Pandemic fuels consumer PE activity in Q1

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Soaring demand in high-growth industries is causing a steady flow of PE investment into the sector

While 2020 was a tumultuous year for global dealmaking, private equity (PE) activity within the consumer sector finished the year on a high.

A total of 180 deals announced in the final quarter reached the highest quarterly volume on Mergermarket record (since 2006). Deal value also rallied, with the US$33.3 billion in deals announced in Q4 reaching the highest quarterly deal value in more than three years.

While not reaching the record highs of Q4, PE dealmaking within the consumer sector displayed a particularly strong start to 2021. A total of 143 deals were announced in the first quarter—an increase of 59% compared to Q1 2020, while total deal value of US$25.75 billion increased more than four times year on year.

Consumers seek casual comfort

In the largest consumer PE deal of the quarter, L Catterton acquired an 85% stake in German family-owned shoemaker Birkenstock for US$4.6 billion.

Backed by French luxury brand LVMH, the US-based PE firm reportedly beat competition from rival CVC Capital Partners to secure the deal. Birkenstock, which is almost 250 years old, is said to have been attracted by L Catterton’s track record working with family-owned brands, as well as its ability to expand into Asia.

The casual footwear industry has seen an increase in demand amid the pandemic as the work-from-home culture increasingly sees consumers gravitate toward brands mixing comfort, durability and heritage. Brands such as Birkenstock have become one of the surprise winners of the pandemic, with CEO Oliver Reichert naming his footwear the “official home-office shoe.”

Reflecting the popularity of casual footwear, UK shoemaker Dr Martens made its stock market debut in January of this year, with a valuation of US$5 billion at IPO.

US dominates activity

The US took a large share of consumer PE deals in the first quarter, attracting 48 out of a total 143 announced deals.

The largest of these deals was Apollo Global Management’s acquisition of US-based retailer The Michaels Companies, valued at US$4.4 billion. Through the deal, which takes the company private, Michaels aims to gain the financial flexibility it needs to invest in retail and digital platforms.

Apollo will be aiming to capitalize on the momentum that the arts and crafts retailer has gained over the pandemic, as consumers turned to home-based activities. Michaels’ sales reportedly rose 15% year over year in the third quarter of 2020, to US$1.41 billion, while its online sales more than doubled.

Connected healthcare fuels deals

The drive towards online health is prompting a wave of activity in the sector. Philips completed its transformation from diversified industrial company to healthcare technology group through the US$4.4 billion sale of its domestic appliance business to Hillhouse Capital. The divestment, announced in March and completed the next month, will allow the Dutch group to focus on its core med-tech business, in particular online health services—a trend accelerated by the COVID-19 pandemic.

In February, it was announced that US PE firm Warburg Pincus had agreed to acquire a minority stake in India-based pharmacy retail chain and e-retailer Medplus Health Services in a deal valued at US$68.5 million. As well as operating over 1,800 stores, the retailer operates online store MedPlusMart, lab testing centers MedPlus Pathlabs and surgical equipment distribution business RiteCure.

Leading Indian conglomerates Reliance and Tata are reportedly making headway into India’s highly attractive online health industry, as the country’s COVID-19 crisis has led to a surge in demand for online pharmacy services. Their presence will further ramp up activity in the online health sector as PE firms and corporates compete for prize assets.

Outlook

Businesses that have been able to adapt their business model to their changed circumstances—for example, monetizing online operations—will see profit in the long-term, COVID effects notwithstanding.

Private equity activity in the sector is expected to remain strong over the course of the year, as investors seek out the winners of the pandemic and other companies that will participate in growth in the post-pandemic world, while some will look for opportunities as companies restructure.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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