October 2013 - April 2014
Capital confidence barometer: consumer products
64% of respondents see the economy improving
52% of respondents see credit availability improving
59% of respondents say their focus is on growth
68% of respondents expect deal volumes to improve
44% of respondents expect valuation of assets to increase
Increased confidence and credit availability to drive M&A activity
Our ninth Capital Confidence Barometer shows increased confidence in the global economy among consumer products executives. Coupled with the improving availability of credit, this is expected to drive M&A activity in the sector.
More than half of respondents are positive on global economic growth, credit availability and corporate earnings. According to our survey, 64% of consumer products (CP) executives see the economy improving, compared with 51% six months ago and 23% a year ago.
Emerging markets concerns not universal
What is your perspective on the state of the global economy today?
Concerns around the emerging markets slowdown are not universal. Fifty-two percent of respondents based in these markets are optimistic about the local economy, compared with 44% in mature markets.
CP companies are slightly less optimistic about opportunities in decelerating emerging markets than other sectors. Fifty-five percent of CP executives remain largely optimistic about opportunities in emerging markets – provided greater rigor is applied to deal making.
Despite the perceived challenges, interest in emerging markets is growing or staying the same for CP firms. Political and regulatory risk is the top factor by CP respondents for reducing focus on emerging market investment.
Credit availability improving
Over half (52%) of CP executives see credit availability improving, with 35% of CP companies planning to use debt to finance deals, compared with 32% six months ago. To advance their strategic initiatives, CP companies may take advantage of improving credit conditions.
The percentage planning to use cash for financing has fallen from 55% six months ago to 47%. This confidence to use more debt and equity to finance deals represents a shift away from risk-aversion and smaller, cash-based transactions.
The boardroom agenda
Corporate governance and regulatory issues have a greater focus on CP boardroom agendas.
Companies maintain a strong focus on efficiency and cost control as well as risk management. For CP executives, a focus on corporate governance, regulatory issues and investor relations has increased compared with six months ago.
Declining sentiment around innovation and R&D aligns with executives’ focus on disciplined growth activities.
Focus on growth
How do you think the boardroom agenda at your company has changed from a year ago?
CP companies’ focus on growth is now at a two-year high. An increasing majority (59%) now say their focus is on growth, compared with 49% six months ago.
While operational efficiency and cost control are still at the forefront of CP companies’ agendas, those pursuing purely stabilizing activities have dropped from 14% to 9%. The trends indicate resilience andreturn to growth after a prolonged period of global headwinds of uncertainty.
Organic growth will center on core products and existing markets. Companies remain in their comfort zone, looking to gain share in existing products and markets rather than diversify into new products or services areas.
Most CP firms expect “modest” improvement in deal volumes, not a return to historic high levels. 68% of CP respondents expect deal volumes to improve, due to an alignment of the core fundamentals:
- Positive economic sentiment
- Enhanced credit availability
- The imperative for growth
- Expectation to create jobs
Appetite for acquisitions has also been fueled by improvement in asset quality, number of opportunities and likelihood of closing.
What is your expectation for M&A/deal volumes
in the next 12 months? (At global level)
Unlike other sectors, CP expectations for larger deals (>US$1b) have fallen from 7% to 4%, while those for smaller deals (<US$51m) has risen from 28% to 36% since April 2013.
Portfolio optimization and the pursuit of growth are likely to dominate M&A activity. Business unit sales continue as the predominant structure for CP divestments as they focus on core assets and shed underperforming business units. Gaining share in new and existing markets are the top two drivers for planned acquisition activity in CP.
The CP sector has seen a decrease in the expected valuation of assets. CP respondents are fairly split in their expectation that the price/valuation of assets will increase (44%) or stay the same (42%) over the next 12 months. Improving economic sentiment and expectations for M&A may cause greater valuation gaps over the next year.
Top investment destinations
The top three investment destinations for CP investment are emerging markets – India, China and Brazil. European countries are notably absent from the list, while the US and Canada make the top five.
A number of factors are influencing capital flow decisions, including:
- Geographic proximity
- Risk aversion
- Existing ties
- Receptiveness of local governments
- Regulatory environment
CP companies perceive the regulatory environment to be pro-growth. This is largely unchanged from six months ago. With 83%, slightly more CP respondents than from other sectors think the global regulatory environment is supportive of business growth initiatives.
China, France and Russia are seen as the top 3 countries where the regulatory environment is supportive.