M&A in Europe: The Brexit effect on Retail, Consumer & Leisure
03 April 2017
2016 was a tough year all round for M&A in the EU. M&A activity was muted leading up to the EU referendum, and even more uncertain after it, not least because the result was not what had been expected. So what now, some nine months later, and after Article 50 has now been triggered? Have the markets regained their momentum, or are deal volumes still subdued?
Retail & Consumer: Purchasing power
As the graph above shows, deals in retail & consumer (R&C) levelled out in the latter half of 2016. But that overall trend masks some interesting divergences, both geographically and within different segments. Sentiment in Europe has generally taken longer to recover than in the UK; likewise retail has remained muted across the continent, but consumer goods have been more resilient, and especially so within the UK. FTSE 250 consumer goods companies have actually outperformed the index since the Brexit vote, buoyed by continued domestic demand. The online food delivery firm Just Eat, for example, saw its share price rise by around 38% from 24th June to the end of the calendar year, while white goods supplier AO World rose 24% and Dairy Crest foods 17% in the same time frame.
UK retailers have also benefited from the fall in the value of sterling, with overseas and tourist shoppers homing in on luxury brands. So what does the rest of the year look like? The elephant in the room will continue to be sterling. The fall since the EU referendum hasn’t just made buying goods in the UK more attractive, it’s also made buying UK companies more attractive too.
Deal volumes in R&C could well remain strong as a result, but inbound is likely to be much more prevalent than outbound. Notable deals since the Brexit vote have included the acquisition of snack group Tyrrell’s by Amplify Snack Brands of the US, and the sale of Chaucer Food Group to the Japanese manufacturer Nagatanien. On the retail side, the South African retailer Steinhoff purchased Poundland Group for £610m.
Leisure: Hard work ahead?
The leisure sector is likely to face more of an uphill battle than R&C in the next few months. It has been underperforming the FTSE250 since the referendum and it’s not difficult to see why: leisure faces a nearly perfect storm of rising staff costs, rising business rates, increasing regulation, and uncertainty about the impact of changing labour policy. On the positive side, exchange rates could again be a big factor, especially if higher numbers of tourists are attracted to visiting the UK.
Deal volumes will also be affected by specific issues within the industry. For example, airlines are facing more pressure to cut costs, as corporate travel budgets are squeezed. On the other hand, restaurant chains are an M&A hot spot, as consumers show no sign of reining back from going out, though the performance of the big pub chains was mixed, with Greene King down 11% and JD Weatherspoon up 23% between the referendum and the end of the year.
Other areas of the industry continue to be fragmented, which means there are opportunities for consolidation which could well appeal to private equity houses with plenty of cash waiting to be spent. Assets like leisure parks also have relatively predictable - and therefore appealing – cashflow profiles. By way of example, the US PE firm Hydra Industries acquired Inspired Gaming Group for £200m in the summer of 2016, while Exponent Private Equity bought Leisure Pass Group at the end of the year.
If you would like to discuss any of the issues raised in this article please share your thoughts below or schedule a meeting.