Large, strategic transactions drove retail merger and acquisition activity last year to another post-recession record, although deal sums “retreated from the frothy levels of 2015,” according to a report released Monday by global strategy and management consulting firm A.T. Kearney, which also expects deal-making to rise this year, along with a rebound in those valuations.
The primary drivers of consolidation activity in retail — slow growth, plentiful capital and strong balance sheets — will continue this year. But with a more complex political environment emerging, well thought out strategies will be required, according to the report, “Off to New Peaks in Uncertain Times.” A.T. Kearney tracked deals from the past decade among consumer and retail companies, and spoke to C-level retail executives, 67% of whom anticipate an increase in mergers and acquisitions in coming months and years.
Small acquisitions are on track to drive innovation and new opportunities for growth as they did last year, and the strong dollar versus the euro and the pound will continue to send capital overseas this year. Europe and North America accounted for 75% percent of last year's total deal value, with Europe attracting 45% of the total capital.
From the analysis three predictions emerge: stratification of deals with increased interest for both micro and mega deals; a bump in deals backed by private equity; and growth across global markets even in the face of rising political uncertainty.
In 2016, 58 megadeals were valued at more than $1 billion, with consumer goods and food companies posting a 46% jump, according to the report, which also highlights the proposed tie-ups of eyewear retail giants Essilor–Luxottica and drugstore rivals Walgreens–Rite Aid as “crucial to improving bottom lines” this year.
"While many of the circumstances that made 2016 a banner year for M&A will yield a similar level of deal making in 2017, several other factors have emerged that change the lens on the overall picture," A.T. Kearney Partner Bob Haas, leader of the firm's global Mergers & Acquisitions Practice and co-author of the report, said in a statement. "Increasing pressure on companies to grow revenues and profits has been matched by emerging political uncertainty, which will make cross-border transactions far more complex and potentially not as favorable as domestic and repatriation deals. At the same time, high multiples in developed countries will bring more balance in global growth."
While valuations of big deals tempered in 2016 by 21%, that’s likely to change thanks to “mounting global optimism, increased liquidity and the strong US dollar,” noted A.T. Kearney principal and report co-author Bahige El-Rayes.
“To navigate the crosscurrents of shifts in market dynamics and political conditions, consumer and retail companies will need a strategic approach that accounts for the risk of economic nationalism in various parts of the world, starting with our own region, as well as a long-term view on the value created by M&A deals,” he said.