EY - Consumer products deals quarterly: Q3 14

Consumer products deals quarterly: Q3 14

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This year has been notable for a sharp increase in total deal value, which continued in the third quarter.

The dominant theme underpinning this activity is portfolio optimization, as the large consumer companies pursue the challenging objective of achieving consistent organic growth in developed markets.

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Strategic portfolio optimization is far from straightforward. Businesses continue to become more global and organizationally complex, therefore encounter a difficult time deploying a robust portfolio review process. Many companies, consequently, do not look to rationalize their portfolio because they perceive that the return from doing so does not outweigh the time, aggravation and distraction involved. Generally, companies fail to remove cultural and organizational bias from the portfolio review process.

Developing meaningful and actionable scenarios, including sequencing and phasing of activities, as review output and linkage to shareholder value creation metrics is a best practice. 

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However, to create shareholder value, the strategic portfolio review process should result in what brands, categories or businesses should be grown, fixed, exited or sustained. Periodic, consistent and objective portfolio review and rationalization is a sign of a well-managed company.

Q3 data highlights

Total disclosed deal value was US$53b in Q3 14, not far short of Q2 14’s US$57b, which was the highest quarterly total since 2008. In the first three quarters of the year, total value has outstripped the comparable period in 2013 by 75% and is already 58% ahead of 2013’s full-year figure.

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Two megadeals, with a value greater than US$5b, were announced during the quarter: Reynolds American’s purchase of Lorillard and the related divestment of some of Reynolds’ and Lorillard’s brands to Imperial Tobacco. So far this year, eight megadeals have been announced, twice the total for the whole of 2013.

In contrast to this year’s surge in value, the trend in total deal volume has been relatively stable. Total deal volume decreased by 2% from 299 deals in Q2 14 to 294 deals in Q3. A sharp drop in transactions in the household and personal care sector from 31 in Q2 14 to just 17 in Q3 14 was a notable feature of this quarter’s deal activity.

Investment themes

  • Procter & Gamble to cull under-performing brands

Strategic portfolio optimization is an ongoing investment theme underpinning M&A activity in the global consumer products sector. Procter & Gamble, the world’s largest household and personal care company, announced at the start of August that it would divest or discontinue 90 to 100 of its brands that are non-core to its business. The company will focus on its remaining 70 to 80 “leadership brands,” as it seeks to revitalize growth and reduce costs.

  • Companies are focused on portfolio optimization

The results of the latest EY Global Capital Confidence Barometer survey bear out this focus on optimization. Consumer products groups were asked on which capital management issue – raising, investing, optimizing or preserving – their company was currently placing the greatest attention and resources. Optimizing was the clear frontrunner with some 51% of consumer products and retail respondents ranking it first.

  • US tobacco industry shake-up

The third quarter’s largest deal – the US$27.4b acquisition of Lorillard by Reynolds American – is both a scale play in the US market and a portfolio optimization story, combining the second and third-largest US tobacco companies to take on market leader Altria Group.

  • Coca-Cola’s Monster energy play

Coca-Cola’s purchase of a 16.7% stake in Monster Beverage for US$2.2b is a clear example of the portfolio optimization theme. Coca-Cola will transfer ownership of its energy business to Monster. In turn, Monster will transfer its non-energy business to Coca-Cola.          

  • Ongoing focus on healthy eating

Within the food sector, one variation of the optimization theme is the focus by large operators on acquiring “healthy eating” brands. In September, General Mills agreed to pay US$820m to acquire organic foods company Annie’s, which is best known for its boxed macaroni and cheese and bunny-shaped crackers.

  • Giving brands breathing room

In the healthy eating space, there is a trend for large companies not to fully integrate natural/organic acquisitions. In part, this reflects the desire to capitalize on the growth opportunity in a new segment, without the red tape and cost structures of a large company.
A number of large companies have taken the decision not to fully integrate acquisitions, believing that a brand can prosper if the company buying it leaves it alone – fearing that full integration risks brand dilution.

  • A new business model for the food sector?

Annie’s has a non-traditional operating model, having built its business without investing in manufacturing facilities. While outsourcing manufacturing carries a risk with regard to food safety and maintaining customer trust, Annie’s shows that it is possible to build a very loyal customer base operating this business model. Co-manufacturing is therefore generating increased interest.