Author: Laura McNaughton
Laura leads our Consumer brands sector and team. Laura has significant experience of working with high growth consumer brands from private equity investment through to IPO. She also advises private equity funds and large corporates on the trends and changes driving value in the consumer sector.
Laura is an M&A Corporate Finance Partner and has been at BDO for over 15 years.
Over the last 18 months, the global pandemic has been driving exponential growth for some consumer brands. Captive audiences, with consumers having more time to shop online, or the market shift to direct from brand acquisition, mean that some brands have grown as much in just the last 18 months as was predicted over the next three years. So, has this growth led to an increase in M&A activity?
The simple answer is yes. The high levels of liquidity in private equity funds and the desire from large global players to engage with the consumer mean the volume of consumer deals is significant. However, appetite is focused to a limited number of subsectors, where valuations are at an all-time high. Acquirers are also cautious when considering acquisitions because of expectations around the growth in the consumer market in 2022.
Consumer behaviour and valuations – some examples
There are several deals from the last six months that capture the valuation effect of changing consumer behaviour.
In April, we supported LDC in its minority acquisition of Le Mieux, an equestrian brand. This is a sub sector historically driven by distributor and wholesale channels. A number of well-regarded UK brands have struggled to demonstrate the breadth of their brand due to limitation on Stock Keeping Units (SKUs) retailed through wholesale accounts.
The consumer trend to purchase direct from brands has been a significant market shift. It has allowed more brands to not only “own” their relationship with the consumer but to engage through social media channels and direct interaction with customers. The result has been significant growth at both revenue and margin level for those brands.
Our expectation for the equestrian sub sector is that the market shift, with growth in the consumer demographic, will lead to consolidation over the next three years. Brands that are well regarded with a strong hold on the UK consumer will be extremely attractive to international buyers looking to consolidate.
We expect similar trends in the outdoor living, cycling and direct to consumer food propositions, all of which have seen similar shifts in the channel mix and a revolution in consumer engagement. These sectors have also benefitted from the changes to lifestyles driven by lockdowns and a broader focus on wellbeing.
What’s next for consumer M&A?
UK consumer brands are seeing high levels of growth, including like for like growth against March – May 2020, the “COVID Period”. Nonetheless, the pandemic and Brexit have created significant challenges for 2021. Potential growth is being hampered by limited production capacity, challenges on import and stock being locked in ports globally. Acquirors and investors may wait for these supply chain issues to be resolved which may delay some transactions.
There is heightened appetite for consumer brands considering IPO as an option. We have seen several successful transactions in H1 2021, such as Parsley Box, In the Style and Made.com. Market valuations are at a high, driving overall valuations for private companies to increase. As a result, we anticipate a steady volume of consumer brands coming to the listed markets over the next 12 months.
The UK large corporates are also reacting to the changes in consumer behaviour. Some of the UKs largest retailers are likely to undertake transactions, either divestment of non-core brands or the acquisition of brands to improve their position in the direct-to-consumer marketplace. I predict a number of prominent names undertaking activity in the coming 12 months.
Focused investment appetite for consumer brands
For all the reasons I have explained above, the right consumer brands in the right subsectors will see strong investor appetite. H1 2021 has experienced a strong start for consumer M&A activity. I am confident we will see a surge in private equity confidence, a growing appetite from trade to undertake transactions and increased valuations for listed entities. All of which will create a landscape of high investment appetite over the next 12 months.
Our Consumer team produce regular forecast reports on the trends in consumer behaviour as well as advising clients on the full range of accounting and business issues. Find out more here.
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