Expert Voices: Baird's Matthew Tingler shares consumer M&A outlook
As fears of a recession or a rapid increase of interest rates subside, investors are readying for a pickup in consumer M&A, says Baird consumer and retail managing director Matthew Tingler.
The big picture: Tingler has spent more than a decade in investment banking. He shared his thoughts on his M&A outlook with Axios.
This interview was lightly edited for clarity, style and length.
How challenging has it been securing financing for private equity buyers in the consumer arena?
- A lot of the investors and sort of the debt investors, financing banks have been a little skittish, in particular on consumer. Consumer discretionary is a little challenging, just because investors and financing sources are not necessarily knowing which direction consumer spending is going to go, with an inflationary environment [and] interest rates going up.
- And then on the financing side, you also have interest rates that have gone up, as well as the amount of debt that lenders can borrow is pulled back, just the quantity of debt that they can borrow. That just has an impact on valuation.
What are the conditions that will spur deal activity?
- As soon as lenders become more comfortable, that just supports the private equity firms being more aggressive and having more confidence in doing deals. I'm selling two businesses now. We're seeing lenders more supportive than they have been in recent months.
What's the private equity auction environment like?
- In the past, for example, if we were selling a footwear business, we'd have a general indication that these five strategics would probably have good interest, these 30 private equity firms may have pretty good interest in an asset like this.
- But today, just to kind of cover our tracks and make sure we go broad enough that we can get a deal done — that we don't miss parties that we just don't know [who] may have a thesis that we're not aware of about the asset or the industry — we may go out to 50, 100, 200 different parties.
What's your outlook on strategic dealmaking?
- The environment's been good for strategics. So we have had a number of strategics active in our processes and successful in our processes. I sold a business to a public company earlier this year. And they were in an advantageous position.
- I'm selling a business right now, where the amount of debt the lenders are willing to give on it is like 4, 4.5x, whereas the same asset we sold back in 2016, it was 6, 6.5x. So just that lesser amount of debt just kind of works as a governor on valuation.
- Strategics today are able to compete more effectively because the valuations aren't being pushed as high as in the past because the private equity firms can't afford to pay as much.
What are your general observations on the debt markets?
- There's a lot of funds or firms that are raising credit funds these days. So probably credits just become more prevalent in the market, I think that's not going to change, especially where the cost of interest rates are in the money to be made on the credit side these days.
- The syndicated markets have been a little soft. Private credit has taken advantage of that over the last 12 months. The syndicated market hasn't been as favorable syndicating out big LBO loans. There just hasn't been the appetite for it. The syndicated markets will come back if the market comes back.
- What happens when those markets come back for the private credit lenders remains to be seen, but private credit is not going to go anywhere. It's become a big part of the market.
Do you think we'll see more corporate divestitures?
- You're starting to see some of them. Wolverine Worldwide has already announced publicly they're selling off Sperry. They sold off another brand earlier this year, Keds. I do think you'll see more of that. VF Corp. publicly announced they were going to sell off their bags division, Eastpak [Jansport, and Kipling]. I think you'll see it both ways.
- I think you'll see acquisitions, and I think you'll see divestitures as you have new management teams coming in. There's a fair amount of turnover in leadership in the consumer sector, particularly soft lines and outdoor recreation companies like VF Corp., Vista Outdoors.
Who are the likeliest buyers for those kinds of brands?
- Both strategics and sponsors. From the strategic angle, Sperry, for example. I think Sperry could be a nice asset within a portfolio of some of the publicly traded and larger privately held footwear conglomerates.
- Something like a Decker's, they have two big brands, which are Hoka, which is a year-round brand, a running shoe brand, and probably more skewed to the spring, summer, but [the other], Ugg, tends to be more skewed to the winter months. You put Sperry in that portfolio, that's more seasonal to the summer and spring months, and that can offset Ugg. You take out some of the seasonality in the broader company performance.
- Private equity always has a thesis around improving companies. Think, private equity looks and says, "If I buy Sperry, then there's other divestitures coming out ... can I build a platform, which I can then take public in the future or sell to a larger footwear conglomerate?" Within our own business, a lot of the companies that we sell, our buyers skew more heavily to private equity than strategics.
Where do you see the biggest M&A opportunities?
- I like workwear and the apparel, footwear market. I think workwear is a very tried and true and stable category. There's just more of the functional nature of it. There's the repeat-use, replenishment nature of it.
- There's a business called Brunt that is doing that more in the traditional, industrial kind of workwear. Stripes Group, the private equity firm, has an investment in it and it's doing very well. It's taken that same playbook of like building brand equity, direct to consumer approach making things sexy. Most people want to wear something they feel good about and can identify with. So I think workwear is a good category.
- Another as well is [the] componentry businesses in the apparel market. I sold a business last year called Primaloft, which does synthetic insulation for outerwear, like North Face and Patagonia. They're kind of a biodegradable, synthetic alternative. It was just more conducive to ESG sustainable momentum. And then companies that are providing inputs to footwear businesses.