April 10, 2018
Exec Summary
Total deal value in the Consumer industry amounted to $381.1bn in 2017, a 68.4% rise from the prior year. This accounted for 12.1% of global deal value. Despite a dramatic increase in total deal value, volumes have declined by c. 5% to 2,093 in the period.
The increase in value in the Consumer industry is largely related to a number of high profile deals in the year. 2017 saw six acquisitions with consideration greater than $10bn, including British American Tobacco’s (BAT) acquisition of the remaining 57.8% of shares in US-based Reynolds America for $49.4bn. The acquisition grants BAT access to the US market, creating the world’s largest tobacco business. Cheap debt has meant capital is readily deployable and, in turn, private equity activity in the Consumer space was the most significant since 2007. The 517 completed private equity deals, amounting to $65.2bn, represents an 84.2% rise in value since the prior year.
M&A activity in Q1 2018 has been more subdued than Q1 2017. Deal volumes fell by 16.1% from 508 deals to 426. The decline in deal values, however, was more significant. Values decreased by 52.6% from $166.9bn to $79.1bn, mostly because there was one single megadeal in the period. Nevertheless, Q1 2018 marked the fourth highest quarter since 2009, illustrating a positive environment for dealmaking (the highest quarter was last year).
The Food & Beverage subsector is one which has made headlines during the last quarter of 2017 and the start of 2018. With consumer preferences shifting towards healthier, natural foods, traditional companies are re-evaluating their strategies for growth, as well as product lines. In December, Unilever agreed to sell its spreads business, including the likes of Flora margarine, to US buyout fund KKR for c. $8bn. Sales volumes in the spreads business have been suffering in recent times due to changing tastes and, following a failed takeover bid by Kraft, Unilever have begun to restructure their portfolio.
Contrary to these trends, JAB Holdings’ (JAB) announced the acquisition of soft drinks business, Dr Pepper Snapple (Dr Pepper) in January this year. Dr Pepper will be merged with coffee company, Keurig Green Mountain (owned by JAB), in a deal that could be worth as much as $21bn, making it the largest ever in the soft drinks arena. This will enable Dr Pepper to better compete with market giants such as Coca Cola and PepsiCo.
Economic uncertainty following the Brexit referendum led to a spike in UK Consumer M&A, with companies looking to consolidate to protect themselves from the unknown. With the additional pressure of inflation and stagnant wages, the total value of announced deals more than tripled to £22.1bn. Looking forward, we anticipate similar levels of activity. Companies will continue to look for ways to adapt to the new economic environment and should the value of sterling remain depressed, the UK will be an attractive destination for foreign investment.
Sector Insight: Pubs, Bars and Restaurants
Over the years, the restaurant and bars sector has become increasingly saturated. People eat and drink out far more regularly and, accordingly, associated businesses have benefitted. Today, however, pubs, bars and restaurants are facing significant cost pressures, predominantly due to rising property, tax and employment costs. Byron Burger, Jamie’s Italian and Strada are examples of businesses which have faced multiple site closures since the new year as a result of these pressures.
Consumers are also being squeezed with rising inflation and stagnant wages. To remain competitive, businesses must therefore find innovative ways to cut costs. Brand engagement is more important than ever, with customers far more likely to return to restaurants and bars that can differentiate themselves. Generic chains have suffered, especially businesses which have focused more on the number of sites than their individual quality. Towards the end of Q1 2017, Flat Iron, a London-based steak restaurant group received £10m of investment from private equity firm, Piper. Flat Iron’s USP of selling high quality but affordable steaks has enabled them to succeed in the competitive environment we see today. While the current restaurant climate suggests the days of aggressive site roll-outs may be over, the sector still presents opportunities for M&A from several angles. Going forward, we expect to see consolidation among businesses who are struggling to keep down costs, but also further investment in those who have successfully shifted their emphasis to quality, value and differentiation.
The number of wet-led establishments has been falling ever since the smoking ban was implemented in 2007. This trend now appears to be slowing with an annual decline of 6% in 2016 halving last year. In September 2017, UK pubco Admiral Taverns received equity investment of £37m from C&C Group and Proprium Capital Partners. The investment will allow C&C to enter a “resilient and growing” earning stream. In February 2018, Lonsdale Capital Partners acquired a majority stake in Nightlight Leisure Limited, trading as Simmons Bars (who were advised by Bluebox Corporate Finance). Simmons have developed a simple and flexible business model that has enabled them to concentrate on minimising operational complexity and costs so to maximise gross margins. The model has enabled Simmons to scale and the deal includes a £5m growth capital facility to help fund the further rollout of sites across the UK.
With an over-saturated market for restaurants, and various cost pressures for businesses and customers, wet-led establishments can offer customers quality and value for money. We anticipate continued growth in this market segment over the coming year and, in turn, further investment too.