OC&C Global 50: The year of the mega-deal

2015 was the year the trigger was finally pulled on the global mega-deal.

Many had been expecting widespread fmcg consolidation for a number of years – given the cash sat on the global giants’ balance sheets and the fragmented market in most sectors.

Last year it finally happened, with deal activity across the Global 50 jumping back to almost match its pre-recession high.

The number of deals across the Global 50 was actually down slightly from last year – dropping from 56 deals in 2014 to 51 deals in 2015.

But it was the size of the deals that rebounded as the global mega-merger came to the fore.

In value terms, M&A was worth $226bn in 2015 compared to just $54bn last year and $70bn in 2013. The total is the second highest level of M&A across the Global 50 on record, falling just short of the $233bn achieved in 2008.

The figures were heavily boosted by the $120bn-plus AB InBev takeover of SABMiller – one of the biggest corporate takeovers in history – and the £54.5bn merger of Heinz with Kraft Foods. But there were also five other fmcg deals worth over $1bn and a further four deals worth more than £500m during the year as global consumer goods firms turned to M&A to boost stagnant growth.

The era of consolidation-driven mega-deals still seems to have some way to go.

“Global consolidation will continue,” says Akeel Sachak, global head of consumer for Rothschild, “especially in categories where there are benefits from having a global or regional footprint. There are a number of globally relevant brands that have momentum but could benefit from stronger local routes to market.”

The quest for consolidation may not be over, but the era diversification seems to be.

More than 94% of acquisitions (by value) were motivated by strengthening positions within existing sectors and markets, rather than diversification or growing in new geographies.

This theme follows the divestment strategies of recent years, which has seen the global clients shed non-core businesses to focus on margins and leverage their core strengths.

Much of that work has already been done – such as RB spinning off its pharma division or P&G shedding a host of non-core brands like Duracell – meaning divestments are also shifting to same-sector deals to feed the consolidation drive.

The AB InBev/SABMiller deal meant the vast majority of divestments were in the beer and spirits sector – accounting to $134bn against the next biggest sector of food and drink with $7.5bn.

The AB InBev/SABMiller process led to the third largest divestment of the year – MillerCoors’ sale to Molson Coors Brewing Co. in the US for $12bn, but there were a number of other deals in the sector including four Heineken acquisitions (Desnoes & Geddes, Guiness Anchor Berhad and Namibia Breweries) as it sought to grow its emerging markets strength.

3G Capital’s ownership of AB InBev has shown the way for other global giants on how to use M&A to create value by building up margins over time through consolidation and synergies since its formation in 2008.

There is likely to be more large-scale M&A in the alcohol sector as more assets could yet fall out of the AB InBev/SABMiller merger as the process progresses – not least SABMiller’s Easter European brands of Lech and Pilsner Urquell which have been put up for sale.

Tobacco has been another sector to lead the consolidation wave – much of it triggered by 2015’s Reynolds-Lorillard merger. However, the cigarette market has become far less fragmented as a result of recent acquisitions and, despite persistent rumours British American Tobacco could be eyeing up Imperial Brands, there may be limited scope for further deals in developed markets.

There could also be more consolidation driven again by 3G Capital, given its proven track record of extracting value from huge M&A deals. HSBC global beverage sector head Carlos Laboy predicts its next target may be Coca-Cola, given how Coke has already had to shift its focus from growing volumes to cutting costs, shedding bottling assets and looking after the bottom line in the new 3G Capital-inspired landscape.

To read the full OC&C Global 50 report click here.