M&A Sector Spotlight: Consumer deals take flight

Rebounding after a lackluster 2023, merger and acquisition (M&A) activity in the US consumer market has got off to a strong start in the first half of 2024. Consumers have proved resilient, and the economic environment stabilized after several years of uncertainty. So, what is driving the rise in deal kick-offs, which sectors are the focus of activity, and will deal kick-offs translate into deal closures?

In our latest webinar, panelists discussed the outlook for M&A in the consumer sector in the second half of the year, and into 2025.

A strong start to the year

Consumer sector M&A enjoyed a "robust" start to 2024 according to Abby Roberts, Senior Director at Datasite Insights. Figures for the number of deals launched through Datasite showed global sell side kick-offs were up 94% in January on the previous year. The second quarter was not quite so active; nevertheless, in June kick-offs were still up 17%.

The data chimed with panelists’ own experience. Scott Collins, Managing Director at Three Sixty Seven Advisors, said 2022 and 2023 had seen a drop in activity after the extraordinarily strong 2021, but 2024 was showing signs of being the turning point. “This is going to be the year when it comes back,” he said.

Sean Huss, Managing Director at William Blair, agreed and said his own organization had seen a 70% increase in pitch activity. Meanwhile Touline Elshafei, Corporate Counsel at ALDI Inc said she expected "quite the uptick in Q3".

The upbeat outlook was shared by our webinar audience, who were polled for their views. The overwhelming majority (77%) said they expected an increase in consumer M&A, 16% said it would stay the same, and just 8% expected a decline.

Drivers for deals

Collins identified three factors driving the growth in activity: the strength of the consumer, stable interest rates, and a more narrow gap between the valuation expectations of buyers and sellers. Stable rates were particularly important for private equity buyers, he added, as this provided the best conditions for modeling deals.

Huss also picked up the strong state of consumer finances and argued that headlines emphasizing the weakness of consumer sentiment and spending power were misleading. “If you look at consumer debt to net worth, it’s at an all-time low,” Huss said. And, he added, investors, who have been uneasy in recent years, were also exemplifying willingness to “get back to work”.

Delving deeper into consumer sentiment Elshafei said concern over ethical and sustainability issues was also a factor. Consumer demand for companies to have demand values and the need for business to react to that was creating “a big opportunity for M&A”, she said.

However, the market is not without risks and potential headwinds. Elshafei identified the upcoming US election as a possibly destabilizing factor and regulatory scrutiny as a potential issue. Collins meanwhile raised geopolitical issues, notably global conflicts, but he added that, while he was keeping a close eye on these issues, they had not had an impact on the M&A market so far.

Our audience poll found that the outlook for the US economy was regarded as the most important factor for driving consumer M&A in the months ahead (59%), with the US election also weighing heavily on many people’s minds (39%).

Sub-sector focus

The non-discretionary consumer segment was highlighted by all our panelists as a focus for M&A activity. Elshafei highlighted healthcare as a particular potential hotspot with the prospect of consolidation of service providers from dental practices to hospital services, driven by the ongoing demand for health provision from an older population. Huss agreed: “Essential services have been a huge source and focus of activity.”

For Collins, attention to supply chains post-Covid was another driver, with many businesses looking at whether an acquisition could help build more supply resilience. “That disruption left a bad taste in the mouth for traditional consumer goods,” he said.

What sets consumer M&A apart from other sectors is the high importance of brand and values, according to panelists. Elshafei commented: “Unlike in other industries, if you can get into the mind of a consumer, you can get their loyalty,” she said, adding that the power of social media, and influencers in particular, were a unique factor in consumer behavior.

“Consumer brand has so much power and it’s hard to put a number on it. That’s why I am always excited by the consumers,” said Collins, adding that a change in marketing or brand perception can transform the fortunes of a consumer business extremely fast.

Closing deals – outlook and best practice

Roberts said Datasite figures showed deal closures were also rising in 2024, and suggested this could be due to deal hangovers from 2023. “Last year we saw a lot of processes stall, but we are seeing those deals come back with more of the due diligence and preparation already done,” she suggested.

However, Roberts also warned that the high number of deal launches in the first half of the year could create logjams meaning the proportion of those deals that closed might be lower in the second half.

Due diligence and preparation are key to getting deals across the line, according to Elshafei. “The best practice is to be transparent and get the due diligence right,” she said, a view echoed by both Huss and Collins.

Huss added that closures could also be improving as dealmakers had adjusted to the new conditions and as valuation expectations become more aligned. “The entire universe had to develop a new playbook for a non-zero rate environment. There has also been a gap to be bridged between buyers and sellers and we have been through that process,” Huss said, adding that the risk bar had been very high in previous years, but that some risk appetite had returned.

Key takeaways

At the end of the session, panelists were asked to sum up their thoughts.

“It’s better this year than 2022 and 2023 and it takes some time to rewrite that playbook,” said Collins. “But we’ve all caught our breath a bit and this is going to be a good year.”

Elshafei returned to her focus on the consumers themselves. “Consumer retail growth is going to continue, and I think the trend in M&A will follow. Focusing on that consumer awareness and transparency is what will be important as we proceed.”

Huss, meanwhile, summed up the mood of the event. “Cautious optimism. We do not want to walk into this thinking that everything has turned up roses, but we do feel very good about what we are seeing.”