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Analysis-As inflation soars, European consumer goods M&A slows
Global Banking & Finance Review®
Company
By Richa Naidu
LONDON (Reuters) – As a cost-of-living crisis with no end in sight sends shockwaves through Europe, deals in the region’s retail and consumer-products industries have slowed dramatically – even more so than in other sectors, data shows.
Record inflation around the world has changed the way people shop, with many families trading down to cheaper private label products instead of the key brands that the likes of Unilever, Procter & Gamble and Nestle advertise so heavily.
In Europe, amid uncertainty around the consumer goods and retail industries – and with a potential recession looming – corporate buyers and sellers are finding it hard to agree on valuations, according to six bankers and M&A lawyers at major firms.
“We’re seeing down trading within the retail aisles so people are not buying branded products anymore. They’re buying private label,” said Gaurav Gooptu, a managing director in BNP Paribas’ investment banking team advising clients in the consumer, health and retail sector.
“If there’s a demand-side slowdown and ultimately a recession, that means a hit to top and bottom-line at consumer packaged goods companies and ultimately valuations will get impacted,” he said.
The amount spent on acquisitions in the European consumer and retail industry has slumped 38% to $45 billion so far this year versus the same period last year, according to Refinitiv data. In comparison, deals across all sectors are down only 4% to $601 billion.
“M&A has slowed this year. Larger strategic deals that have been a long-time germinating have been happening but some mid-cap deals, particularly private equity-driven, have hit the road blocks,” Robert Plowman, co-head of Citi’s EMEA Consumer Products Investment Banking team, said.
The number of European consumer and retail deals has declined 24% to 1,074, the Refinitiv figures show, while the number of deals across all sectors is down by 12% to 10,425.
To be sure, global dealmaking across the board is entering an arid season as raging inflation and a stock market rout curb the appetite of many corporate boards to expand through acquisitions.
DEAL OR NO DEAL?
Indian conglomerate Reliance Industries Ltd and U.S. buyout firm Apollo Global Management confirmed in April that they were planning a joint bid for UK high street pharmacy chain Boots – that deal has since fizzled out, however.
Similarly, at the start of this year, Dove soap maker Unilever failed to clinch a deal to buy GlaxoSmithKline’s consumer health business despite making three bids. The business listed this month with a market value of 30.5 billion pounds ($36.72 billion), well below Unilever’s final offer of 50 billion pounds.
Speculation emerged at the start of the year that Enfamil maker Reckitt Benckiser was considering selling its formula business but, since then, reports have said the potential deal has seen little interest from buyers.
Consumer companies are also investing money that may have been earmarked for big acquisitions in buying companies that are part of supply chains rocked by the pandemic.
“There are many more companies out there that are trying to get a grip on their supply chain,” said Kurt Haegeman, global chair of consumer goods at law firm Baker McKenzie.
Making sure targets meet potential upcoming European Commission sustainability requirements has also given some companies pause before making bids.
“These laws will require companies to look into their production facilities to verify what it is that they are doing,” said Jacquelyn MacLennan, a partner at law firm White & Case.
Deal volumes may not pick up again until 2023.
“People with businesses to sell are thinking: let’s wait until after the summer or next year and see what happens rather than act right now,” Citi’s Plowman said. “We won’t know until the third or fourth quarter how things will look next year.”
($1 = 0.8306 pounds)
(Reporting by Richa Naidu; Editing by Matt Scuffham, Kirsten Donovan)
M&A stands for mergers and acquisitions, which refers to the process where companies consolidate through various types of financial transactions, including mergers, acquisitions, and takeovers.
Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. It is typically measured by the Consumer Price Index (CPI).
Private label products are goods branded by a retailer or wholesaler, but manufactured by another company. They are often sold at lower prices compared to national brands.
Consumer perception is the way consumers view and interpret a brand or product based on their experiences, beliefs, and feelings, which can significantly influence their purchasing decisions.
Valuations in finance refer to the process of determining the current worth of an asset or a company, often used in M&A transactions to assess fair market value.
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