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Consumer M&A Activities & Opportunities — COVID-19 Virtual Roundtable


In week 10 of Axial’s virtual roundtable series, Axial members gathered to discuss the current state of M&A in the consumer sector. Ten industry experts from private equity firms, investment banks, and corporations discussed a variety of consumer verticals and channels including Amazon e-commerce, retail grocery, gaming, and subscription boxes. Topics of conversation included the shift to virtual due diligence, distribution channels, customer acquisition strategies, and supply chain risks. 

Thank you to below Axial members who participated in the discussion:





Show Notes 

Introductions 00:00 – 6:56

Accessing relevant industry data – 7:20 – 9:52

  • Klaviyo – You’re able to look at consumer trends and metrics through interactive charts 
  • Can toggle through different categories based on data from their platform and see things like shifts in demand from consumers
  • This can provide a good indication of how M&A may be changing
  • Google Trends – explore Google search terms and their prominence 
  • Can use this to look into consumer purchase intent

What transactions are most likely to close in the second half of the year? 9:52-15:20

  • Corporate carve outs – as companies try to decide what is core to their business and what is “disposable”
  • Bolt-on acquisitions that are on the smaller end of the spectrum
  • E-commerce and essential businesses/non-discretionary
  • Anything that helps to facilitate the new work-from-home environment
  • Businesses either seem to have huge spikes to demand, or demand has gone down significantly; few in-betweeners
  • Subscription gaming business: the business has doubled and is doing very well in this environment, but strategics who were interested in this deal said they could not focus on M&A because either business was booming or business was not doing well
  • Now that the shock of everything has subsided and businesses are finding their new normal, M&A is picking back up with strategic buyers
  • Subscription-based companies seem to predominantly be doing well
  • Trends that were starting before COVID have accelerated significantly 

Valuations when the new normal is not actually the new normal: 15:20-19:45

  • There have been huge spikes in demand in certain sectors, but businesses are not going to continue to accelerate at this rate and may not retain the customers they’re acquiring, and that makes it significantly more difficult to value a transaction accurately 
  • Will firms ultimately overbid because they have capital they need to put to work and businesses are performing well at this moment in time?
  • During a pandemic when the shelves are empty, it’s likely that as long as you had a product on those shelves, it was purchased. Now that it has been 45 days, are people going to come back and repurchase your product?
  • Look at the data — are people actually interested in a product or was it a one-time fire sale?

E-commerce & Amazon: 20:30 – 25:15

  • Pattern – buys product from brands and resell it (one of the top five Amazon sellers)
  • 65-70% of brands that they work with saw a major lift in sales when the pandemic began — supplement and health space did very well in addition to the pet space 
  • If you have a good direct-to-consumer strategy, you will likely be able to keep it up
  • If you’re too reliant on brick and mortar, that is a red flag
  • If you already had a good multi-channel strategy, that’s a positive
  • Shipping time has a huge impact on brands right now; when people are accustomed to getting a product the next day, it’s not well-received when it starts to take 30+ days
  • Subscribe-and-save is a good data point to look at to see if a product is doing well because it means you have repeat revenue (and interest)
  • How do you model a lifetime value for someone who has been acquired in the past 1-3 months? This could be a fundamentally different type of customer, but there is no way to know because we don’t have any historical data yet.

New-customer acquisition: 25:15 – 27:44

  • While there may be some attrition with consumers who have adopted new brands, it is also fair to say that some of these customers may have been pushed to adopt e-commerce, and now that they’ve done it, they will become a long-time customer
  • This could be a great time to push new-customer acquisition efforts if it’s reasonable that customers will stick with you
  • Video gaming business has accelerated its acquisition strategy because they’re having fantastic success bringing new users on (unit volume is up by 30-40%); they see this as taking advantage of a — possibly short-term — opportunity to reduce the cost and effort of customer acquisition

New hurdles for valuations: 27:44 – 37:08

  • When you’re valuing a company, there are now many more line items to produce discrepancies against TTM numbers: increased customer growth, lower marketing spend, decreased costs
  • Buyers are looking at sustainability when it comes to these new metrics, but it’s tough to tell what can exist as a long-term reality  
  • It is likely that a buyer and a seller will need to compromise — the buyer should be able to appreciate that there is some increased value, but the seller also needs to recognize that there is likelihood that not all of the increased value is permanent 
  • New valuation methodology: first value a business on a pre-COVID basis and apply the pre-COVID multiple, then separately look at what’s happened post-COVID (provide some calculation about what you think will be sustainable within these metrics) but apply the same multiple that you has used in the first scenario
  • It’s especially interesting to consider applying the same multiple to a post-COVID scenario — many investors thought that multiples were creeping too high prior to the pandemic
  • In one case, a buyer who is a PE with a clear rollup strategy is looking at their five-year exit strategy and backtracking from that to get their price rather than trying to look at a multiple of EBITDA today
  • There will likely be more earnouts to bridge the valuation gap since a lot of business owners feel very strongly that recent growth is sustainable
  • There is less depth to the debt markets than there used to be; lower leverage is the new normal and pricing is up 100-300 basis points
  • It’s difficult to get to the same return levels if your debt stack is much lower and more expensive
  • Good cash-flow businesses are still in demand — though often at a lower multiple — but bids have come down for higher-growth businesses that are cash-poor
  • Emphasis has moved from the income statement to the balance sheet
  • A lot of companies in the lower middle market don’t have large cash reserves
  • There will likely be an increased use of seller notes

