Consumer markets M&A 2024 mid-year outlook

The need to transform businesses will continue to drive M&A activity, but investors are cautious about which deals to pursue

In our January M&A 2024 outlook, we expressed cautious optimism for increased M&A activity in 2024, assuming stable macroeconomic conditions. In that report, we also expected consumer companies to continue reviewing their portfolios and focusing on transforming their businesses through M&A to achieve their strategic goals. This still holds true, although the recovery has been delayed by heightened economic and geopolitical uncertainty, lingering elevated inflation, and postponed interest rate cuts in the US. Nevertheless, there are promising signs on the horizon with the first interest rate cuts in Switzerland, a weakening Swiss franc, still solid Swiss domestic consumption, and the recent free trade agreement with India. For more detailed insights on consumer M&A and an overview of developments and prospects in Switzerland, read on.

Simon Malin

Partner, Deals Retail & Consumer Goods Leader, PwC Switzerland

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Over the past two years, deal volumes and values in consumer markets have dropped significantly due to economic challenges, financing issues, and valuation gaps. 2023 was particularly tough for M&A in general, and consumer deals were among the hardest hit. While M&A activity between 2022 and 2023 saw a 7% decrease in volume and a 31% drop in value, in the first half of 2024, deal volumes fell by an additional 22% from the already low levels of the previous year, and deal values were 4% lower than in the same period of 2023. The discrepancy between volumes and values is partly due to two large deals in the retail and packaging sectors. However, after a challenging period with volumes and values well below historical norms, dealmaking in consumer markets is expected to improve in the second half of the year.

EV/EBITDA deal multiples in the business-to-consumer sector in Europe and North America rose from a low of 8.4 in 2023 to 8.8 in the first quarter of 2024, according to Pitchbook data. This upward trend, combined with an increase in the number of larger deals and a resurgence of IPO activity, indicates a strengthening market. Additionally, the initial interest rate cuts by the Swiss National Bank, the European Central Bank, and by several other countries are contributing to a more favourable investment climate. These factors collectively suggest a gradual recovery in investor confidence within the sector, paving the way for renewed dealmaking activity.

Consumer M&A themes to watch in the second half of 2024

As in previous years, consumer companies will continue to refine their portfolios, driven by the need to focus on core, high-growth markets. This trend is expected to result in carve-outs and portfolio realignments. Noteworthy recent examples include Unilever’s decision to separate its ice cream business, Sanofi’s move to spin off its consumer healthcare division, and a ten-year partnership between Tesco and Barclays to deliver financial services to consumers.

Despite a slump in private equity exits, the consumer markets, particularly the beauty sector, have experienced significant IPO activity. In the first half of 2024, Spain’s Puig, Germany’s Douglas, and Switzerland’s Galderma all went public, rekindling investor interest in these types of assets.

We anticipate that large consumer operators, particularly in the retail sector, will leverage M&A to enhance operational efficiency, build resilience, and capture a larger share of consumer spending. Some will pursue consolidation to tackle challenges, as seen in the merger of Brazil’s fashion retailers Arezzo&Co and Grupo Soma, creating a combined entity with over 2,000 stores and 34 brands. Others will diversify into new markets or adjacent categories. For instance, Walmart’s February 2024 agreement to acquire VIZIO Holding Corp. for $2.5bn aims to tap into the audio and video equipment market. Similarly, The Home Depot’s March 2024 announcement to acquire SRS Distribution for $18.3bn seeks to expand the group’s growth with professional customers and increase its addressable market in specialty trade distribution.

The increase in retail insolvencies in 2023 and early 2024 highlights the sector’s challenges, such as the rise of e-commerce and changing consumer preferences. The restructuring of The Body Shop demonstrates how these difficulties affect both large and small retailers. We expect this trend in distressed M&A to persist, leading to consolidation as financially stable companies acquire brands, intellectual property, and selected assets.

“The recovery of M&A in consumer markets took longer than we have expected in our last report in Q1/2024. However, based on our recent discussions with companies, we expect activity to have bottomed out as a result of gradual regulatory improvement (India Free Trade Agreement), continued flexible company strategies, as well as the gradual reduction in interest rates and declining inflation rates in Switzerland. Thus, M&A activity remains a critical tool to accelerate transformation, drive growth, and give companies a competitive edge to tackle future challenges.”

Simon Malin,Partner, Deals Retail & Consumer Goods Leader, PwC Switzerland

Consumer markets M&A hotspots

PwC’s Voice of the Consumer Survey 2024 found that 64% of respondents listed inflation as one of their top three concerns affecting consumer spending. From a growth and investment perspective, certain subsectors are therefore more attractive than others:

Ongoing interest in 'good for you' products is driving investment in consumer health and specialised nutrition companies. In the US, The Simply Good Foods Company plans to acquire Only What You Need for $280m. KKR’s proposed acquisition of the optical platform Nexeye in the Netherlands demonstrates PE’s interest in the sector, while Galderma’s IPO represents a successful private equity exit. In addition, we expect businesses in vitamins, minerals, and supplements (VMS) to come to market in the latter half of 2024.

