Revamped with brand-new datasets expanded in scope and depth, the latest RSM US Quarterly Industry Profile for the consumer products industry is now available. Powered by the PitchBook Platform, the report offers in-depth insight and analysis of M&A and private equity activity, exits and performance in the industry. It also includes greater, more in-depth analysis of key datasets for PE investment, comparing trends in North America versus those of Europe.
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Highlights in this report include:
- Total B2C deal flow by year and quarter, broken out by region
- Breakdown of transactions by deal size, sector and deal type
- Median deal sizes
- Add-on deal activity
- Select 2Q 2017 B2C transactions
- A detailed look at exit activity in the industry
B2C At A Glance
Change is here, and more is coming
- There’s a dichotomy between positive consumer sentiment and what they’re spending their money on. They’re spending their money on experiences, not on products sold in stores, which is reflected in sluggish retail data.
- The retail sector has evolved so rapidly that manufacturers are worried about which retailers are going to be closing stores or filing for bankruptcy in the near future.
- Amazon’s acquisition of Whole Foods is a shift not only into physical grocery stores, but also a shift into serving higher-end customers. If successful, Amazon’s pivot could have ramifications for retail beyond its current customer base.
- Valuations are not expected to go down in the near term, short of any broader geopolitical or economic cycle changes.
- PE firms are concerned about tax reform and regulation and the impact they would have on the apparel industry, which is on pace for a significant decline in activity. Certain segments are on pace for a 30 percent or more decline in 2017.
- The consumer space is in the midst of a massive evolution. The niche businesses are likely going to have a lot more value than many broader businesses, which are having trouble staying nimble and navigating this changing environment.
M&A Deal Flow
Massive evolution underway
M&A activity continued to decline in volume across North America and Europe, registering a multiyear low in the second quarter. The 694 deals completed in Q1 were roughly half the normal quarterly totals as recently as the first half of 2016. Those overall numbers bely the industry’s pipeline. Scott Walti, partner with transaction advisory services at RSM US, notes that the volume of transactions has picked up significantly in the last few months. “In terms of deal volume, we’ve seen a significant increase during the past few months across our practice. The first quarter may have been an aberration as the second quarter was strong and the third quarter is also starting off strong.”
Even so, the M&A market is undergoing changes alongside the broader consumer products space. Carol Lapidus, consumer products practice leader at RSM US, says consumer spending habits have evolved rapidly and now focus predominantly on experiences over tangible goods. “There’s a real dichotomy between how the consumers feel and what they’re spending their money on.” Retail sales are down while consumer confidence is up, and companies looking to acquire need to recognize the new reality. “If strategic buyers aren’t using big data to understand their customers’ spending habits, if they’re not invested in omnichannel, if they don’t have a strategy or understand their consumers very well, they’re taking on increased risk in any acquisitions they may make,” adds Walti.
Private Equity Deal Flow
Declining: Uncertainty and competition at fault
Private equity (PE) deal counts continued downward in the second quarter. The 218 deals completed in Q2 in the consumer products space were the fewest recorded since mid-2012, and marked the seventh consecutive decline dating back to Q1 2015. As is the case with exit activity, dealmaking has assumed a lower priority for many investors, which are taking advantage of a historic fundraising market and dividing their time accordingly. The data suggests the PE market is beginning another cycle.
For PE firms that are actively looking to invest, familiar roadblocks still present problems. Alex Monahan, director with transaction advisory services with RSM US, notes that sky-high dry powder levels and a lack of investable opportunities remain the key issues. “The opportunities just aren’t there yet, and when good companies do come to market, the process is very competitive.” As a result, PE firms are jumping the auction processes earlier to try to get exclusivity, or to just get a better look at companies before other bidders get involved. “To do that, PE firms need to have a compelling story of what the business can be post-close to justify current valuations,” says Walti. “If a buyer doesn’t come into the auction process with an experienced operating partner, a strong value creation model, and/or a pipeline of acquisition candidates, they may have a hard time winning auctions in this environment.”
Certain sub-sectors have seen bigger declines in activity than others. Sectors heavily affected by discretionary spending, especially retail, apparel and accessories, and restaurants, hotels and leisure, are on pace to see significant declines in volume this year. Lapidus relays concerns from some PE clients, which have stepped on the brakes in some cases due to tax reform and new potential regulations. “Tax reform has definitely had an impact on deals. PE firms are now questioning whether a company’s business model will need to change, and in some cases they’re finding there isn’t a clear path to growth because of that.”
Private Equity Exit Activity
Exits are falling, but for good reason
Private equity exit activity has fallen off dramatically, sliding for the third consecutive quarter to 106 exits by count. Exit totals were nearly twice that as recently as Q3 2015, though it’s worth remembering where PE is in its cycle. Exits and to a lesser degree deal activity have taken a backseat to fundraising efforts, which are producing nearrecord levels of dry powder.
Through the first half of the year, 237 portfolio companies have been exited. Approximately half of those exits were through sales to strategic or financial buyers, with a scant 13 PE-backed companies going public. With only 237 exits at the halfway point, 2017 will likely see the fewest exits by count since at least 2012 and perhaps earlier. This is less of a liquidity concern and more a reflection of how strong the sellers’ market has been over the last three years, including PE’s banner year in 2015 when almost 700 exits were consummated. Given the amount of dry powder in the market, secondary buyouts may take on a more prominent role for PE firms looking to sell.
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