Consumer deal flow slows as COVID-19 virus spreads in US – Analysis

14 March 2020

The rapid spread of COVID-19 leaves the fate of many announced consumer M&A deals in jeopardy as the public markets fluctuate and consumers are encouraged to avoid places of public gathering. All-cash offers around halfway through an auction process still have a good chance at closing, said one beverage industry executive.

[The second and third paragraphs were amended to clarify the information given by the beverage industry executive]


  • Cash deals have better chance of closing
  • Distressed assets could hit market later this year
  • Dealmakers embrace video conferencing to get deals done


The rapid spread of COVID-19 leaves the fate of many announced consumer M&A deals in jeopardy as the public markets fluctuate and consumers are encouraged to avoid places of public gathering.


All-cash offers around halfway through an auction process still have a good chance at closing, said one beverage industry executive.


But offers that are half cash and half stock will likely be put on hold until the market stabilizes, he said.


Securing debt financing is also a challenge because lenders are nervous about the uncertainty that coronavirus represents in the marketplace, said multiple sources. With many bulge-bracket investment banks implementing travel bans, securing syndicated financing is especially difficult, said a restaurant-focused investment banker.


Sellers likely to wait


As a result, several assets that recently came to market in the consumer space are suddenly seeing no bidders and no demand, said a consumer-focused private equity professional, who predicts more sellers will pull out of the marketplace over the next two to six weeks. Many have a “wait-and-see” mindset, he said when asked how long sellers plan to retreat.


Companies preparing for an initial public offering have undoubtedly shelved those plans for at least four months due to market volatility, said several sources.


Recent IPO filings include San Francisco-based food delivery service DoorDash, which confidentially filed with the SEC on 27 February. It raised USD 600m in a Series G round in May 2019, when it was valued at USD 12.6bn.


Live M&A deals that can afford to “pause” for two to three months while the COVID-19 virus dissipates may escape this market disturbance unaffected if it is short-term, said the restaurant-focused banker. The downside is the uncertainty of waiting, he noted.


Meanwhile, a lack of financing options for companies is an opportunity for private investors to step in and provide growth capital, said the restaurant-focused banker.


Cashed up strategics may be well-positioned, as sellers could be willing to accept all cash at a lower valuation rather than risk a higher valuation with financing attached, the banker said.


On 11 March, PepsiCo acquired Las Vegas-based Rockstar Energy Beverages for USD 3.85bn. According to an industry executive, Pepsi is known to do all-cash deals. Pepsi’s 2018 acquisition of SodaStream for USD 3.2bn was a cash deal. Pepsi reported USD 5.5bn in cash and cash equivalents through 2019, according to filings.


Amazon also took the plunge on 12 March, paying USD 1.15bn in an all-cash deal to buy the former Lord & Taylor flagship store in Manhattan, the New York Post reported.


Distressed opportunities to come


Meanwhile, a retail-focused private equity professional said he is aware of several deals around six months in the works that recently fell apart due to market volatility and investor uncertainty.


That same source expects to see a wave of distressed assets—especially in Europe—hit the market over the next six to 18 months as companies assess the negative cash flow suffered throughout 1Q20 and possibly 2Q20.


Public companies could overreact to poor quarterly earnings and hastily offload low-performance assets, he noted.


Embracing video conference


While travel bans at most bulge-bracket investment banks and large-cap companies are slowing down deal flow, some bankers are finding creative ways to fast-track live deals before months of work is lost.


One banker in the food sector said a Europe-based buyer flew only four essential “decision-makers” to New York to meet in person during management presentations while 18 additional team members attended via an online video conference.


That source praised the experience and said, in the future, the compromise could reduce “the courtship process” by nearly a month, especially on international deals. The downside is glitches and bugs in the streaming service, he said.


Getting over the finish line


As the debt markets tighten up, large cap companies could have a harder time financing deals, one source said.


The source pointed to Shearer’s Foods – a packaged foods company reportedly marketing itself off USD 190m in adjusted EBITDA – as an example of a sizable consumer auction that could be impacted. On 7 February, Mergermarket reported that the Ohio-based business had recently collected initial bids.


A lending source, however, said Shearer’s process may be spared from the turbulence of other subsectors, since its products are manufactured in the US and are shelf-stable, the demand for which ticks up during an emergency. In the consumer sector, the restaurant and leisure industries will be more heavily impacted than food and beverage, he said.


Late stage restaurant auctions include Qdoba Mexican Eats, which this news service reported was in the second round on 22 January. The Apollo Global Management-backed company is projecting USD 59m in EBITDA, and could be valued at 8x-9x EBITDA, as reported.


Companies that do not use manufacturing in China could also have an easier time getting financing, the source said.


Radio Systems Corporation, a USD 100m EBITDA pet products company based in Tennessee that manufactures some of its products in China, is one such company that has been exploring a sale, according to a 21 February Mergermarket report.


Hope for short-term impact


The consumer-focused private equity professional expects deal flow to slow for at least four to six months, especially as consumer packaged goods has difficulty securing materials from China—the epicenter of the COVID-19 outbreak.


No company wants to sell while its own sales are down, he said, and it will take time for suppliers and brands to recover from their economic losses.


The restaurant-focused investment banker, however, noted that new virus cases are already down in China—which took “draconian measures”—and industry is already starting to ramp back up.


That source suspects that these next few months will be a simple “blip” in sales trends.