Annual Consumer M&A Report – Middle Market M&A Activity and Outlook

Consumer M&A Remains Resilient Despite Inflationary Headwinds

Capstone Partners released its second annual Consumer Industry Middle Market Activity & Outlook Report, offering insights and analysis into merger and acquisition (M&A) activity, valuations, public market trading multiples, and key macroeconomic trends impacting the industry. The report features sector highlights from Capstone Partners’ Consumer Investment Banking Group, which is the leading advisor to privately-owned consumer businesses seeking to fund growth and achieve liquidity.

Despite a turbulent economic environment and significant volatility throughout capital markets, M&A activity in the Consumer industry has demonstrated considerable resilience. Transaction volume was not expected to meet the record levels of dealmaking in 2021, and amid a backdrop of elevated inflation, many market participants forecasted a drastic pause in Consumer M&A. However, in 2022, Consumer transaction volume showcased a greater level of defensibility compared to the broader M&A markets. Notably, Consumer M&A volume declined 13.5% year-over-year (YOY), compared to the broader M&A market which recorded a 19.2% fall. Select sectors, including Vehicle Aftermarket and Home Goods, nearly met or exceeded 2021 transaction levels—indicating the fervent buyer appetite that has persisted in certain pockets of the market.

Consumer industry M&A purchase multiples remained healthy, despite a YOY decline in transaction volume. In 2022, the average EV/EBITDA multiple amounted to 12.4x which marked a slight improvement over the 2021 average of 12.0x. High-quality companies continued to fetch premium multiples, particularly those that maintained healthy levels of profitability. Targets with promising business synergies have been in high demand as industry players have increasingly sought ways to optimize operational efficiency.

The U.S. macroeconomic environment in 2022 did not provide the most conducive backdrop for M&A activity. However, many lessons have been learned over the past two years that may provide fuel for a strong transaction market in 2023. Geographic diversification of suppliers, an adequately leveraged balance sheet, and a focus on the most profitable products and business segments are among the improvements that many privately-owned businesses are carrying into 2023. In past economic crises, M&A activity has typically registered substantial declines. However, as witnessed following the Global Financial Crisis and in 2021 post-COVID, dealmaking has often surged upon economic recovery. M&A volume over the next 24 months may prove to be no different than historic precedent.

“The year 2022 was a transition period and a bridge to what we have witnessed in early 2023. The COVID shock had largely subsided by 2022, replaced by supply chain problems and inflation settling in as a prolonged, uninvited house guest. Normally, this would spell disaster for the Consumer industry. However, the twin panaceas of COVID stimulus checks and greater consumer savings generated by changed lifestyles fueled spending levels into early 2023. Even the all-time wrecker of a good time, inflation, was allowed to participate in the fun. Consumer product companies were able to increase pricing relatively unabated,” said Capstone Managing Director and Head of Consumer Investment Banking Ken Wasik, the lead contributor in the newly released report.

Also included in this report:

• Capstone’s outlook for 2023 deal activity and valuations in the Consumer industry.
• Four key themes driving industry growth and transaction volume.
• Commentary and insights across nine Consumer verticals from lead sector M&A professionals.

To discuss the trends included in the report, provide an update on your business, or learn more about Capstone’s wide range of advisory services and Consumer industry knowledge, please contact us.