Global consumer products deal volume highest since before recession

LONDON, 10 NOVEMBER 2010 – The number of deals concluded by consumer products companies globally totaled 301 in Q3 10. This is the first time deal volumes have exceeded 300 since Q2 08. Private equity (PE) accounted for over 20% of all deals, the highest proportion recorded since Q1 2007. Total deal value also increased, to US$22.5 billion – more than doubling the Q2 10 tally, but some way off the peaks seen in Q1 10 (US$43.22b) and Q2 08 (US$89b).

Commenting on the figures, David Murray, Global Consumer Products Transactions Leader at Ernst & Young says, “This quarter we have seen consumer products companies look beyond the economic uncertainties and put the cash accumulating on their balance sheets to good use. Companies are driving synergies in developed markets and pursuing growth in developing markets. Although we don’t think the fourth quarter will produce a further acceleration in deal flow, there is a healthy pipeline of deals under discussion and we are confident that the improved level of activity will be maintained to the end of the year.”

Private equity surges

There were 70 PE deals this quarter, accounting for 23% of deal volumes – more than any quarter since we began to keep records. PE was active as both a buyer and seller, appearing as a buyer in 2 of the top 5 deals and as a seller in 3 of the top 10 deals. A gradual thawing of capital markets has allowed PE firms to secure debt funding for high quality mid-size transactions.

Private label businesses continue to look attractive to PE, with Goldman Sachs Group back in the market this quarter alongside TPG Capital to purchase Ontex International – the disposable hygiene products manufacturer owned by Candover Partners, for US$1.5b. The other big PE deal this quarter was the purchase of Unilever’s Findus Italy frozen-food business and assets by Birds Eye Iglo Group, a portfolio company of Permira Advisers, for US$1b. The hotly contested auction illustrates the continuing appeal of cash-generative consumer products businesses to investors. For Unilever, the sale allows it to focus on its core categories in the Italian market.

HPC dominates top 10 deals by valve, though food is ahead on volume overall

The volume of deals in HPC (household and personal care) was broadly consistent with earlier quarters (29 deals). With three largest deals this quarter; HPC dominated the market for mid- to larger-size transactions. Two of the deals – Reckitt Benckiser’s US$3.8b purchase of SSL International and Unilever’s acquisition of Alberto-Culver for US$3.7b – are both representative of efforts by large consumer products companies to achieve scale in developed markets and focus on faster-growth, high-margin categories. Of the remaining top 10 deals, 4 were food and 3 were beverage deals.

BRIC goes global

This quarter it’s not just companies in the BRIC economies that are going global – witness the purchase of Sucrogen by Singapore’s Wilmar and the acquisition of MW Brands by Thai Union Frozen Products. The Thai Union deal gives it control of the John West brand, among others, illustrating the appetite for household-name developed-world brands among emerging-market companies.

What does the future hold?

Of course, there will still be bumps on the road ahead. In the background, the economic outlook remains far from certain with policymakers nervously eyeing economies they hope will be strong enough to withstand far-reaching public-debt-reduction programs.

“This uncertainty may keep companies more focused on doing deals equivalent to about 20%-25% of turnover, rather than betting the house on a mega-deal, but we believe they will not be deterred from making acquisitions” comments Murray. “Indeed, the prospect of prolonged low growth in Western countries strengthens the rationale for deals that give access to the faster growth of emerging markets, or which bolster market position in developed economies.

Concludes Murray, “We have seen a significant improvement in consumer products deal volumes over the past 10 months. We expect Q4 to be similar to Q3 2010 in terms of deal volume, as businesses world-wide continue to seek growth and consolidation. In particular, US companies might become more active than they have previously been, notably in seeking transactions overseas.”

About the report

Consumer Products Deals Quarterly is based on Ernst & Young’s analysis of FactSet Mergerstat data from Q1 2007 to Q3 2010. Data was pulled from the FactSet Mergerstat database using standard industrial classification codes. For the purposes of this paper, our definition of consumer products is only those companies in the food, beverages, tobacco and HPC subsectors. Deal activity and valuations may fluctuate slightly based on the date that the Factset Mergerstat database is accessed.

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