European consumer M&A presents opportunities in Covid-19 chaos

With Europe going into lockdown in Q1, fortunes have diverged in the region's consumer sector. Luxury goods businesses and most non-food retailers are having a tough time, while businesses supplying consumer staples to grocery retailers are enjoying a "mini boom" as a result of pantry-loading, says Akeel Sachak of Rothschild.

Staple and non-discretionary retailers and their suppliers are holding up. The market for homeware and household products is active, as many people are stuck at home, says one of the sector bankers. Food is a particularly well-placed niche of the consumer sector, and as more people buy such goods online, business is certainly good for online retailers.

The business outlook translates to M&A, with about 80% of processes now delayed, the first banker says. European consumer deals fell from 63 (worth €2.07bn) in February to 45 (€1bn) in March, Acuris data show. Deals are slowing down, and early-stage deals are being postponed, according to a third banker, adding that a large-cap but earlier-stage food deal in which he is involved has been pushed back to September. Yet, in the sector's resilient niches, a few deals are cracking on, including the sale of a private-label ice-cream business on which one of the bankers is working.

A few food deals in the pipeline remain due to close in April. Among those for sale are Italian cereal producer La Sanfermese, which is in exclusive talks with private equity firm Orange Capital; Apetito-owned Dutch frozen food supplier Bonfait, the sale of which, despite earlier worries about its fate, is in its final stages; and French chocolatier Group Cemoi, which hired BNP Paribas to explore a sale just as the pandemic began.

Lesaffre, a family-owned French yeast producer potentially valued at €6bn, is also readying for a sale. So, too, are Molson Coors's CEE assets, with investment memorandums being sent out, as reported by Mergermarket.

Meanwhile, firms bringing food and drink to housebound consumers are seeing sustained investment interest. Dutch delivery platform Takeaway is set to complete its proposed £5.9bn acquisition of UK peer JustEat, pending approval by the UK Competition and Markets Authority (CMA). Such interest is present for smaller firms in the space, too: Oddbox, a UK-based fruit-and-vegetable delivery firm, received £3m in funding from Mercia's Northern Venture Capital Trust. Optimistically following these peers, UK-based recipe-box company Mindful Chef is seeking £25m in investment this year.

Opportunities in other sub-sectors
Food and e-commerce are not the only sub-sectors still seeing M&A. Echoing the first banker's bullish case for homeware businesses, Andrew Jakins of Highstead Partners points to the recent completion of one of his own deals – the sale of Conran Shop – as proof of the resilience of investors' demand for stronger brands in this space. Others, such as Laura Ashley, which hired PwC as administrators last month, will fall by the wayside, he cautions.

Deals are also still closing for apparel and accessories firms. Here, unlike in the suddenly moribund leisure space, M&A will do no worse than slowly taper as e-commerce sustains demand, according to a fourth banker. Finnish workwear brand Touchpoint notably bought Domino Workwear, also based in Finland. The largest deal in the space, eyewear maker EssilorLuxottica's proposed acquisition of Grandvision, remains on track to close, but the buyer could reassess its offer. Acuris data shows healthy volumes of activity at the lower end of the market in Q1, with 23 acquisitions of European apparel firms for a total disclosed value of €37m.

Transactions underway in this space include the sale of Alpha Group-owned French children's clothing retailer Cyrillus-Vertbaudet; the sale of Italian motorcycling accessories retailer Tucano Urbano, which Gruppo Biman is in talks to acquire; Polish shoe retailer CCC's PLN 500m (€109m) rights issue; and the sale of Polish leather-goods producer Ochnik.

As the pandemic drags on, apparel firms under the cosh could become targets for opportunistic buyers; in CEE, these might eventually include Monnari, Quiosque, the Paan Capital-owned Kan, the Arx-owned Komex, and VRG. In the UK, TM Lewin has already hired Deloitte to explore its options.

A more pronounced drop-off in M&A activity has taken place in Europe's personal care and beauty space. Acuris data shows 11 deals at €40m in Q1. Part of this may be explained by the predominance of firms in this space with exposure to Italian production and design, the first banker says. Still, Coty is pressing ahead with its divestment of its line of professional beauty products, with KKR and Henkel as reported bidders.

Structural obstacles
As much of the sector sees less demand from consumers, even the most resilient sub-sectors face obstacles to demand from investors. A key weak point is financing, where the market for corporate bonds is "drying up", according to one of the bankers. A lack of cheap financing is likely to put most private equity buyouts on hold.

Deals that are at or before the due diligence stage are being put on hold, the third banker says. Evidence for this effect is widespread. Spanish sponsor Alantra called off three early-stage consumer sector exits last month, the fourth banker says. Alantra's three holdings in the sector are MonBake, Unión Martín and Frías Nutrición, according to its website.

A spokesperson for Alantra said no sale process has been considered nor initiated for any of those companies.

Further down the supply chain, Walmart was reported earlier this month to be delaying its sale of a majority stake in UK grocer Asda because of market conditions in the pandemic. Asda's suitors were all reported to be private equity firms.

Deals in the pipeline for which funding is already secured may slow down but should still be on track for completion, according to the fourth banker.

Yet this slowdown creates opportunities for some prospective bidders, says Catherine Crawley-Boevey of Highstead Partners. With private equity firms less able to pursue LBOs, cash-rich family offices could find opportunistic acquisitions amid the slump, she says.

Public companies are unlikely to pursue M&A, however well capitalised they might be, until we are well on the way back to "normal life" – but they will instead focus on cash conservation and survival, says Sachak. But even as most corporates preserve cash and do so by putting non-essential M&A on hold, some could find lucrative opportunities to invest in the coming months, according to Crawley-Boevey. Recently active corporate buyers in the consumer sector include Henkel, which is in the running to buy Coty's professional beauty products, and Nestlé, whose subsidiary Nestlé Purina PetCare recently bought pet-food brand Lily's Kitchen.

For some of the deals ahead, especially those involving corporate buyers, yet another obstacle lurks: regulators face reduced capacity for merger review in the coming months. At the Competition and Markets Authority, resources are being allocated to deals already under review so that at least those remain on track, meaning that deals in the pre-notification stage could face lengthy delays, according to a competition lawyer active in the consumer sector. As the pandemic persists, a rapidly changing retail environment could complicate its provisional findings on the competitive landscape for deals such as JD Sports' proposed takeover of Footasylum.

Investment outlook
Even when deals complete, advisers are not in the clear, given macroeconomic conditions. The collapsing price of oil, and its knock-on effect on foreign exchange rates, dented fees on a recent deal the first banker worked on.

Such conditions are likely to persist for at least the next four or five months, he adds. Jakins and Crawley-Boevey suggest a similar timeline, pointing to Q4 as the date when normality could return to consumer-sector M&A.

When deal activity picks up again, it will do so in a torrent, especially in the UK, the first banker says. Last year, the market wanted more clarity on Brexit, which it then got in some measure. Prospective vendors and bidders must now wait a bit longer, but many delayed processes should come to market next year, he added. Then, says Jakins, pent-up private equity demand will be put to work.

This article was originally published in Unquote sister publication Mergermarket

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