M&A in Europe Q2 update: The Brexit effect on Retail, Consumer & Leisure
September 27, 2017
Markets continued to be dominated in Q2 by the same key themes that have dogged deal volume since the Brexit vote. Ongoing margin pressures, price-sensitive consumers and regulatory uncertainty continued to hamper the strategic decision-making ability of key stakeholders, whilst political ambiguity surrounding Brexit negotiations dampened investor appetite. The result of the snap general election on June 8 displayed another example of the difficulty in predicting public sentiment whilst the reduction of the Conservative majority by 13 seats and the resultant hung parliament ensured a further prolonging to the uncertainty fostered in UK markets since last year’s referendum.
UK markets posted a reduction in R&C deal volume for the fourth successive quarter, whilst UK and European Leisure markets displayed declines in activity for back to back quarters. Despite this, deals have still been taking place with some big ticket items propping up M&A in these sectors. Notable activity in Europe in Q2 saw LVMH Moet Hennessy acquire a c.25% stake in iconic fashion brand Christian Dior in a multi-billion dollar deal, whilst CVC announced its proposed acquisition of luxury Swiss watchmaker Breitling for £674m. In the UK, Brewdog sold 22% of its business to TSG Consumer Partners whilst a string of high profile M&A announcements included L1’s purchase of Holland & Barrett from The Carlyle Group, the sale of Weetabix to Bright Food Co. from Lion Capital, and The Body Shop transferring from L’Oreal to Natura, all summing to a potential cumulative deal value of over £4bn. Standout Leisure deals saw both European and UK average multiples soar in Q2, despite volumes declining, with football club AC Milan and hotels group Boscolo fetching £627m and £435m respectively, whilst GH Equity completed its acquisition of Grosvenor House Hotel for £585m, and KKR bought Travelopia from TUI for £325m.
Margin pressures will continue to drive complexity in strategic decision-making for retailers, with businesses facing the choice of potentially deterring customers by passing cost pressures on to the consumer or squeezing their own profits by bearing the costs themselves. With retailers rethinking their operations and asset portfolios, capability-driven acquisitions could support M&A growth as businesses look to optimise their front-to-back office functions through acquiring rather than developing expertise and asset consolidation could prompt divestments. Consumer goods companies face similar problems, with customers pondering the inherent trade-offs between spending less, borrowing more, or switching to cheaper alternatives. This could see discount brands gaining ground over pricier competitors, and the potential for strong growth in this sub-sector might appear attractive to potential investors.
The UK Leisure market remains an attractive proposition for foreign investors despite impending regulatory pressures of post-Brexit people costs. The industry is reliant on a migrant and temporary workforce, whilst national minimum wage increases will continue to be phased into the industry, inevitably raising businesses’ cost bases. Fragmented markets could spark consolidation, whilst a shift toward purchasing experiences rather than physical goods may cause disruption. Airlines continue to be a sector to watch in an increasingly competitive pricing environment which has already seen recent operator consolidation.
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