M&A deals in FM CG sector likely to revive in 2018

After two years of a surge in mergers and acquisitions (M&A) deals, 2017 proved to be a quiet year for the fast-moving consumer goods (FMCG) sector. The sector not only witnessed the least number of deals but the cumulative valuation also went down sharply— because of macro-level policy changes and knew-jerk reactions offered by the government.

In 2015, according to data available from UK-headquartered accounting firm Grant Thornton, the cumulative value of M&A transactions surpassed ~405 billion. The following year, the number went past ~460 billion or 13.6 per cent higher yearon-year (y-o-y) as major players such as Hindustan Unilever (HUL), Emami and Godrej Consumer Products picked up stakes in personal care product companies. While, HUL completed acquisition of hair care brand Indulekha for ~3.3 billion from Mosons Group, Emami bought another hair care brand Kesh King for ~16.5 billion.

However, last year not only the number of deals fell to 16 from 21 in 2016, total valuation of M&As also came down to ~300 billion — 35 per cent lower y-o-y. During 2015, when the sector was recovering from a slowdown in the acquisitions space, after the two years of lull, the total number of deals went up to 17. Last year, no major deals took place in the personal care space, except Emami acquiring Helios Lifestyle at the end of 2017. According to Dhanraj Bhagat, partner, Grant Thornton, the deal between Lotte Confectionary and Havmor ice creams, in which the former acquired the Ahmedabad-based ice cream company for close to ~10 billion, helped the yearly numbers for M&A deals. Another internal deal, where Tata Sons raised its stake in Tata Global Beverages by acquiring 43-million shares from sister concern Tata Chemicals in exchange of ~77.7 billion, also added to the yearly numbers.

According to sources, the ~3.2-trillion FMCG space in the country, which is the fourth largest globally by market size, is now hoping for a revival in demand and market activities. “Last year was particularly bad for us as the twin blows of note ban and goods and services tax (GST) had to be dealt with. It hardly left us with any time or resources to concentrate on inorganic growth plans as streamlining operations according to ever changing rules remained the focus,” said a senior executive from a key FMCG player.

Data collected from annual reports of top FMCG players show the top seven firms hold ~340 billion in reserves and surpluses as of March, 2017. And, cash and cash equivalents of the top five players surpass ~74 billion. Among them, the two North India-based firms Dabur and Nestle hold ~35.5 billion and ~21.4 billion in cash.

In a recent interview with this publication, Sunil Duggal, chief executive officer, Dabur India, had indicated that the company was looking to buy suitable firms that were smaller but scalable. He also said the company had a budget of ~10 billion for local M&A activities.

Harsha V Agarwal, director, Emami, said, “We are always on the lookout for appropriate opportunities — smaller or bigger — and wherever we feel there is a synergetic and strategic fit with our business plans, we initiate steps to acquire or invest or partner at appropriate price. In 2018, we will keep on looking in the personal and healthcare sector for acquisition, investment, strategic partnership or tie-up.”

However, the outlook for 2018 hinges on several factors. Experts say, a lot would depend on what measures the government takes in the Budget and how they are being implemented, as recovery of demand would also play a role in revival of deals in the sector.