M&A activity among consumer markets companies over the past six months has evolved along different themes geographically, offering a preview of how dealmaking trends are likely to play out in 2021. In the Asia-Pacific region, for example, the convergence of physical and online shopping experiences has led e-commerce players to acquire brick-and-mortar retailers to expand their consumer reach. In the Americas, mall owners have been acquiring ailing retailers out of bankruptcy in an attempt to maintain mall occupancy levels against the backdrop of declining footfall. In Europe, the Middle East and Africa (EMEA), megadeals have continued to dominate the M&A landscape, triggered by portfolio reviews involving large grocery retailers and fast-moving consumer goods (FMCGs).
The pandemic has adversely affected large pockets of the retail, consumer, hospitality and leisure subsectors, but government support in the form of relief measures and aid packages has in some instances shielded businesses from the full force of the pandemic. Businesses must use this period to rethink their M&A strategies and business models and take action to successfully recover from the crisis.
We believe the full impact of the COVID-19 crisis will unfold in the months to come, resulting in a further increase in restructuring-led M&A activity during 2021.
“The second half of 2020 saw several regional themes emerge—from the rise of SPACs in the US to the continuation of big carve-outs in Europe to the convergence of online and physical retail in Asia-Pacific. We expect these to continue to play out in 2021.”
M&A trends in the second half of 2020
Global Consumer Markets Deal Volumes and Values
Source: Refinitiv, Dealogic and PwC analysis
Deal volumes and values recovered in the second half of 2020 across retail, consumer, hospitality and leisure subsectors compared with the first half of the year, positioning M&A activity as a key feature of the economic recovery. All three geographic markets (Asia-Pacific, EMEA and the Americas) reported higher deal values in the second half of the year than the first half.
- Asia-Pacific appears to be leading the way out of the crisis, mirroring the region’s relative success in controlling the pandemic. Across the M&A landscape, deal volumes in Asia-Pacific exceeded those in the Americas and EMEA as corporates continued to reshape their portfolios to focus on strategic priorities. The region also saw a resurgence in IPOs and cross-border M&A activity despite looming geopolitical uncertainties.
“Despite being the earliest impacted region by COVID-19, a few countries in the region have been able to recover quickly. This in turn helped to fuel investor confidence in M&A activities, resulting in a quick rebound in the second half of 2020, expected to continue in 2021.”
- In the Americas, despite the lowest deal volumes in the second half of 2020, deal values were the highest of the three regions. A number of deals in the Americas involved unconventional purchasers, such as special-purpose acquisition companies (SPACs) and mall owners.
“In the US, M&A deal activity in the sector remains robust, bolstered by the availability of capital, the demand for innovation and acceleration of long-simmering transformation strategies.”
- Total M&A deal values in the EMEA region were higher in the second half of the year than in the first half, but still somewhat muted compared to Asia-Pacific and the Americas as major economies grappled with sequential waves of COVID-19 restrictions. Big portfolio reviews by large grocery retailers were the key driver of megadeals in the second half of the year in this region.
“COVID-19 has increased the interest in resilient sectors or business models. As the pandemic continues to bite, investors and corporates continue to review some of the most affected areas, either to provide the much-needed funding for survival or as an opportunity to consolidate.”
M&A hotspots
Our insights point to several M&A hotspots in the retail, consumer, hospitality and leisure subsectors, many of which are expected to continue to be active in 2021:
- Grocery and health and wellbeing have continued to perform strongly in the second half of 2020 and have maintained their position as category winners. Over the past six months, ethical consumerism has fuelled a growing trend towards veganism, leading to an uptick in M&A activity involving clean and sustainable brands.
- M&A activity in the pet industry has also increased in the past few months as spending on pets continues to rise, resulting in increased demand for consumables, particularly at the premium end.
- As global trends continue to show consumers spending more time at home, certain pockets of retail, such as home improvements, have benefitted from a shift in consumer focus towards home and away from clothing and cosmetics. This also continues to benefit e-commerce giants.
