Consumer Companies Bail on Non-Core Assets: "Deep is the New Wide" – Mergers & Acquisitions

Consumer sector players are increasingly eager to part with assets seen as non-core in a market that rewards specialization, says Kearney partner Bahige El-Rayes. Deep is the new wide, El-Rayes says. It used to be about diversified products, now its about consistency, agility. In many cases consumer [companies] realized they dont need everything they have.

That realization is widely felt. Three quarters of sector executives at the top 20 consumer companies surveyed by global strategy and management consulting firm Kearney said that they could carry out a major divestiture. The rationale? Strategic restructuring to strengthen balance sheets and enable growth.

The novelty in the survey data, released today, is in the type of growth corporates seek on the back of disposals. Rather than deploying capital in megadeals that fundamentally reorient strategy, executives tell Kearney that they want to pursue small, discrete acquisitions that give them exposure to a market without weighing in as a potential drag on the balance sheet should markets shift.

The word is defined optionality, El-Rayes explains. Companies are increasingly like venture capitalists; they need to be more agile and less certain in terms of trends and capability.

To capture upside to an emerging technology, for instance, executives are now thinking, There are a ton of technologies. I want to be positioned but dont want a billion dollar investment. I want a footprint but not too much where Ill be exposed in a few years.

Grocery shoppers are clamoring for personalized nutrition and shopping options that improve gut health, but how companies position themselves for a possibly transient shift in preferences is less clear.

Health and food are coming together, and its not certain if its a fad or not, El-Rayes frames the scenario. Is that something that consumer packaged goods companies have a role to play in, or are they the big evil? Who is the culprit for the processed sugar? Where are the growth opportunities? Should packaged goods companies double down on that?

Rather than seeking a transformational merger of equals, corporates could play the possible outcomes by acquiring a small health food company. The parent can drive reverse integration such that the values and positioning of the fresh-focused target permeate the wholeco, driving organizational change without the price tag and legacy assets of a larger deal.

Mondelezs 2019 acquisition of a majority stake in Perfect Snack owner Perfect Brands is a zeitgeist transaction: the maker of Oreos and Cadbury eggs acquired organic, non-GMO clean snacks in the deal. Meanwhile, Cargill invested $75 million in textured vegetable protein maker Puris to bring its total investment to $100 million the same year.

This preference for option value is evident in trending valuations. Deal multiples for small and midsize deals are increasing relative to large deals, which have cumulatively fallen 34 percent since 2018. When asked what sized targets they plan to acquire, approximately 60 percent of respondents pointed to $500 million targets and below.

While divestitures are top of mind in consumer sector boardrooms across the globe, so are the depths of redeployment. Kearney, working with Dealogic data, projects consumer M&A to rebound off 2020 lows should first quarter transaction rates continue apace.

El-Rayes is co-author of the report Forged in Crisis, Poised to Innovate, and leads the UK and Ireland consumer practice of Kearney.

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Consumer Companies Bail on Non-Core Assets: "Deep is the New Wide" - Mergers & Acquisitions

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