Driving growth in challenging times

Traditionally, the consumer products (CP) industry has been based on stability and consistency. The sector which provides staple products to many consumers has remained significantly resilient and highly attractive to investors as it offers sustainable returns over a prolonged period. However, as the combination of Brexit uncertainty, tariff concerns and choppy economic headwinds started to fade, new challenges appeared, namely COVID-19 (the Pandemic) and the Russian invasion of Ukraine. The impact of the Pandemic on M&A deal activity is clear with European CP annual deal volumes (greater than €200m) falling to just over 950 by the end of 2020 compared just below 1,250 deals in 2019, a 23% decline. Activity levels started to recover over the course of 2021 with 1,230 deals, marginally below 2019 levels, and while deal activity level data for 2022 is still being assimilated, deal volumes might have declined by around 20% on 2021 levels.

Looking at historical deal trends, it is almost 15 years since the financial crisis of 2008 had a severe impact on CP M&A activity which many had feared might be permanent. Looking back, activity had started to recover by the end of 2010 already. However, hopes of a return to economic normality quickly subsided as consumer confidence eroded, and deal activity levels continued to be affected until the end of 2014. Subsequently, there was a noticeable pick-up in deal activity in 2015, as accumulated savings and cheap debt led to companies and investors seeking out inorganic growth opportunities.

Overall, while the Pandemic saw a dramatic downturn in deal activity, it was also a catalyst for a major bounce-back in 2021 as senior management implemented a strategic refocus of their business portfolios in response to pressures from activist investors looking for sustainable returns. In fact, half of US and European consumer companies, ranked by market capitalisation, have activists on their board. However, the momentum of the 2021 recovery was significantly supressed by the Russian invasion of Ukraine given the negative impact on debt markets, raw material and energy cost inflation, and macro-economic uncertainty. Subsequently, 2022 recorded a higher number of mega deals (over €1bn) compared with 2019.

Unpicking the large (over €200 million) deals between 2020 and 2022, some interesting trends emerge including:

• the importance of private equity/family office buyers as key stakeholders in the sector
• the reallocation of capital by large corporates to higher growth core business areas with non-core business divestments
• 2021 has a much higher proportion (over 50%) citing new product offerings possibly reflecting the underlying need to adapt to changing consumers
• a step up in listed company takeovers
• a more active European-US corridor with a growing proportion of US buyers taking advantage of a period of weakened sterling levels and US based assets being bought by European buyers.
  

The outlook for M&A deal activity in 2023 remains strong given that:

• high levels of cash reserves held by private equity/family office investors
• sector consolidation to manage high-cost pressures, deliver revenue synergies and enhance product portfolio positioning
• beyond cost cutting M&A offers investors a direct route to new geographies or product categories
• strategic investors continue to put pressure on large corporates to focus on divesting non-core businesses to free up capital and re-align their business portfolios
• financial distress, exacerbated by higher interest rates, will result in some businesses becoming opportunities for well-funded acquirers
• climate change, sustainability and ESG factors are important catalysts for M&A activity.
  

As highlighted in Deloitte’s separate 2023 Consumer Products Outlook report, we identified that the most successful profitable growth leaders are the ones actively making investments to meet changing consumer needs and creatively transform their business. Critically, M&A offers an accelerated way to drive such change and increase market share.

For further analysis of major deals by sector and valuation multiples, check Consumer Products M&A Insights March 2023.