Publications - Amherst Partners
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Publications

M&A activity in the food and beverage industry remained robust in Q1 2018, a continuation from a highly active 2017. While Q1 2018 activity was down as compared with Q1 2017 levels, we believe that interest in the sector and current industry trends will result in full year 2018 activity ending up in-line with 2017 levels.

A number of sector trends will continue to drive deal activity in 2018. Primary trends include the emergence of the so called Amazon effect and changing consumer preferences toward (i) healthier, better-for-you alternatives, (ii) local brands/ingredients, and (iii) an increased appetite for snacks and on-the-go consumables.

As large, old-line food and beverage companies (think General Mills and Kellogg) have been caught holding the bag with vast, traditional product portfolios (e.g., sugary cereals), consumers, particularly millennials, have been voting with their wallets and forcing big changes at these companies. Hence the falling stock prices for old liners, including last-twelve-month declines of 10%+ for each of General Mills, Kellogg and Post. Large, old-liners have been prioritizing M&A for on-trend growth as it is often easier to acquire trusted, proven brands than to build them organically. And with on-trend, high-quality businesses of scale in short supply, competition for deals is often price based, with buyers offering significant premiums. For instance, Hershey paid a 70%+ premium for better-for-you snack company Amplify in late 2017.

Food and beverage retailers are also under pressure from the Amazon effect. The monumental impact of Amazon’s acquisition of Whole Foods in mid-2017 illustrates Amazon’s ability to significantly disrupt established industries. Stock price impacts were immediate, with next-day declines of 15%, 12% and 5% for Kroger, Target and Walmart, respectively. This generated an urgent need to develop scalable online grocery/fulfillment strategies among traditional grocers. As they experiment with online order/in-store pick-up, some have leveraged M&A to acquire proven delivery capabilities (e.g., Target’s acquisition of same-day delivery platform Shipt in late 2017), a trend we expect to continue.

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Despite a slight pull-back in 2017, building products sector M&A activity remained strong with 117 transactions, during the year representing approximately $4.9 billion in deal value. Robust acquisition activity has continued into 2018, as the number of transactions in the first quarter increased 8.8% over the same period from a year earlier.

The current favorable M&A environment has been supported by increases in both residential and non-residential construction, as well as increased spending for home repair and remodeling. We expect M&A activity to remain strong through 2018 driven by low interest rates, strong economic fundamentals, healthy levels of corporate cash balances, and access to cap¬ital available through debt and equity markets. Additionally, the enactment of corporate-friendly tax reform is expected to further accelerate acquisition activity.

The building products sector remains a highly competitive marketplace with larger players benefiting from scale. Both strategic and financial buyers are looking to capitalize on expanded economies of scale and expand their scope by filling gaps in existing product offerings. In addition, these firms will continue to search out new geographic market opportunities. As a result, we expect companies with strong brands and a value-added proposition to likely become acquisition candidates.

We’re also continuing to pay close attention to the competitive tension from e-commerce players. Al¬though penetration in building products has lagged consumer categories, the sector is not completely insulated from the so-called Amazon effect. Amazon’s B2B unit currently hosts 13MM home improvement and 3MM building material SKUs. The program, which launched three years ago, has since realized a five-fold increase in its home improvement revenue – by some estimates, Amazon’s home improvement sales could outpace Menards’ in 2018. Additionally, Amazon’s Home Service feature places customers in direct contact with professionals for bulky or behind-the-wall installation projects, and can potentially offset the key advantages of brick-and-mortar competitors. Consequently, residential building products category leaders are racing to get in front of this challenge by investing in downstream e-commerce tools and building out their direct-ship capabilities.

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