By Daniel Hunter
The top 30 UK listed consumer products companies have amassed £16bn in cash reserves, according to new analysis from business advisory firm, Deloitte. The seven largest companies hold £13bn alone. Against a backdrop of low or no growth in developed markets and slowing growth in emerging markets, increasingly some of these large companies are looking to acquire.
The high levels of cash reserves are coupled with renewed confidence in the sector. Deloitte has gauged the opinions of 24 of the key European market players and found their optimism about ‘merger and acquisition’ activity for this sector over the next year has increased dramatically from 28% to 80% - compared to six months ago. In addition, consumer products companies’ sentiment towards their financial prospects has also more than doubled over the same period, from 22% to 56%.
“Optimism is returning to the sector as economic conditions begin to ease. Improving consumer confidence, a recovery in corporates’ attitude to risk, record cash holdings and the availability of low cost credit have combined to create highly favourable conditions for an upturn in M&A activity," Conor Cahill, corporate finance partner in the consumer business practice at Deloitte, commented.
"A number of companies now have the firepower from their accumulated reserves to continue to expand their presence into high growth markets or consolidate their position in existing markets by acquiring competitors.”
However, despite improving conditions, completed European deal volumes in recent quarters have not yet shown a marked uptick in activity levels. The research shows there are three key barriers that are holding back a potential spending spree. Primarily, there continues to be price expectation gaps between buyers and sellers and it is noticeable that pricing levels for the sector as a whole have remained remarkably resilient.
As such, vendor pricing expectations do not appear to have realigned during the downturn. The other two factors both relate to uncertainty, firstly in respect of the sustainability of the economic recovery and secondly, the potential regulatory issues which may arise. Both these latter factors act as sources of inertia in deal execution.
“Whilst the scene is set for the consumer products sector to see a significant rise in M&A activity, this has not yet come to fruition. Companies have spent time and effort rebuilding their balance sheets and they will want to ensure that any future deals do not undermine such hard work and are part of a coherent growth strategy," Cahill continued.
“Nevertheless, there is a building pipeline of potential deals and a return of the ‘feel good factor’. In the absence of major economic shocks, we expect to see a healthy uptick in deals in due course.”
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