Although we see no mega-deals on the horizon, strategic deals are back and the mid-market and PE are ready to move.

We believe the first quarter of 2010 will mark a turning point for deal-makers in the global consumer products sector. The cautious optimism that we noted in Q4 09 has borne fruit in terms of a sharp rise in both deal volume and value.

Confidence is returning

Many companies have succeeded in boosting their reserves during the recession through an increased focus on cash generation and working capital improvement, whilst others have also tapped the corporate bond markets.

As earnings rise and interest rates remain low, there is external pressure on both PE and corporates to execute deals rather than accumulate more cash. Even with credit remaining tight, there are signs that availability is improving in some regions, particularly the US.

With means and motive strongly aligned, it’s little wonder that deal volumes grew by a third on the prior quarter, while values rose by a staggering 334% (largely courtesy of the Kraft/Cadbury deal, the Nestlé/Kraft deal that enabled it, and of course the Heineken acquisition of FEMSA).

Like last quarter, we believe deals of this scale will help build confidence at the mid-market levels and encourage further deal activity.

Despite growing confidence, however, we anticipate that it will take some time before we return to pre-recession activity levels. Global economic recovery is likely to be slow and patchy — with emerging markets continuing to improve much faster than their developed neighbors.

Only if the improvement seen in Q1 10 extends through the next two quarters will we feel comfortable in describing the recovery as “established.”

What’s driving deals?

In addition to the marked recovery in confidence, we see three fundamental deal drivers in the current market conditions:

• Scale, growth and efficiency:

The case for scale

The case for scale is more compelling than ever. Consumer products companies have high fixed costs so any increase in volume drops disproportionately to the bottom line. Many companies have found it almost impossible to increase prices as retailers increase pressure on margins in some areas, private label continues to strengthen and consumers are still down-trading.

This means that volume is one of the few games left in town and will become ever more important as material costs look set to increase over the next 24 months. Mergers and acquisitions are a quick route to boost volume, which is one reason why activity levels are starting to increase.

Decoupling of growth rates

The decoupling of growth rates between developing and developed markets is creating opportunities for companies wherever they are located. Companies facing flat growth in mature markets need access to fast growth developing economies where populations have a higher proportion of young people, a growing middle-class whose affluence and consumption is increasing, and a growing appetite and appreciation for brands.

At the same time, fast growth companies based in these markets are looking for opportunities to diversify into other developing markets to exploit consumer and product synergies.

The quest for efficiency

The quest for efficiencies is also a perennial deal driver as companies look to control their supply chain, improve control over route to market or drive down their cost base by merging existing businesses.

At a more granular level, we also note the growing importance of natural and organic product to food, HPC and, to an extent, beverage companies. We anticipate that this is a deal driver that will grown in significance through 2010 and beyond.