US retail and consumer deals insight

April 2014  |  FEATURE  |  MERGERS & ACQUISITIONS

Financier Worldwide Magazine

2013 was an encouraging year for the US retail and consumer (R&C) market. According to the PwC report ‘US Retail and Consumer Deals Insights: 2013 Year in Review and 2014 Outlook’, total deal transactions in 2013 exceeded $100bn for the first time since 2008.

PwC’s data notes that two of the major contributors to the increase in deal activity were the continuation of deals in the food and beverage sector, and private equity’s (PE) continued investment in the apparel, footwear and accessories sector.

In particular, the $28bn acquisition of HJ Heinz Company by PE firms Berkshire Hathaway and 3G Capital – one of the largest consumer product deals ever completed – helped to drive total deal value for the year beyond the $100bn mark. The deal for Heinz was a particularly momentous one for the food and beverage sector, as well as the wider R&C market, and this is most evident when examining the total M&A figures for the year. Excluding the Heinz transaction, total M&A deal value for 2013 was actually down 3 percent on 2012, reaching just $79bn. This year on year decline was largely due to a sustained period of inactivity during the second quarter of 2013. Food and beverage transactions throughout 2013 drove the majority of deal volume and value for the wider R&C sector. Of those disclosed deals valued at $50m and above, 24 percent were generated in the food and beverage markets. The size of the average food and beverage deal increased in 2013, again built upon the foundation of the Heinz deal. Food and beverage deals averaged $863m for the year, a healthy increase on the $556m registered the previous year.

According to the report, transaction value for announced deals with values greater than $50m was also up noticeably in 2013, reaching $107bn – an increase of 32 percent from the $81bn achieved in 2012. This leap can also be attributed to the Heinz acquisition.

Despite the considerable rise in deal value throughout 2013, deal volume for announced transactions with a value greater than $50m decreased by 2 percent, and 2013 saw just 126 such deals completed. This decline can be accredited, in some part, to the higher deal volume recorded during the final quarter of 2012. The looming uncertainty and threat of the fiscal cliff, and changes to tax rates, spurred many companies that would otherwise have remained inactive until 2013, into action late in 2012. “Although total retail and consumer deal volume fell during 2013, the sector represented about 12 percent of total US deal volume for the year – and R&C deal value increased to a five-year high,” said Leanne Sardiga, partner and leader of PwC’s US R&C deals.

The report shows that average deal size actually increased by 67 percent in 2013, reaching $399m. Yet, despite the increase in deal value, there was considerable uncertainty last year. Consumer sentiment fluctuated significantly throughout the year as they were troubled by a number of factors. The slowing of the US economy, the uneven nature of the nation’s recovery and issues surrounding the fiscal cliff, debt ceiling and government shut down, all contributed to the levels of uncertainty experienced by US consumers.

Despite the pessimism which prevailed throughout the US economy, the crucial holiday period during the fourth quarter did provide some solace for the retail sector. Q4 core retail sales increased 4.2 percent on 2012 and, encouragingly, this jump helped to drive up consumer sentiment for the year overall. This rise in consumer confidence was echoed in the University of Michigan’s Consumer Sentiment Index. In December, the index rose to 82.5, up from 73.8 in January.

PE continued to play an important role in the R&C sector throughout 2013, particularly in the apparel, footwear and accessories subsector, where it accounted for 53 percent of all transactions with a value greater than $50m. Despite playing a pivotal role in the past, total PE involvement in the retail sector did tail off in 2013. For those deals valued at $50m and above, PE accounted for just 26 percent of retail deal volume and 42 percent of the retail deal value in 2013. Last year saw a considerable drop off compared with 2012 where PE contributed 37 percent and 45 percent respectively.

PE retail deal activity was led by two deals. An investor group consisting of Ares Management LLC and state-owned Canada Pension Plan Investment Board acquired Dallas-based operator of specialty retail stores Neiman Marcus for $6bn. A second investor group led by Cerberus Capital Management completed a $3.3bn acquisition of five of Supervalu’s grocery chains including the Albertson’s and Jewel-Osco brands.

In the consumer sector, PE proved to be heavily influential in 2013. For deals valued above $50m, PE comprised 27 percent of total deal volume and 46 percent of deal value. These figures represented a considerable leap compared with those recorded in 2012, where PE accounted for just 17 percent and 7 percent respectively. PE growth in the consumer sector was heavily influenced by the Heinz megadeal.

The report also outlines five ‘megatrends’ poised to help define the world’s economy over the next 12 months. Accelerating urbanisation, demographic shifts, climate change and resource scarcity, shifts in global economic power and technological breakthroughs are factors that will ultimately affect global M&A strategy. It will be important for firms within the R&C sector to fully understand these trends, and their wider implications for both their own businesses and future M&A strategies and targets.

