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Companies prepping for more M&A activity ahead

Aug 23, 2023
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Illustration: Brendan Lynch/Axios

Deal volumes in the consumer and retail sector likely won't reach frothy levels this year, but KPMG consumer & retail partner Frank Petraglia believes the market has reached its bottom.

What's happening: More pre-deal activity. Companies are more actively revisiting strategy and prepping businesses to bring to market, according to a KPMG report.

Zoom out: The financing markets are turning a corner, Petraglia says, recognizing that interest rates are more stable now and consumer confidence is increasing while unemployment is relatively low.

  • "There's a path, a soft landing, that is going to continue to encourage dealmaking," he says.
  • That means that lenders ultimately "really need to get comfortable with the performance of these businesses."

Zoom in: Private equity is becoming more active though he believes there's been a shift.

  • "There is this paradigm of PE that is going to be a little bit different for the foreseeable future where they are going to write bigger equity checks," he says, adding they'll also leverage less of the purchase price upfront.
  • Hold times will likely lengthen as the firms spend more time with their companies to really transform their businesses.

The intrigue: PE becomes a little disadvantaged in this environment compared with corporates because strong companies have the cash on hand and a synergy story, Petraglia says.

  • "Some corporates may be able to write a check and also have the strategic upside that they may not have," he says.

Between the lines: There are some bright spots, especially in food and grocery, where consumers are still expected to spend.

  • Within grocery, fresh produce is one of the higher-margin areas in a historically low-margin category, Petraglia says.
  • Petraglia also sees more deal activity happening within the grocery space for players to broaden their distribution channels, especially as competition heats up.
  • He also expects more activity around regional restaurant chains and casual dining chains, especially where there's a concept.

State of play: Well-received restaurant brands are garnering investor interest, in part boosted by the successful IPO of Cava Group.

  • Private equity firm Bain Capital agreed to buy Fogo de Chão, the Brazilian steakhouse chain, in a deal valued at around $1.1 billion, including debt, per Reuters.
  • Meanwhile, Angelo Gordon & Co. put Benihana, the Japanese teppanyaki and sushi restaurant, on the auction block.
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