Insights into global consumer products quarterly deals: Q4 09 - Ernst & Young - United States

Insights into global consumer products quarterly deals: Q4 09

Despite the lowest volume of deals announced for three years in Q4 09, strategic deals are happening, private equity is active and average deal sizes are holding up. In fact, we believe signs of recovery are coming through.

While we don’t expect the global transaction landscape in the four key CP subsectors (beverage, tobacco, food and household and personal care) to transform overnight, we do believe the current economic climate offers companies with expansion plans and a strong balance sheet opportunities to create value through acquisitions.

Key trends we anticipate in 2010:

• Recessionary pressures – To reduce risk, companies are selling assets no longer crucial to their business or they’re acquiring complementary businesses in other markets, indicating more active portfolio management.
  
• Private equity (PE) – PE has remained active in the global consumer products sector, accounting for around 10%-20% of deals. The continued presence of financial investors implies there will be opportunities in the marketplace over the long-term.
  
• Subsector performance – Food was the driver of deal volume through 2009, while beverages generated the lion’s share of the value. Still, there was a declining trend in both subsectors. Tobacco is now a largely consolidated global subsector and we do not anticipate a large number of intra-sector deals going forward. Household and personal care (HPC) turned in a surprising performance in Q4 09, as the only subsector where deal volume actually increased.
  
• Geographic split – Europe (excluding the UK) was the most active region in terms of cross-border deal activity in Q4 09, followed by the US and Asia Pacific. The UK accounted for 46% of the value of businesses acquired, dwarfing both the US and Asia Pacific. Although deal volumes in emerging markets lag those in developed economies by some margin, they remain an area of focus.

• High deal success rate – While deal activity slowed, corporate development functions had time to plan ahead. That means many businesses have decided which targets they want to pursue, which can ultimately generate strategic deal-making. It also suggests that when such deals come about, they have been thoroughly researched and are more likely to succeed. Takeover targets are increasingly finding themselves with a number of potential suitors which indicates increasing competition to make the right deal.
  
• “Hot” sectors – Despite a poor last quarter in 2009, food has been the most active of the key consumer products subsectors, whatever the state of the market. We anticipate this trend to continue, and expect rising deal volumes in several categories, including dairy and baby food, which look ripe for consolidation. We also expect the trend toward consolidation to gain traction in the beverages subsector. Tobacco is also one to watch as companies seek to diversify the product base and look to make strategic alliances outside the sector.
  
• Financing issues – The volume and progress of deals in 2009 was undoubtedly hampered by a lack of confidence and finance. This will likely ease in 2010.
  
• Seeking new markets – Even though prices are rising and competition for assets is increasing, CP companies are keen to harness the growth potential in emerging markets where there is a relatively high proportion of young consumers, an increasingly enriched middle class and a fast-growing urban population keen to experiment with new brands.

For further insights into the trends likely to shape consumer products deal activity in the coming months, download your copy of "Consumer products deals quarterly" (pdf, 1.3mb) today.