EY - Consumer products deals quarterly: Q2 14

Consumer products deals quarterly: Q2 14

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The first half of the year has been notable for a sharp increase in total deal value in the consumer products sector.

The first quarter’s total matched the highest aggregate quarterly levels achieved in any of the last three years, while the second quarter’s total reached a six-year high.

The large majority of the top 10 deals in the first and second quarters have involved targets in developed markets. Achieving consistent organic growth in these markets is increasingly challenging, driving companies to:

  • Turn to acquisitions and joint ventures to drive the top-line
  • Seek out higher growth segments
  • Optimize their portfolios

Valuations are also rising, reflecting a scarcity of quality assets for sale, rising equity markets and a rebounding IPO market, all of which help explain why private equity has been evident on the buy side in the last quarter.

Data highlights for Q2 14 include:

  • Pick up in total value gathers pace

Disclosed deal value climbed to US$57b in Q2 14 from US$41b in Q1 14. There were three megadeals, with a value greater than US$5b, announced in the second quarter, and all of the top 10 deals had a value of more than US$1b.

Deal values Q3 11–Q2 14 EY - consumer products deal values Q311- Q214

Deal volumes Q3 11–Q2 14 EY - consumer products deal volumes Q311- Q214

  • Deal volumes make steady progress

Second-quarter deal volumes increased by 4%, to 299 deals from 287, in Q1 14. The four-period long-term moving average of total deal volume increased from 287 to 288 deals.

  • Private equity activity declines sharply

The number of private equity deals declined from 51 in Q1 14 to 35 in Q2 14, a 31% decrease. In contrast, the number of corporate deals increased by 12%, to 264 deals. The proportion of corporate deals in total deal volumes consequently increased from 82% in Q1 to 88% in Q2.

  • All top 10 deals had a disclosed value of more than US$1b

The top 10 deals had a combined total value of US$44b, the highest in the three-year review period. These 10 deals alone surpassed the aggregate total value for any quarter since Q2 08.

Top 10 deals in Q2 14 EY – top 10 consumer products deals Q2 14

  • Top 10 deal activity dominated by acquisitions in developed markets

Of the quarter’s 10 largest acquisitions, eight involved a target company in a developed world market. Of the remaining two deals, one target was in India and the other in Singapore.

Notable investment themes in Q2 14

  • Hunt for growth drives developed market deals

The consumer products sector in developed countries is a tough market environment, offering in many cases zero growth or low-single-digit organic top-line growth.

In recent years, the focus of many leading global companies in the sector has been to expand into emerging markets. This year, however, there have been noticeably fewer big-ticket deals involving a global player expanding into emerging markets.

Meanwhile, global companies have sharpened focus on their developed-market businesses. To create value in the absence of organic revenue growth, companies are focusing on operational efficiency, pursuing acquisitions and making strategic divestments.

Looking ahead, we expect companies will continue to pursue acquisitions to expand revenues in a zero-growth environment.

  • Portfolio optimization ongoing among the industry’s largest players

The recurring theme of portfolio optimization is particularly evident at the top end of the market capitalization scale. Large multinational consumer products groups are optimizing their brand portfolios and geographic market exposure through the disposal of non-core and lower-growth businesses, and the acquisition of faster-growing and/or higher-margin businesses.

  • Joint ventures can provide an elegant solution

Companies are taking strategic decisions to restructure their portfolios but are not necessarily opting to divest businesses fully. While they may no longer wish to devote management resources to running the business being put into the joint venture, companies still want to participate in the synergies created by the new company and to share in longer-term value creation.

Receiving cash and retaining a stake in the joint venture can be an elegant strategic solution compared with fully divesting. A joint venture can be more tax efficient and is often favorably received by the market.

Of course, every trend has its exceptions, and some companies are moving in the opposite direction, taking full control of joint ventures and investing in the business.

  • Private equity activity declines amid rising valuations

The number of private equity deals dropped by 31% in Q2 14 compared with the first quarter to stand at their lowest level in the three-year review period. There was also a lack of any private equity buyer in the top 10 deals.

Rising equity markets and resurgence in IPO activity are driving valuations higher. This trend is making it more difficult for financial buyers to compete with strategic buyers, which may have greater ability to generate synergies.

The flipside is that the more buoyant IPO market offers private equity owners an increasingly attractive alternative exit option compared with a trade or secondary private equity sale.


Top 10 deals in Q2 14

Buyer name Buyer country Target name Target country Disclosed value (US$m) Announced date Deal type Sector Cross-border or In-border
Bayer AG Germany Merck Consumer Care Business United States $14,200 6 May 14 Corporate HPC Cross-border
Tyson Foods Inc. United States Hillshire Brands Co. United States $8,550 29 May 14 Corporate Food In–border
D.E Master Blenders Austria Mondelēz-Coffee Business Netherlands $5,000 7 May 14 Corporate Beverages Cross–border
Cofco/Hopu Investment China Noble Agri Ltd. Singapore $4,000 2 Apr 14 Corporate Food Cross-border
Mars Inc. United States Procter & Gamble Co. Pet Food United States $2,900 9 Apr 14 Corporate Food In–border
Post Holdings Inc. United States Michael Foods Inc. United States $2,450 17 Apr 14 Corporate Food In–border
Mizkan Holdings Co. Ltd. Japan Unilever/Conopco Inc. United States $2,150 22 May 14 Corporate Food Cross-border
Diageo plc United Kingdom United Spirits Ltd. India $1,901 15 Apr 14 Corporate Beverages Cross-border
Symrise AG Germany Diana Ingredients SAS France $1,797 14 Apr 14 Corporate Food Cross-border
Nestlé Switzerland Valeant Pharmaceuticals International, Inc. Canada $1,400 28 May 14 Corporate HPC Cross-border