The recession and COVID-19 pandemic has changed the playing field for M&A, shifting the buyers and sellers, and accelerating the changes underway in the industry. Private investors lead sector investments as the availability of capital and low interest rates have created a favorable investment environment. Strategic acquirers need to focus on building supply chain flexibility, strengthening e-commerce and last-mile capabilities, and investing in emerging tech as consumer behaviors and demands continue to evolve through the pandemic and its aftermath.
“Though the past two decades have emphasized lean and efficient companies as the business model worthy of envy, recent events have shifted focus to resiliency and customer experience.”
The dispersion of impacts within and across the subsectors will create pockets of strength, distress, and resilience that will shape the M&A landscape. Of the three CM subsectors, consumer continues to drive M&A activity and represented 50% of all deals announced in the first half of 2020. The food and beverage (including alcohol) category constituted 42% of the 264 consumer deals announced in the period, which also increased by 29% from H1 2019 to reach $8.8 billion in investments H1 2020. Four of the 10 largest deals announced in H1 2020 belonged to the category, led by PepsiCo Inc.’s acquisition of Rockstar Inc., an energy drink manufacturer, for $3.9 billion. As consumers spend more time at home, at-home cooking occasions are on the rise. Indulgent foods, snacking, and off-premise alcohol sales have become fast-growing sectors within the food and beverage category. In the household category, items like paper towels, disinfecting wipes, and other cleaning products, will continue to see increased demand as consumers ensure they can keep their homes clean and safe during the pandemic. Companies with available capital in the food and beverage, and household and personal care categories will continue to scale operations by acquiring adjacent businesses, particularly in fast-growth segments, that complement core operations across North America and international markets.
Investments in the hospitality and leisure subsector remain strong and reached $15.2 billion in H1 2020, accounting for 37% of all Consumer Markets deal value. The hospitality and leisure subsector has been significantly impacted by travel restrictions and government mandated lockdowns in an effort to prevent the spread of the COVID-19 virus. In response, casino and gaming players temporarily ceased operation, while hotel and lodging companies have reduced their workforce in an effort to cut expenses as travel demand remains suppressed. Two of the three largest deals announced in H1 2020 belonged to the hospitality and leisure subsector: Blackstone Group’s acquisition of IQ Student Accommodation Group, a rooming and boarding houses operator, for $6.1 billion, and the acquisition of the Grand Las Vegas assets of MGM Resorts International by an investor group comprised of MGM Growth Properties LLC and Blackstone Real Estate Income Trust Inc. for $4.6 billion. Together, both private equity deals represented 70% of total investments in the subsector. Under current market conditions, we expect subsector M&A activity will remain positive in the near-term as corporations continue to divest under-returning businesses to boost liquidity and reduce debt.
Retail investments were the second largest contributor to M&A volume and accounted for 34% of all transactions disclosed in the first half of the year. The largest retail deal announced was Just Eat Takeaway.com NV’s pending acquisition of Grubhub Inc., a provider of online food delivery services, for $7.3 billion. The internet/ e-commerce category led deal value and accounted for 72% of total subsector investments. E-commerce has experienced rapid growth as consumers are affected by stay-at-home orders. Accelerated demand for consumer staples and food delivery has led retail players to increase investments in strengthening their supply chain and e-commerce fulfillment capabilities. Additional investments in cold storage warehouses and distribution centers, emerging tech, and last-mile delivery will help build a competitive advantage and capture market share as online sales soar. Apparel and footwear brands, and department stores that have dealt with tariffs and rising competition over the past year and a half will further experience financial distress from store closures related to COVID-19. As the shift to online and digital shopping continues, we expect additional divestments of underutilized physical retail assets in 2020 as well as secondary banners and brands. Retail investments will focus on customer-facing online operations to improve the overall shopping experience and boost loyalty. Improving the profitability of online operations will be top-of-mind as retailers need to create the right channel mix and meet consumers where they are without sacrificing the bottom-line.
The economic burdens and uncertainty brought on by the COVID-19 pandemic have led to rapid shifts in consumer behavior, including changes in daily routines and discretionary spending. The new ways of being impact how we consume, how we work, and broader behavior patterns.
Evolving consumption patterns, coupled with the current state of market volatility and overall uncertainty, will generate numerous M&A opportunities in 2020. M&A will be active through positions of strength, distress, and resilience that will shape the landscape.
The information presented in this report is an analysis of deals in the Consumer Markets industry where the target company, the target ultimate parent company, the acquiring company, or the acquiring ultimate parent company was located in the United States of America. Deal information was sourced from Refinitiv and includes deals for which targets have a target mid industry code that falls into one of the following mid industry groups: Agriculture & Livestock, Apparel Retailing, Automotive Retailing, Casinos & Gaming, Computers & Electronics Retailing, Discount and Department Store Retailing, Food and Beverage Retailing, Food and Beverage, Home Furnishings, Home Improvement Retailing, Hotels and Lodging, Household & Personal Products, Internet and Catalog Retailing, Other Consumer Products, Other Consumer Staples, Other Retailing, Recreation & Leisure, Textiles & Apparel, and Tobacco. Certain adjustments have been made to the information to exclude transactions which are not specific to the Consumer Markets sector or incorporate relevant transactions that were omitted from the indicated mid industry codes.
This analysis includes all individual mergers, acquisitions, and divestitures for disclosed or undisclosed values, leveraged buyouts, privatizations, minority stake purchases, and acquisitions of remaining interest announced between July 1, 2018 and June 30, 2020, with a deal status of completed, partially completed, pending, pending regulatory, unconditional (i.e. initial conditions set forth by the buyer have been met but deal has not been withdrawn and excludes all rumors and seeking buyers). Additionally, transactions that are spin-offs through distribution to existing shareholders are included. Percentages and values are rounded to the nearest whole number which may result in minor differences when summing totals.
Partner, Consumer Markets Deals Leader, PwC US
Partner, Deals Practice, PwC US
Director, Deals Practice, PwC US
Director, Deals Practice, PwC US
Director, Deals Practice, PwC US
Manager, Analytic Insights, PwC US