Core retail sales excluding auto, gasoline and building material sales increased by 1.6 percent in Q4 compared to the third quarter, and 4.2 percent year on year. The quarterly increase from Q3 was based on the 3 percent increase in food and beverage services and a 2.3 percent increase in non-store retailers. The year on year increase was predicated on a 9 percent increase in non-store retailer sales, a 3.1 percent increase in food and beverage stores and a 4.7 percent rise in food services and drinking places.

According to the report, this data demonstrates that many organisations are continuing to expand their omnichannel strategies. Core retail sales in 2013 rose above the growing wave of uncertainty in the wider economy, increasing 3.8 percent compared to 2012. The nascent housing recovery also served to help strengthen the increase in core retail sales during 2013, and improved household financial conditions may have transformed into increased levels of consumer spending. A marked decrease in unemployment in the US has also played a significant role in helping to increase retail sales in 2013. The national unemployment rate fell from 7.9 percent in 2012 to 6.7 percent in 2013. This decline in unemployment is not without its caveats, however – the majority of job creation in the US last year focused predominantly on low wage segments.

In light of potentially waning levels of uncertainty surrounding US monetary and fiscal policy, the report suggests that US consumers will continue to remain cautiously optimistic throughout 2014. Further improvements to home values are also likely to contribute to the burgeoning recovery of core retail sales in 2014 and beyond.

The National Retail Federation has predicted that retail sales will rise 4.1 percent in 2014, however the frigid weather throughout January and February will undoubtedly have an effect on both Q1 2014 sales and sales for the year in general. The consumer sentiment index for January dipped more than a full point from December’s level, dropping to 81.2.

For disclosed deals valued over $50m, cross-border deal activity experienced a stunted 2013. Deal activity last year was down to 37 percent of R&C deal volume and just 33 percent of deal value. Outbound deal activity in 2013 was far more common, accounting for 59 percent of cross-border deal volume and 45 percent of deal value. Since 2008, outbound deal activity has accounted for 57 percent of cross-border deal volume on average. As in 2012, Europe was the biggest recipient of US investment in 2013. However, both volume and value of investment into Europe as a percentage of outbound transactions decreased in 2013, relative to other areas.

US investment also played a significant role in the Asia-Pacific region throughout 2013. US investment into Australia alone accounted for 50 percent of Asia-Pacific outbound transactions.

Inbound activity into the US was dominated by Canadian and Asia-Pacific investors in 2013. The most notable inbound transactions in the R&C sector were the Neiman Marcus acquisition and Chinese firm Shuanghui International’s purchase of Smithfield Foods in a deal worth $4.8bn.

R&C companies are likely to continue to invest strongly in fast growing, emerging international markets in the coming year. According to the report, companies will rely on outright acquisitions and joint ventures to help grow in these foreign markets going forward. China and Brazil are likely to be the chief recipients of R&C companies’ investment throughout 2014. The two BRIC nations are already popular investment destinations for many companies due to their burgeoning middle classes and consumer economies, both of which will undoubtedly prove popular for R&C businesses.

Compared with previous years, 2013 was a significantly slower year in terms of restructurings and spin offs. Recent years have been heavily punctuated by companies re-evaluating their wider portfolios as they attempt to respond to increasingly difficult and competitive environments. To that end there was only one spin off of a firm announced and concluded within the R&C sector throughout 2013. The Crimson Wine Group Ltd unit was successfully spun off from its parent company Leucadia National Corp. Despite this successful spin off there were a number of announced spin offs which did not come to fruition in 2013. Notably, none of the spin offs announced by Sears, Darden Restaurants, and the Kimberly Clark Corporation actually came to pass. According to the report, increased levels of shareholder activism may ultimately lead to an increase in spin off activity throughout 2014 and beyond, maintaining the status of the spin off as a valuable business tool for the R&C sector.

Since 2008, non-spin off divestitures in the R&C sectors have accounted for 32 percent of total R&C deal volume. In 2013, however, deal volume growth for the R&C sectors was down 5 percent year on year and divestiture deal value growth also slipped 18 percent, or $8bn.

Although R&C deal volume declined in 2013 there are still many reasons for those within the sector to remain positive about the year ahead. Indeed, deal values climbed to a five year high, driven by the megadeal for Heinz. As the US economy begins to recover from the worst excesses of the financial crisis it is likely that consumers will remain cautiously optimistic.

© Financier Worldwide

BY

Richard Summerfield