Getting a deal done: 37:08 – 41:01

  • Lower debt is going to imply a lower purchase price
  • Specialists are oftentimes able to tout that they have a faster sign-to-close because they don’t have to do all of the industry diligence, but that speed is something that can no longer be promised
  • The pace of which you can do proper diligence is a major factor right now
  • There will probably be less aggressive IOIs than you may have seen before 
  • Availability of debt is likely going to put a lot of deals on hold
  • There are fewer active buyers out there right now, which makes it harder to run a competitive process

Transaction structures and risk sharing: 41:01 – 48:45

  • If business owners are holding steady to higher valuations, how receptive have they been to sharing the risk with the use of earnouts, seller notes, etc?
  • A deal was recalibrated 5 days before closing when a bank backed out on debt financing, so the seller agreed to take a million dollars of paper and, as a tradeoff, the sponsor put in more equity
  • Risk sharing is definitely going to come back
  • For strategics, they are looking at brands that they feel confident they can grow quickly, so it puts them in a position where they can be seen as a “growth engine” — businesses are often inclined to be more of a “partner” and are very receptive to earnouts because they feel confident that the business is going to do well
  • Prior to COVID, Pattern would have preferred to buy 100% of a business in most cases, but there are now more rollovers 
  • Some sellers are not agreeable to a specific multiple for the future, they’d rather reevaluate the business to see what market value is at that time
  • Buyers are going to propose more earnouts than seller notes
  • If there is a buyer who is in the middle of the pack but they’re willing to give all cash, that may ultimately help that specific buyer

Due diligence considerations: 48:45 – 57:10

  • Owners are concerned about the cleanliness of their plants and the health of their workers
  • When travel opens, how are people going to think about the risk that comes along with that, i.e., lawsuits and/or the possibility of having to shut down your plant?
  • The due diligence checklist will come to include new inspection and testing for facilities across industries, especially in manufacturing and processing plants
  • There will be a lot more due diligence related to the supply chain overall
  • Costs may go up across supply chains for a variety of reasons — new certifications, increased protocols, etc. — and it is a real possibility that supply chains may crumble 
  • Something that will likely be looked at during due diligence in the future is: What did this business do during the COVID crisis? It will give a much richer understanding of the company, the culture, and the management team overall

Government loan programs: 57:10 – 59:10

  • If there is a transaction going on, do you have future liability? There is a fear that you could be exposing yourself to significant problems if you transact too quickly after a loan is forgiven. You may have to pay back the loan in this case

Distribution channels: 59:10 – 1:05:30

  • Products that were historically being sold through certain channels may be better served if they are sold through Amazon or other e-commerce options
  • Pepsi unveiled a direct-to-consumer business and they launched (which they have been sitting on for 20 years), so now the big brands are going to get more competitive in the space
  • In addition to the supply chain issues that came up earlier, there is also a major distribution problem that could arise if you are reliant on someone else to get your product out there
  • If you sell through Amazon and they put a 30-day delay on non-essential items, your business will suffer because of that if you don’t have a backup DTC solution
  • The basis for Amazon deferring the shipment of some items was that they wanted to keep the essential items very accessible, so a lot of non-essential items were not as accessible 

The virtual deal process: 1:05:30 – 1:13:10

  • Are bankers expecting to do deals virtually from start to finish?
  • Lenders still need to visit businesses, but the rest of the process can be done virtually
  • The more digital the business — if most of the data and the assets are digital — you’ll be more apt to be able to diligence everything without site visits
  • If a business has a lot of inventory and requires a field audit, that field audit is going to be necessary no matter what
  • What used to be 50% remote can probably be 90% remote today
  • If there is a sales force that is critical to a business, it is important to see that in action
  • There is a generational gap that we are still dealing with, and while we may be in a different place in 10-20 years, right now it will be very difficult to get everything done without any in-person visits
  • The fully virtual diligence of a management team is one of the biggest hangups
  • There is a subjective aspect to a transaction that revolves around cultural fit
  • Many investors have a vision of being a partner with a team, and that means you need to have a good sense of the people you’re going to be partnering with

Grocery stores: 1:13:10

  • As a consumer, you always knew that the grocery store was going to be open even if nothing else was
  • Is the grocery store the most reliable channel to sell products?
  • There has been a bearishness around grocery stores over the past many years; has COVID provided an opportunity for these stores to position themselves in a much more strategic position.
  • More rural grocery stores who have a tie with their communities are going to benefit from what has happened in the past few months, because shoppers will want to stay local versus going to a much more crowded store further away.
  • Brick-and-mortar grocery retailers have really been given the opportunity to serve their communities — providing safer times for seniors to shop, being open, providing WiFi, etc.
  • Grocery stores (and larger chains like Target and Walmart) have been able to stay open an experiment with new things like delivery, curbside pickup 
  • A possible threat to grocery stores is the dollar store
  • Robotic distribution is a huge opportunity in the next 5 years

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