant firepower for businesses Bank of England’s 2% target. While in some looking to acquire in the UK and Europe.