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Non-cyclical consumer goods expected to be leading sector for M&A in 2011

The non-cyclical consumer goods sector is set to see the second highest level of global M&A activity this year, according to the latest KPMG Global M&A Predictor, which tracks potential deals in the year ahead.


Non-cyclical consumer goods expected to be leading sector for M&A in 2011

The Predictor tracks market capitalisation compared with earnings (the Price to Earnings (P/E) ratio) to give an indication of confidence and appetite to do deals.  Non-cyclical consumer goods came second only to telecommunications in terms of predicted level of activity. 

David McCorquodale, retail M&A partner at KPMG, said:‪“Retail was a relatively hot trend of 2010 and we expect it will continue to attract both corporate and private equity deal-making activity this year, particularly at each end of the value or luxury poles.

“Regardless of the twists and turns in the economy, retail and consumer goods companies always keep investors on their toes!  While the sector is known for being subject to the capriciousness of consumer behaviour, non-cyclical consumer goods like food have really been the solid performer in this downturn.
“While sectors like leisure and property continue to frighten nervous investors, food and food retailers are proving more comforting owing to an understanding that commodity price increases need to be absorbed and that this is non-discretionary spend.”

The research found that UK companies as a whole are increasingly in a strong cash position, with forecast net debt compared to EBITDA (earnings before interest, tax, depreciation and amortisation) set to tumble by 30% over the next year.  Net debt is forecast by analysts to go down 21%, showing extensive deleveraging, and meaning that M&A capacity is improving strongly.

However, analyst forward P/E ratios show that the picture is less rosy as the ratios are down some 14% over the last 12 months for UK companies.  Such a significant drop suggests diminished deal-making appetite.

David Simpson, Global Head of M&A at KPMG, commented:“The UK M&A market is at a strange impasse where companies have been paying down substantial levels of debt, compared with their earnings, and are predicted to do so substantially over the next year but reduced price to earnings ratios show that the market is unconfident.  On the stock markets, where markets are improving in spite of economic nervousness, this is called ‘climbing a wall of worry’; we are seeing the same situation in the M&A market.

“One thing is certain, management teams are going to have to work hard this year to get investors on side and support their M&A ambitions.  With the market cap of the UK companies in our survey up 8% in the last year, it’s a communications battle some management teams will feel confident they can win.  Companies that want to escape low growth home turf will have to convince investors if they are to succeed.”

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