- The pandemic has fuelled greater focus on environmental, social and governance (ESG) factors such as sustainable sourcing and production of goods, ethical supply chains and brand management—areas that are influencing investment decisions across the deals landscape.
- Across the retail, consumer, hospitality and leisure subsectors, there has been an overarching shift towards direct-to-consumer sales. This has led to a rise in partnerships and collaborations between businesses, particularly those with online platforms. The pandemic has also accelerated the trend towards adjacencies—expansions into related areas of business—with an uptick in deals in last-mile delivery, logistics and technologies supporting the direct-to-consumer channel, all of which play a critical part in fulfilling e-commerce sales.
- Consumer markets businesses have seen an increase in convergence with technology and pharma as businesses seek to innovate to remain relevant.
- We expect key trends of M&A activity in 2021 to include further distressed M&A transactions and consolidation, particularly amongst brick-and-mortar non-food retailers (notably fashion apparel and department stores) and certain pockets of hospitality and leisure (travel and restaurants).
Key themes driving M&A activity
Constant redefinition of the core
We expect portfolio redefinitions to be a key driver of M&A activity in 2021, continuing a trend seen during 2020. Large retailers, FMCGs and conglomerates have shown resilience throughout 2020 and remain focused on value-creation strategies as they look forward. They continue to engage in M&A transactions to create value, either through a combination of acquisitions in growing categories, channels and markets or through divestitures of non-core business components and planned exits from non-strategic markets.
For example, to focus on its core categories, Nestlé sold its Chinese bottled-water business to Tsingtao Brewery in August 2020. Similarly, Walmart exited the UK market in October with the sale of its UK grocer, Asda, in order to focus on its core US market and its faster-growing overseas ventures in China and India. Elsewhere, Kraft Heinz sold its US natural-cheese business and a mix of other cheese brands in North America and internationally to the French dairy products company Groupe Lactalis. From Kraft Heinz’s perspective, the deal is a part of its agile portfolio-management strategy, while the cheese business makes a better strategic fit within Groupe Lactalis’ portfolio.
In addition to portfolio reviews and carve-outs, we expect 2021 to bring an increase in corporate transactions triggered by struggling businesses looking for strategic options for long-term survival. Corporates with deep pockets and private equity firms with available capital will be on the lookout for such opportunistic M&A deals.
Buying into the new 'rule breakers'
New entrants, or ‘rule breakers’, have been disrupting the traditional landscape of retail, consumer, hospitality and leisure businesses for some time and are increasingly becoming part of the status quo. The pandemic has proved that people are more open to change and experimentation than businesses expected.
The past six months have seen an acceleration of trends such as digitalisation, direct-to-consumer sales, convergence of technology with in-store experiences, contactless delivery and payment options, and the growing importance of ESG considerations. Retail, consumer and leisure businesses will need to rethink their business models and act quickly to match the rapid pace of change in customer shopping habits. Some businesses have the capability to innovate and disrupt, while others engage in M&A deals to acquire rule breakers.
Disruptors make attractive acquisition targets for both corporates and private equity firms. Nestlé, for example, invested in two direct-to-consumer businesses in 2020. In October it announced the acquisition of Freshly Inc., a US-based start-up focused on healthy prepared-meal delivery, and in November it acquired Mindful Chef, a UK meal-kit company. Separately, General Atlantic acquired a 20% stake in Gymshark, the UK online fitness-apparel brand, describing it as ‘authentic, disruptive and differentiated’. The rapid growth of e-commerce, an increasing focus on health and wellness, and the substantial social community created around Gymshark’s products and services made the company a compelling investment opportunity for General Atlantic.
We believe M&A involving rule breakers will be one of the dominant drivers of deals in 2021.
