20 February 2018
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Consumer sector to lead mergers and acquisitions growth in 2018

Business Times
31 Jan 2018
Michelle Quah

Growth in the Asia-Pacific is predicted to be 21% over last year's total of US$104 billion: Baker McKenzie

The changing habits of consumers around the world are set to make the sector one of the most exciting in the year ahead.

Global consumer transactions are expected to rise to US$632.6 billion this year, turning the consumer goods and retail (CG&R) sector into the top sector for mergers and acquisitions (M&A) growth this year, says Baker McKenzie.

The multinational law firm's Global Transactions Forecast, developed in association with Oxford Economics, sees worldwide consumer trends driving this growth - with the new consumer being connected and global, primarily shopping online, and their buying decisions influenced by what their friends and celebrities like on social media.

As more of these new consumers go online to purchase everything from clothes and electronics to household supplies and organic vegetables, Baker McKenzie predicts that transactions in the consumer sector are likely to continue rising.

Digitisation and consolidation within the industry already drove M&A activity in 2017, pushing transaction values to a total of US$543.2 billion.

Alyssa Gallot-Auberger, global chair of CG&R at Baker McKenzie, said: "The way we shop has probably changed more in the last five years than in the last 50. The new consumer often uses a physical shop as a place to have an experience rather than a place to buy things."

Baker McKenzie expects North America to lead the pack, with transactions totalling US$304.4 billion, followed by Europe with US$178.6 billion and the Asia-Pacific with US$125.9 billion. Latin America will be next with US$17.3 billion, then Africa and the Middle East with US$6.4 billion.

The predicted growth in the Asia-Pacific - up 21 per cent over last year's total of US$104 billion - will be driven by rising GDP throughout the region, and retailers' pursuit of younger, increasingly Internet-savvy consumers.

Brian Chia, an M&A partner at Wong & Partners, the Kuala Lumpur-based Malaysian member firm of Baker McKenzie, said: "There is pent-up demand that will drive deal activity, not just from strategics, but also private equity funds that are cashed up and have ample dry powder.

"Private equity will be a key driver of deal activity in the consumer sector, as fund sizes get bigger and more focused on specific Asian markets."

The easing of restrictions on capital outflow imposed previously by the Chinese government, which slowed outbound Chinese investment in 2017, is expected to drive Chinese acquirers to regain their focus on targets in Europe and North America.

Tracy Wut, an M&A partner at Baker McKenzie based in Hong Kong, said: "Consumer remains one of the top sectors for outbound investments by Chinese companies that are looking for growth beyond the domestic market.

"Factors such as rising disposable income, the demand for high-quality branded products, and vertical integration in supply chains will all contribute to increased deal activity."

Consumer activity is expected to also drive the initial public offerings rebound this year.

In 2017, the consumer sector was the most active by IPO volume, with 348 listings worth US$38.2 billion - up 37 per cent over 2016. Baker McKenzie predicts the sector will be second only to the finance sector this year, and accelerate by almost 60 per cent over last year.

The firm's report also noted that listings in the Asia-Pacific region led the resurgence in the consumer sector in 2017. It expects China to remain the top listings destination for consumer companies, which raised US$7.8 billion worth of capital last year.

This trend is expected to continue as consumer and retail companies look to tap the expanding middle class, growing consumer markets, and rise of online shopping.

Ms Gallot-Auberger said, "The booming IPO market there can be linked to the increasing strength of the Chinese consumer, together with the pure size of the market. The projected increase of online shopping in China underscores the appetite of the Chinese consumer for what's new, including new share issuances."

Following a peak in deal activity in 2018, though, Baker McKenzie forecasts that both M&A and IPO transactions in the consumer sector will drop by 13 per cent and 8 per cent, respectively, in 2019. It said this would be in line with a larger, worldwide trend of cooling deal activity in developed markets.

The firm forecasts M&A values in the consumer sector dropping to US$551.3 billion in 2019 and US$435 billion in 2020.

As for IPOs in the sector, it predicts they will decline slightly to US$55.1 billion in 2019, before falling further to US$33.9 billion in 2020.

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.