Sixth and last episode of EY M&A Compass, the in-depth look at the Italian M&A market developed by EY together with BeBeez
by Stefania Peveraro
Article published in BeBeez Magazine no. 22 of 29 June 2024
As many as 53 deals for a total of EUR 3 billion. This is the balance of m&a activity involving Italian companies in the consumer & retail sector in the first quarter of 2024.
This was said by Giorgio Castelli, Partner, Strategy and Transactions, EY Italia, in the sixth episode of EY M&A Compass, the in-depth report on the Italian m&a market developed by EY together with BeBeez, who pointed out that “these are significant numbers, if you think that the last quarter of 2023 saw only 40 deals for a total of EUR 2 billion in the sector and that the first quarter of last year counted only 47 deals for a total of EUR 1 billion”.
The data, contained in EY’s latest report on m&a in Italy, thus show that the consumer goods&retail sector had a weight of 18% in the first quarter of the year on the total of 294 m&a deals with Italian companies as protagonists, while in the first quarter of last year the weight had been slightly lower, i.e. 15% of the 285 total deals mapped then (see another article by BeBeez and here the EY report). And the whole 2023 had instead counted 181 transactions in the sector out of 1,210 (around 15 per cent) for EUR 6.6 billion in total, compared to EUR 58.6 billion for the market as a whole (see here a previous article by BeBeez and the full EY report here).
There are therefore encouraging signs in Italy, in line with what is happening globally, ‘where companies in the sector are using strategic disposals to finance growth programmes, reduce debt and focus on core business,’ Mr. Castelli continued.
Click above to watch the sixth episode of EY M&A Compass
with Giorgio Castelli, Partner, Strategy and Transactions, EY Italy
Question. M&A activity seems to have picked up in this first part of the year also in Italy. What are your expectations for the coming months?Answer. Year 2023 was a complex one for the m&a market, influenced by various factors, including higher interest rates that made debt more expensive. Last year, some deals were put on hold due to the significant difference between expected and offered multiples, as well as buyers’ uncertainty about year-end results, also due to macroeconomic and geopolitical issues. In the first few months of 2024, many of these processes have been resumed and closed, and we expect a positive trend for the remainder of 2024 with an increase in the number of deals compared to 2023, thanks to the easing of monetary restrictions and anticipated rate cuts, especially during the second half of the year. That said, the cost of debt will remain high in 2024, so we expect m&a deals initiated by strategic players to continue to be driven by growth and transformation logic. Private equity funds, for their part, will focus more on mid-market deals or creative structures to finance larger deals, such as joint ventures, larger sellers’ minority stakes, or earn-out / vendor loan formulas, and club deals.
Q. In this context, how is the consumer & retail sector in Italy behaving?
A. It is one of the sectors that is driving the market. Last year, with its 181 deals, it accounted for about 15% in terms of number of deals out of the total. Of course, in terms of value it only accounted for a little over 11%: EUR 6.6 billion compared to the total EUR 58.6 billion of the entire M&A market. This year, the same sector is accounting for 18% of the total number of deals recorded in the first quarter, with a 13% increase in the number of deals compared to the same period last year.
Q. Does this mean that perhaps smaller deals prevail in this sector than in others? Can you give us some figures on this?
A. Undoubtedly over the last three years in Italy there has been a predominance of small deals, i.e. less than EUR 100 million, which accounted for 74% of the 34 deals with disclosed values in 2023. However, the figure could be even higher, because the value of the deals is not always disclosed and the deals with undisclosed values are probably all below 100 million, so in reality the percentage could be much higher. Not only that. In the calculation of the total value there are no add-ons, i.e. acquisitions made by companies already in the funds’ portfolio. This is a type of activity that the funds will continue to pursue in the coming years.
Q. How heavy is private equity activity in the sector?
A. It is in line with the figure for the market as a whole: around 40% in terms of number of transactions, with industrial companies still weighing in for the majority. But this is a global trend, across all sectors. According to the recent CEO Outlook Pulse, carried out by EY in January 2024 on a significant panel of CEOs, interest in m&a deals in the consumer goods sector in Europe consolidated significantly in July 2023 (+24 percentage points compared to November 2022) and then declined in October 2023 (-25 percentage points compared to July 2023), reflecting companies’ responsiveness to changing market dynamics and economic conditions. More broadly, there is a clear movement towards joint ventures or strategic alliances in m&a transactions (+10 percentage points in January 2024 compared to October 2023) to reduce risks and costs, unlock resources and accelerate strategic agendas that would facilitate business transformation.
Q. But why do companies do m&a in the consumer sector?
A. For various reasons. For example, because they aim to enter high-growth categories and a fast and effective way to do this is to focus on successful and established brands. Then there is the issue of sustainability: the demand for ethical, ecological and healthier products (e.g. plant-based) is growing. Companies are thus embracing business models with more control over the value chain (supply chain operations) and circularity. In addition, there is greater sensitivity to territorial aspects as a synonym for quality. Finally, a transversal theme is that of digital technologies and, in this sense, AI solutions are becoming more sophisticated and ubiquitous, improving the consumer experience and making value chains more agile and resilient.
Q. And on the cross-border operations front, how does the industry look? How much are domestic companies buying abroad? For example, we have just seen the announcement of the acquisition of Princes by the Italian NewLat in the UK…
A. I have to say that Italian consumer & retail companies are increasingly active in acquiring foreign target companies. In particular, in 2021 there were no cross-border transactions by Italian buyers, while in the following years these represented 35% by value. In May 2024 these represented 17% by value and 15% by volume.
Q. Talking about consumer & retail means including companies that are also very different from each other. Can you tell us something about the situation of the main sub-sectors?
A. For Food and Beverage there are opportunities for refocusing the portfolios of large industrial players, either through acquisitions or selective divestments. In addition, there will be significant investments in technologies for direct access to the consumer, such as digital channels and other innovative platforms. In the Health & Beauty sector, the global cosmetics market is expected to grow by 9% in 2024, according to Euromonitor, with steady growth rates until 2028, up from 3% in 2018, driven by the US, China and Brazil, so certainly a segment of strong interest to financial players. The nutraceutical sector is expected to be in turmoil following the divestment of the nutraceutical business by large multinationals, and further consolidation and aggregation is expected in the pharmacy and online pharmacy sector. In grocery and non-food value retail, market consolidation will drive retail macro-trends in the near future, with fewer and fewer players. Despite rising sales, declining sales volumes highlight the difficulties of the sector and consumers post-inflation. Major retail operators, including discounters, were partially supported by the growth of branded products, which account for more than 30% of turnover. However, smaller operators are going through a complex period. A number of m&a transactions are also expected in 2024, which will lead to greater concentration. Then there is the Pet & Vet sector where private equity funds have recently invested in retail, food manufacturing and veterinary chains and this trend is expected to continue in 2024. In Food Retail, a possible wave of transactions is expected in the sector, both for add-ons and secondaries; thus, divestments of chains in the hands of private equity funds, which had been postponed in recent years. Finally, in fashion retail, operators will evaluate investments or alliances to develop or increase their online presence.
Below are the previous episodes of EY M&A Compass:
Click here to read the first episode of EY M&A Compass
Click here to read the second episode of EY M&A Compass
Click here to read the third episode of EY M&A Compass
