M&A in Europe update: The Brexit effect on Retail, Consumer & Leisure
May 09, 2017
European and UK M&A markets have continued their descending trend in deal volumes into Q1-17, with this drop appearing more pronounced in Europe than the UK. The European Retail & Consumer (R&C) sector has experienced a significant decline in the number of transactions taking place when compared to Q1-16, and this is mirrored somewhat in the UK marketplace, although the degree to which activity has been stifled is less apparent. After a resurgence in the UK in Q4 last year, deal activity in both European and UK Leisure sectors has decreased in Q1-17. Deal value rather than volume appears to be propping up M&A in R&C and Leisure, with large-scale acquisitions such as Formula 1 by Liberty Media, and Parkdean Resorts by Onex Private Equity, changing hands for a combined total of c.£7bn. Inbound foreign investment was also bolstered by Beam’s acquisition of Sipsmith, and Sumitomo’s purchase of Sports Direct’s Dunlop brand.
Following the publishing of Theresa May’s Brexit Blueprint in January, it remains to be seen how the effects of a standalone Britain will take shape and what the impact of the UK’s changing relationship with its European neighbours will be. The recent announcement of a snap general election in June may see an extension of the waiting game that private equity houses and corporates are playing before committing to investment once political instability dies down. In addition, the US perception of the UK as a route into European markets could be affected as Brexit negotiations develop this year.
Political activity across Europe may have knock-on effects for corporates and investors. Trump’s US foreign policy continues to affect investor appetite with concerns growing over political relations between Western and Eastern economies. Currency fluctuations will continue to impact targets’ valuations and could prompt opportunistic acquisitions, whilst Japan has replaced China as the leading outbound Asian M&A investor in Q1-17 after the announcement of Chinese foreign investment restrictions in Q4-16.
Deal Activity in the R&C sector
Retail businesses in particular continue to be affected by ongoing concerns about sluggish sales and margin pressure, driven by consumer expectations for discounting, further national minimum wage increases, and currency headwinds as hedging agreements roll off in 2017. Distressed and high-performing retailers alike could be targets for M&A this year, with turnaround-focused investors searching for returns from distressed retailers. A number of potential suitors have been identified as assessing profitable businesses in the sector with strong cash flows in growing market segments, such as Body Shop and Holland & Barratt, who are rumoured to be on the market.
The recent 3G approach to Unilever highlighted that many large consumer goods companies could have the potential to operate more efficiently. Both private equity and corporate investors are looking for opportunities, which may drive M&A activity in the sector over the coming year. Those companies looking to raise capital could see divestments as a key opportunity to raise a cash war chest, with carve-outs of brands, business units, and assets on the menu. Unilever’s announcement in Q1 of its intention to sell its spreads business is one such example.
Deal Activity in the Leisure sector
British travel and tourism could continue to benefit from the weakened pound as UK nationals opt for domestic rather than international breaks and the value of sterling makes inbound investment a potentially attractive opportunity. However regulatory uncertainty continues to affect forecasts for many firms operating within the sector, namely gambling companies who await domestic reviews and pubs and restaurant chains battling squeezed margins and policy changes. Consolidation is likely to continue, as shown by recent deals in the caravan parks and pub sectors, as companies chase the economic benefits of scale.
What has been your recent experience in the market? Please share your thoughts below or schedule a meeting to discuss your situation in confidence.