Building in super-resilience
Amid continued uncertainty, companies face unprecedented pressure to build operational and financial resilience into their business models to avoid becoming obsolete, distressed or potential targets of takeovers. Retail and leisure businesses are turning to M&A in search of strategic options as conventional business models are coming under threat and businesses are innovating at lightning speed. Many are looking at M&A to diversify their supply chains, integrate vertically, embark on digital transformation and preserve liquidity. Others are planning restructurings to build resilience into their business models.
As online and physical consumer shopping experiences converged over the past six months, e-commerce and physical players have increasingly used M&A to expand market share, gain access to consumer data and acquire new channels. Alibaba, for example, with its acquisition of a further stake in Sun Art Retail, a Chinese hypermarket and supermarket retailer, is hoping to leverage its digital presence and access more customers by offering a fully integrated online and physical shopping experience. In Japan, KKR and e-commerce retailer Rakuten came together to acquire a majority stake in Seiyu, a local supermarket chain, for similar reasons. In the leisure subsector, Caesars Entertainment announced the acquisition of British bookmaker William Hill in September 2020—a deal that gives Caesars access to sports betting and online expertise and provides a foothold in the fast-growing US sports-betting and online market, the latter having benefitted from the pandemic.
In addition to engaging in M&A activity, businesses have spent the past six months entering into partnerships to access new markets and channels and to leverage digital capability. For example, Hotel Chocolat signed a five-year deal with e-commerce giant The Hut Group that will allow the company to launch its direct-to-consumer chocolate business in the US.
These transactions show how companies are already responding to the accelerating digitalisation of consumer lifestyles resulting from the pandemic. We expect these trends to continue in 2021, via traditional mergers and acquisitions, strategic alliances and partnership arrangements.
What does ESG mean for our clients?
COVID-19 has shown how systemic risks can challenge businesses, strengthening the argument for both private equity and corporate clients to focus on their ESG road maps.
Traditional business models are being disrupted by regulatory changes in the EU and the UK promoting ‘low carbon’ and penalising ‘high carbon’, a shift in investor focus towards social-impact funds and funds tied to decarbonisation, and an overall increase in consumer awareness of ESG factors.
Companies are facing increased pressure to demonstrate that they can operate sustainably, and financial factors are no longer viewed as the only drivers of value. Businesses that have showcased clear social and/or environmental objectives have navigated the crisis more easily and will be more resilient to future vulnerabilities.
Going forward, consumer markets businesses will not only need to identify and address emissions generated from their operations, but will also be expected to address emissions from upstream supply chains, consumer use and products’ end of life. They will also be expected to build back sustainably, taking into account human rights, diversity and inclusion, and corporate governance matters.
Consumer Markets M&A outlook
The pandemic has led to a seismic shift in consumer habits and accelerated emerging trends of digitalisation, innovation, direct-to-consumer sales and ESG considerations. M&A is seen as a key lever in helping businesses to stay agile, embed resilience, to act in order to recover and to create value.
The direct impact of the pandemic on brick-and-mortar retailers and hospitality and leisure businesses will fully unwind over the course of 2021 as businesses wean themselves off government aid and relief measures, leading to more consolidations and distressed-asset sales, particularly involving those with outdated and challenged business models.
Over the course of 2021, we expect high liquidity levels to continue to drive M&A activity under the themes discussed above, to drive collaborations and partnerships, and to result in more IPOs and a rise in restructuring-led M&A activity.
About the data
We have based our commentary on M&A trends on data provided by industry-recognised sources. Specifically, values and volumes referenced in this publication are based on officially announced transactions, excluding rumoured and withdrawn transactions, as provided by Refinitiv as of 31 December 2020 and as accessed on 3 January 2021. This has been supplemented by additional information from Dealogic and our independent research. This document includes data derived from data provided under license by Dealogic. Dealogic retains and reserves all rights in such licensed data. Certain adjustments have been made to the source information to align with PwC’s industry mapping. We define megadeals as transactions with a deal value greater than US$5 billion.
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