US retail and consumer merger and acquisition (M&A) activity during the first quarter of 2014 was primarily driven by five multibillion dollar transactions, according to PwC's US retail and consumer deals insights Q1 2014 report.
More than half of those deals were aligned to the food and beverage sector.
For the three month period ending 31 March 2014, there were a total of 34 deals in the retail and consumer sector with disclosed values greater than USD50 million, accounting for USD39.3 billion in total deal value.
Deal volume for the quarter was consistent with the first quarter of 2013, while deal value was down 14 per cent from the prior year.
However, excluding the purchase of HJ Heinz by Berkshire Hathaway and 3G Capital Partners (a total value of USD28 billion) in Q1 2013, total deal value for the first quarter of 2014 was up 119 per cent year-over-year.
"Deal activity showed strength in the first quarter of 2014, dominated by multibillion dollar deals in the food and beverage sectors, and confirms our positive outlook for the remainder of the year," says Leanne Sardiga, partner and PwC's US retail & consumer deals leader. "According to our Global CEO Survey, retail and consumer goods CEOs are seeing a need to change their strategies around M&A, joint ventures and strategic alliances to capitalise on global trends they believe will most transform their business. But with very few retail CEOs saying a change program is underway or completed, we believe this suggests further M&A is on the horizon – and we're currently helping many companies with these strategic overhauls."
Cross border activity increased during the quarter, on a year-over-year and sequential basis, representing 59 per cent of total deal volume during the first quarter of 2014 – higher than the average, 51 per cent, over the last eight quarters. This rise in cross border transactions is expected to continue through 2014 as retail and consumer companies increasingly look to expand into faster-growing international markets to bolster stagnant organic growth in their home market, as well as to drive growth from an expanding middle class internationally. Accordingly, PwC's Global CEO Survey found that 18 per cent of retail and consumer CEOs plan to initiate or complete a cross border deal in the coming twelve months.
PwC's analysis notes that private equity (PE) activity remained strong in Q1 2014, led by the proposed USD8.5 billion acquisition of Safeway. PE deal volume represented 24 per cent of total retail and consumer deal volume, down from 28 per cent in Q4 2013, and down from 37 per cent in the first quarter of 2013. PE deal value was 30 per cent in the quarter, up from 12 per cent in Q4 2013, but down from 77 per cent during the first quarter of 2013 (which can be directly attributed to the HJ Heinz mega deal).
Spin-offs and divestitures remained a key strategy in the quarter for retail and consumer companies looking to refocus their core businesses, and those in the food and beverage sectors have been the most active over the last five years. Divestitures were up slightly to 33 per cent during Q1 2014 compared to 31 per cent in Q4 2013 – consistent with the average for the last eight quarters. According to the report, spin-offs also remain quite prominent in the sector, with eight transactions in the pipeline as well as a continued level of overall shareholder activism.
The overall IPO market was punctuated by a strong start and finish to the quarter, with a lull in activity from mid-February to early March, emphasising the importance of "IPO windows" providing companies the opportunity to approach the equity markets at the right time. Total retail and consumer industry IPO activity showed an increase year-over-year both in volume and value in the first quarter, as Q1 2014 saw six offerings price for total proceeds of USD1.5 billion, compared to USD1.3 billion from four offerings in Q1 2013. Activity is expected to increase in the remaining quarters of 2014 as the retail and consumer IPO pipeline is the strongest the sector has seen since April 2012, with 16 companies on file expecting to raise USD4.7 billion, contingent upon volatility in the market affecting these potential transactions.
"A number of key deals this quarter were consistent with several of the themes we've been seeing over the past year, including PE investment in retail and continued activity in non-store retailing. In fact, the trend of blurring the lines of retail and technology companies continues to drive deal activity as retailers look at acquisition opportunities to quickly transform their businesses and capabilities to adapt to and better meet evolving consumer expectations, and as shoppers increasingly look to digital and mobile channels," Sardiga says.
