Clifford Chance

Appetite for M&A grows in Consumer Goods and Retail sector as investors seek opportunities in high-growth markets

New survey published by Clifford Chance identifies top drivers and risks for M&A across an increasingly complex global landscape

London 24 July, 2012 – More than half (51%) of Consumer Goods and Retail (CG&R) sector respondents to a new survey, Cross-border M&A: Perspectives on a changing world published by Clifford Chance, are focusing their M&A strategy on high-growth economies, rather than domestic (30%) or global developed markets (19%).

The research, which was conducted by the Economist Intelligent Unit on behalf of Clifford Chance, surveyed nearly 400 companies with annual revenues in excess of US$1 billion from across a range of regions and industry sectors, including the CG&R sector.

The survey revealed a positive outlook for the sector with 60% of CG&R companies expecting current M&A activity levels to be maintained or increased over the next two years. Some 88% of sector respondents expect to focus on strengthening their core business rather than diversifying into new areas.

Features associated with global expansion topped the list of risks and/or barriers to cross-border M&A in the sector in the next two years: increased competition (32%), political uncertainty (28%), rising costs (26%), currency fluctuations and regulatory risk (both at 25%) are all in the top five.

A number of significant themes in the CG&R sector emerge from the survey findings:

• Growth markets feature highly in the top ten attractive destinations for M&A in the sector with Brazil (26%), China (25%) and India (23%) all in the top five. But China, along with other emerging markets in Africa, the Gulf and Russia, also ranks highly as a risky destinations for M&A for CG&R respondents (Sub-Saharan Africa: 28%, Northern Africa: 26%, Gulf States: 25%, China: 20%, Russia: 19%).
• Financing M&A – although globally, respondents from the CG&R sector selected company cash reserves as the preferred method of financing deals, the report reveal significant variations when responses were cut regionally. While European respondents agree with the global consensus, for those in Asia-Pacific and North America, debt financing is the chosen method.
• Joint ventures to manage risk – respondents in the CG&R sector select joint ventures/partnerships with strategic investors as the preferred deal structure currently (39%), taking over from traditional M&A which would have taken the number one spot two years ago (42%).
• Red tape and protectionism – protectionism and restrictions on level of foreign ownership are seen as the biggest legal/regulatory issues for CG&R organisations when considering cross-border M&A opportunities. (They see tax laws as the biggest hurdle in their domestic markets.) Asked to considering the political factors that give them greatest concern in terms of cross-border M&A activity over the next two years CG&R respondents select bribery and corruption and poor protection of foreign investors’ economic rights as the top two concerns at 39% and 32% respectively.

Commenting on the results of the survey from the sector's perspective, Clifford Chance's global head of CG&R M&A, Catherine Astor-Veyres said: “The CG&R sector is an important one for global M&A activity (around 8%) with Asia-Pacific outbound M&A, in particular, growing rapidly. We see the regions with the greatest potential as Asia (especially China and Japan) and Russia. In China, the dynamism of outbound M&A is fuelled by the rising purchasing power of the Chinese consumer, the huge foreign reserve and the strong Renminbi and government policy encouraging overseas acquisitions. Japan benefits from a strong Yen and healthy balance sheets, but limited growth in the Japanese domestic market, leaving little choice but to look offshore. Russia has a buoyant M&A market with a growing affluence of middle classes."

As regards regional differences in preferred financing options, Catherine explains: "The difference in financing options can be explained by the broader economic situation in the different regions: interest rates offered by banks are low for M&A activity in Asia and hence we are seeing a preference in this region for debt financing. When bank finance is not sufficient, however, companies are happy to either dip into their own funds or access State funds (especially in China). In the United States, there is also a preference for debt. This is a result of government action to support businesses through an expansionary monetary policy and low interest rates. In contrast, the eurozone crisis has led to an increase in the cost of financing in Europe. Companies that have cash reserves therefore prefer to use those reserves for acquisitions rather than pay higher interest rates."