The Consumer – Postcard from the USA
November 17, 2015
There have been several US deals over $1billion in the third quarter alone, helping to make 2015 the biggest year for mega deals since the credit crunch. The question for US Corporates is how to keep growing the top line and profits in a sluggish domestic market? ‘Activist’ investors are increasing the pressure even more, pushing companies to sharpen up and hone down in the interests of higher returns. This has driven a large amount of sector consolidation or reshaping of portfolios with significant examples being P&G’s $12.5bn disposal of its beauty business, the Kraft / Mondelez / Heinz divestments and tie-ups and AB InBevs planned acquisition of SABMiller. One company that has so far been able to broadly resist any activist investor pressures has been PepsiCo, which has shown strong results in both its drinks and snacking businesses which has meant it’s been able to argue that keeping them combined makes sense.
The multinationals are also thinking about what acquisitions and categories will help grow their top line. The big corporates have been eyeing up the smaller and more nimble competitors, which have been quicker to identify and exploit new trends and changing tastes, like health food or convenience. This makes them attractive acquisition targets. For example Hain has bought a number of international brands such as Mona Group, Tilda and Ella’s Kitchen or in the domestic market Hormel Foods purchased Applegate Farms, which is a producer of organic meats. A bigger deal, but still driven by the quest for innovative brands, is the recent $1.9bn acquisition by Snyder-Lance of Diamond Foods (makers of Kettle Chips and Pop Secret popcorn).
The strong dollar is another factor unique to the US. The strength of the currency is dampening the revenues US companies are getting from their foreign assets, but making those assets cheaper to acquire. The overseas buying spree is likely to continue, as US consumer goods players make strategic acquisitions in emerging markets to position themselves for the long term in markets like China and Brazil (Kellogg’s for instance has acquired businesses in Nigeria and Egypt already in 2015). In this year’s PwC Annual Global CEO survey, a quarter of US CEOs of consumer goods companies told us they expected to make a crossborder acquisition in the following twelve months.
All this corporate appetite makes it a tricky market for private equity. They’re sitting on anything up to $1trillion, which will have to be returned to investors if it can’t be found a home. But valuations are so high they’re struggling to find good prospects. The big corporates are prepared to pay more, because they can achieve bigger synergies and economies of scale, which is why corporate deals made up 90% of deal volume in consumer goods this quarter, with PE volume declining again year-on-year. As a result, PE houses are being forced to play smarter, or earlier in the business cycle. One example of a more flexible approach would be TSG pairing up with Oasis Beverages to buy Pabst Brewing Company which plays in the craft beer sector, which is very hot right now.
Either way, the US Consumer M&A landscape continues to be active and evolve, with everyone needing to think differently and play a little smarter.
To learn more about some of the key deals that took place in Q3 2015, read our new publication, 'the Consumer' here.
How do you see the rest of 2015 playing out? Share your thoughts below or schedule a meeting to discuss your situation in confidence.