As we predicted in our last report, deal activity in the hospitality, travel, and leisure subsector has increased as consumers prioritise holiday travel and experiences. American Express Global Business Travel Group plans to acquire CWT Holdings for $570m, highlighting investor interest in international travel. More travel agency and tech assets are expected to come to market later this year.

The first half of 2024 saw significant deals in the gaming and sports sectors. International Game Technology plans to merge its Global Gaming and PlayDigital businesses with Everi, and investors acquired the Baltimore Orioles for $1.7bn. We expect several pending gaming and entertainment deals to close in the coming months.

The packaging sector is being reshaped by ESG concerns, driving the need for new capabilities and investments in intellectual property, leading to corporate-led consolidations. Assets strong in ESG are attracting wider investor interest. Notable deals in early 2024 include International Paper’s $9.9bn acquisition of DS Smith Plc and Clearwater Paper Corporation’s purchase of a US paperboard facility from Graphic Packaging International. As energy and commodity markets stabilise, we expect M&A activity in the packaging sector to increase in the next six months.

Major FMCG (fast moving consumer goods) companies are actively reviewing their portfolios, with Unilever recently announcing plans to spin off its ice cream business. Investor interest in pet-related products and services remains strong, as evidenced by Denmark-based BHJ AS’s planned acquisition of Cool Off, Australia’s leading pet food business. There is also continued M&A activity in food staples, out-of-home consumption, and the extended value chain, including ingredients, contract manufacturing, and related agro-businesses

Consumer market M&A volumes and values down in the first half of 2024

Consumer markets deal volumes and values, 2019-H1'24

Sources: LSEG and PwC analysis

M&A volumes and values in consumer markets dropped by 22% and 4%, respectively, from the first half of 2023 to the first half of 2024. Deal values were bolstered by significant megadeals (deals worth more than US$5bn) in early 2024, such as The Home Depot’s $18.3bn acquisition of SRS Distribution and International Paper’s proposed $9.9bn acquisition of DS Smith. Outbound M&A activity from Middle Eastern, Indian, and Japanese investors picked up in the first half of 2024 compared to the same period in 2023. We expect this trend to continue, driven by increasing domestic opportunities due to a growing middle class (in India and the Middle East) and companies with strong balance sheets seeking to invest capital.

M&A outlook for consumer markets in the second half of 2024

The pressure on consumer market companies to transform through M&A to meet rapidly evolving consumer needs and adopt new business models and distribution channels remains as high as ever. Consequently, we expect dealmakers to prioritise transformation and deal readiness in the near term. As market conditions ease and trading performance improves, M&A activity in consumer markets is likely to increase over the next six to 12 months. However, the timing is uncertain, and investors are cautious about which deals to pursue.

And what about M&A in the Swiss consumer market?

Portfolio optimisation

In our view, one of the most interesting actions taken in recent months was the free trade agreement with India. Swiss companies have gradually increased their focus on new fast-growing economies with sustainable growth expectations. Based on the new free trade agreement signed between Switzerland and India in March this year, Swiss multinationals are focusing more on India and less on China. This shift offers three major advantages:

High GDP growth: Due to India’s higher GDP growth rate expectations of more than +6% p.a. for 2024 and 2025, based on International Monetary Fund (IMF) expectations, compared to China’s expectations of just around +4% p.a. for the same period.

Strong increase of middle-class wealth: The average wealth per adult in India has grown by 8.7% p.a. since 2000 and reached USD 16,500 by the end of 2022. Economists estimate that one in four households currently belongs to the upper middle-income (USD 4,000 to USD 8,500 per household) and high-income (USD 40,000 and higher) segments. By 2030, one in two households are expected to earn these amounts, according to the UBS Global Swiss Wealth Report 2023.

Strong online purchasing and gifting nation: Based on the Swiss watch industry study, 70% of Indian consumers buy watches online, either through a multi-brand online platform or virtual marketplace, or directly from a brand’s website. This compares to 38% of consumers in the US, 54% in Germany, 46% in China, 34% in Switzerland, and 24% in Japan.

Conclusion

Among Swiss FMCG companies, we see significant growth potential for Nestlé, the watch industry, manufacturers such as Barry Callebaut, and trading companies such as DKSH, Dufry, etc.

M&A industry trends in Switzerland

Learn about the key trends driving M&A activity in Switzerland

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