Dealmakers in the European consumer space are cautiously anticipating a more active 2H23, with some indications of a pickup in M&A. It, could, however, be early next year before a significant number of consumer companies hit the market, they said.

There may not be enough positive sentiment around the consumer sector for processes to be launched with confidence, said one sector banker. A peak in interest rates would be necessary before more processes start coming to market, this banker said.

Corporate carve-outs as well as strategic-led deals are expected to be the main driver of consumer sector M&A, dealmakers said.

A number of global companies have been recently reshuffling their portfolios, either exiting or entering new niches, geographies and products. We’ve seen a flow of M&A deals driven by strategics in the last four to five years and this will continue, albeit at a slower pace, said Ruben Israelyan, partner at EY’s corporate finance team.

Despite headwinds such as cost of debt and inflation, retail and consumer businesses are still looking to deliver on their core growth strategies, for example around accessing new markets, transforming digital consumer engagement and delivering their ESG strategy, with boards remaining committed to investing in strategy at the right price, said Andrew Rosling, partner at Addleshaw Goddard. 

Some online-driven retailers overinvested in advertising and promotion as well as stock following lockdowns, trying to maintain unsustainable levels of sales, creating consolidation opportunities for more prudent operators, said Rosling.

A number of bigger consumer companies in the food and beverage sector have also come out of the Covid-19 crisis with strong balance sheets and will be able to identify opportunities to add capabilities, brands, or new geographic markets to their portfolios. Those who can understand how to use the current market conditions to their advantage from an M&A perspective, and have a synergy story, are at an advantage, said James Cass, partner and managing director at AlixPartners.

With ongoing global economic pressures and constrained debt markets continuing to shake investors’ confidence in the sector, deal count fell in the first half of the year by almost 18% on 1H22 (867 to 715) – the biggest fall in the deal count since 2020, according to Mergermarket data.

Deal value fell to EUR 31bn in 1H23 from EUR 43.7bn in 1H22, Mergermarket data shows. There was a large drop in volume in 1Q23 which saw the quarter closing at EUR 4.5bn versus EUR 12.52bn in the same quarter last year.  Deal value in 2Q23 reached EUR 26.5bn, however, this was largely due to the EUR 16bn acquisition by Bunge [NYSE:BG] of Glencore [LON: GLEN] backed multinational agricultural grain storage specialist Viterra. The deal represents the largest signed both in the sector and across EMEA so far this year.

The mid and large-cap space seem to be significantly hit, particularly in the UK, where there has not been any deal signed for over GBP 1bn, according to Mergermarket figures.

“Activity is driven by the lower end of the market with most deals done in the UK being below GBP 250m in enterprise value,” said Cass. “Volume has particularly dried up in the mid-cap and large-cap space, which isn't a surprise given what's happened with the credit market and valuations.”

Sixty percent of acquirers in the top 10 deals in 1H23 were strategics, Mergermarket data shows.

While sponsor interest in the sector is typically strong, particularly in the food and beverage segment, private equity activity has dropped significantly, said Cass. Activity is instead largely driven by buy-and-builds, distressed situations and some take-privates, he said.

Top deals so far this year include Blackrock Capital’s GBP 1.18bn sale of luxury perfume house Creed to Paris-based luxury goods company Kering [EPA:KER]. The EUR 1.07bn proposed delisting of Ukrainian sunflower oil producer Kernel [WSE:KER] from the Warsaw Stock Exchange was also among the big-ticket transactions.

The number of sponsor exits in the European consumer space dropped by 20.7% to 23 in 1H23 compared to the corresponding period in the previous year, with the aggregate value of completed deals where values were disclosed so far this year at EUR 20.1bn, Mergermarket data shows. However, excluding the Bunge-Vittera deal, total disclosed deal value would have amounted to around EUR 4.1bn. Also, none of the deal values of sponsor exits in 1Q23 were disclosed.

Among the deals setting the tone in the coming quarters will be the sale of Epiris-backed UK auction house Bonhams, where JPMorgan was hired earlier this year to explore sale options, and Butternut Box, a UK-based pet and food supplier that has engaged Harris Williams to explore a stake sale.  The two companies have a score of 77 and 87 (out of a maximum 100), respectively, according to Mergermarket’s Likely to Exit predictive algorithm*.

Opportunity in disposals

Looking ahead, carve-outs are expected to propel activity in the sector as corporates identify non-core assets in their attempt to change their business models amid lower consumer demand for their product offering.

However, significant carve-out activity is to be expected when market conditions improver, said Cass. Until then, activity is likely to be driven by strategics or private equity-backed assets with strong balance sheets and access to financing, he said, noting that even in such cases, meeting valuation expectations can be challenging.

Valuations are a key sticking point, with buyers and sellers often some way apart, said Rosling. “It is not surprising given the continuing uncertainties around geopolitics and inflationary pressures on sales and margins, and the need to reflect the significant change in the cost of debt,” he said.

The carve-out of UK-based food manufacturer Princes Group from Japanese conglomerate Mitsubishi Corporation [TYO:8058] was paused in April, as its owner decided to hold out for a higher valuation, with a view to resuming the process in 3Q23.

With company insolvencies in 1Q23 close to the highest quarterly level since the UK government’s Insolvency Service started collecting data in 1960, there will be pockets of distressed opportunities as we enter the second half of the year, dealmakers believe.

“We’re seeing a lot more activity than we might typically experience in our restructuring capacity, where companies need to think about refinancing and about whether M&A can be a tool to help them improve their liquidity,” said Cass.

Meanwhile, in the travel sector, both the luxury end and staycation type providers, including caravan parks, are doing very well, a sector advisor said, pointing to Center Parcs UK, a UK-based holiday villages operator, as an example. The latter was reportedly put up for sale with a price tag of between GBP4bn to GBP 5bn by its owner Brookfield earlier this year, but a recent report speculated that the process might have been terminated. Meanwhile, the UK-based economy hotel chain operator Travelodge’s owner GoldenTree is poised to appoint banks to advise on a potential GBP 1.2bn sale.

Founders that have established new products with a strong brand, secure IP and production and a proven track record with customers and consumers will continue attracting the major corporates with global distribution networks and PE investors, potentially as part of a buy and build strategy, Rosling said. The sector advisor is also expecting more fashion brands to come back.

The UK baby products retailer Mamas & Papas (LTE 71) is expected to come to the market towards the end of the year via Rothschild, while Reiss shareholders have tapped Raymond James to review strategic options, while advisors court Permira for Golden Goose stake sale as alternative to IPO.

*Mergermarket's LTE predictive analytics assign a score to sponsor-backed companies to help track and predict when an exit could occur through M&A, an IPO, a direct listing or a deSPAC transaction.