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M&A valuations in consumer packaged goods have climbed among brands offering larger companies access to millennials.
By Steve Gelsi
M&A bankers in consumer packaged goods said they continue to see large conglomerates take aim at tiny targets to boost growth and innovation as they compete for millennial dollars.
The trend is happening on a couple of fronts. Goliaths such as Kellogg Co. (K) paid $600 million late last year for RXBar, which reportedly had 70 employees at the time of the deal announcement. Or more recently, PepsiCo (PEP) set plans to buy tiny Pipers Crisps Ltd. for an undisclosed price.
Another approach gaining popularity is investments in upstart companies via venture-style funds such as Tyson Foods Inc.'s Tyson Ventures unit. After establishing Tyson Ventures in 2016, the food giant has already invested in five companies including Israel's Future Meat Technologies, which makes animal free meat and actually manufactures fat and muscle cells, and Beyond Meat, a maker of meat substitutes from pea protein, yeast, and other ingredients.
Even upstart brands are launching their own investment funds. Harry's Inc., the seven-year-old, direct-to-consumer razor company, set up Harry's Lab with a $112 million Series D venture round led by Temasek Capital Pte. Ltd. and Alliance Consumer Growth LLC, to fund start-ups and launch new products.
The two approaches stem from pressure on consumer brands to remain relevant against upstarts and wary, young consumers. If a company has a strong brand and audience, no matter how small, bigger players will pay up.
"We're seeing 2 to 2.5 times multiple expansion," Alejandro Cola, director at Lazard, said at the ACG New York Annual Consumer & Retail Conference 2018 on Wednesday at the Fashion Institute of Technology in New York. "The largest strategics are acquiring smaller, assets, basically acquiring innovation and product development. It's driving this trend....It's really incredible."
It's quicker and often cheaper for a big conglomerate to buy a small brand than to develop a product itself, he said. M&A is driven by a search for "authentic brands with a story," Cola said.
John Neuner IV, managing director, Harris Williams 7 Co., said the CPG industry is facing disruption in the retail sector from Amazon.com Inc. (AMZN) and others, pressure from shareholder activists and turnover of C-suite executives at large companies. Nowadays it's not unusual for the CEO of a Fortune 500 companies courting entrepreneurs at companies with $20 million in revenue to learn about their company culture.
"We're in a real competitive market," Neuner said. "There's a lot of interest out there in young brands."
Justine Mannering, managing director, Stifel Financial Corp., said private equity firms have been paying higher multiples, comparable to prices offered by strategics, In the beauty sector, successful brands draw a strong social media presence with customers sharing their experiences.
Players contributing to higher prices include corporations setting up incubators, family offices wading into the deal arena, growth equity investments from larger private equity firms, and venture capitalists from the technology world reaching into consumer goods, Mannering said.
Alex Chefetz, managing director, Cowen and Company LLC, said not all brands on the selling block are hot. "The barbell has widened" with a greater range of prices for deals between the haves and the have-nots, he said. "There's plenty of restructuring" which is leading to more deals, he said.
Jeffrey Raider, co-founder and co-CEO of Harry's Inc., and a veteran of Charlesbank Capital Partners LLC, said the company hopes to launch more brands after its new women's shaving line, Flamingo. "We have the license to be disruptive," Raider said.
Adheer Bahulkar, partner, consumer goods at A.T. Kearney, said smaller companies take new products to market 50% faster than larger brands, which remain out of favor with younger consumers.
"Consumers will reward authenticity and they will reject authority," he said.
The ACG Event also held a panel featuring newer consumer brands that have managed to gain traction:
Roy Danis, CEO of whiskey maker Clyde May's, said the company was able to grow quickly despite competition from larger players by focusing on taste tests, and teaming up with a smaller number of national distributors.
Steven Singer, CEO of FODY Food Co., said the company targeted an unmet market need for food for people with irritable bowl syndrome. It uses Facebook and other social media to build a community among the roughly 15% of the population dealing with digestive problems. "We're not here to take advantage of them - we're here to make them feel better," Singer said.
Marc Hill, CEO of Stella & Chewy's LLC, said the company has built up 320,000 Facebook follower for its high-end pet food products. "We respond to every post," he said. The company also donates meals to pet shelters.
Jordana Kier, co-founder of LOLA, said the direct-to-consumer company focuses on products for reproductive health in women "from her first period to her last hot flash." The company has gained traction by identifying an unmet need in the market, she said.
Sarah Lee, co-founder of beauty products company Glow Recipe, generated a social media buzz around her brand through a watermelon shaped popup store. The company has a fruitful relationship with Sephora USA Inc., where it sells its Watermelon Glow Sleeping Mask and other products.
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For reprints of this story, please contact Jonathan McReynolds: jmcreynolds@thedeal.com
Nov 12 2018