Doing the right deals in consumer markets

Globally, 2022 promises new opportunities for dealmakers in consumer markets. The UK is one of the markets leading the way as businesses step up the pace of innovation and digital transformation in response to changing consumer preferences and emerging new business models. Alongside acquisition, portfolio reviews are spurring a wave of divestments and spin-offs.

Strengthening digital engagement and fulfilment is a clear focus of deal strategies. Primarily digital businesses are also stepping up the acquisition of bricks-and-mortar capabilities as part of a push towards omnichannel service and reach in sectors such as gaming and vehicle retail.

Other key trends include the resurgence of vertical integration as companies look to shore up disrupted supply chains and speed up customer response times. As consumer expectations on environmental, social and governance (ESG) increase, further incentives for vertical integration include improved control and transparency over sustainability and labour practices. While ‘conscious consumerism’ had mainly centred on premium and niche products such as clean eating brands or eco-resorts, it’s now moving firmly into the mainstream. The deal scope is also extending into areas such as recycling.

Deal hotspots

As recent headlines highlight, the potential transaction targets include major grocery chains and high street names. But some of the most active areas of the deal market are smaller transactions in niches that have come to the fore in the wake of the pandemic.

High on the list are holiday parks, accommodation portals and other staycation assets. While international travel restrictions have clearly been a factor in encouraging people to holiday in the UK rather than abroad, the staycation boom also stems from the growing desire for shorter, more frequent and more flexible get-aways.

Despite the fluctuations in revenue, freehold pub chains are also on the radar. The attractions include the property value within these asset-backed investments.

Further targets range from health and beauty to pet care to home and garden furnishings. This looks set to continue as people spend more time working from home.

Alongside the growth hotspots, the rebound in deal flows reflects the search for bargains among the many retail, hospitality and leisure businesses who’ve seen drastic falls in revenue over the past years and are seeking out acquirers to help them survive.

Active buyers

The big investors in this dynamic deal market include private equity firms looking to put high levels of dry powder to work and consolidate the footholds they’ve built up in sectors such as pubs and holiday parks. The inward investment from abroad also reflects a widespread view that UK assets are undervalued in comparison to other developed markets.

The main corporate buyers are groups that have weathered the upheaval of the past two years and emerged in a stronger financial position. Acquisition of weaker counterparts offers an opportunity to expand their reach and reinforce their competitive advantage.

Maximising deal value

How then can your business maximise deal value in this resurgent M&A market? Based on the emerging trends, three openings stand out:

1. Split and spin-off to realise value
2. Buy and build
3. Capabilities premium

1. Split and spin-off to realise value

Some of the most successful deals have been spin-offs of fast-growth divisions. Examples include innovative tech capabilities and e-commerce platforms. The market valuations for these spin-offs can often be much higher than the demerging group overall and therefore offer a good way to optimise value and speed up return on investment. Other businesses are likely to follow suit by reviewing their portfolios and splitting out areas of the business likely to attract high multiples.

2. Buy and build

Attractive valuations and readiness to sell have boosted the value creation potential of buy and build. Many private equity buyers are prepared to target assets smaller than their normal deal thresholds as they seek to build up market share and accelerate consolidation in growth niches.

3. Capabilities premium

The value creation potential of differentiators such as customer insight, breakthrough innovation and fast fulfilment highlights the importance of the capabilities-fit within consumer markets deals.

The clear finding from our recent Doing the Right Deals research is that deals that boost capabilities in areas such as talent and technology offer the greatest value creation potential. To deliver the capabilities premium, the buyer can either harness its capabilities to strengthen the target’s value potential (leverage deal) or use acquisition to bring in the capabilities it needs to grow (enhancement deal).

Find out more

We explore the key deal drivers and how to realise the potential further in our Global M&A Trends in Consumer Markets: 2022 Outlook. You can also check out our Doing the Right Deals report for more insights into how to capitalise on capabilities-driven deal opportunities.