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Some Driving Trends in M&A

The consumer goods space is humming with acquisitions over the last few years. There are no signs it will slow down, but it may change. Private-equity and mega-backed deals are increasing in number.

In addition to these players, we’re also seeing the role of shifting consumer desires. A strong interest in healthy, organic living is driving some conglomerates to really change their portfolio. This trend is likely to escalate over the next few years, as more and more consumers get on the health bandwagon.

Noteworthy Transactions
The May, 2018 acquisition by PepsiCo of Bare Foods Co. from PE firm NGEN Partners brought “healthy” carrot and banana chips under the Frito-Lay umbrella. PepsiCo previously acquired Off the Eaten Path, creator of Veggie Crisps.

The goal of many such mergers is to marry healthy living with an affordable price point and accessible products. The Honest Company, for instance, recently announced a $200 million strategic minority investment from PE firm L Catterton. Honest offers a brand that stands for something, but at a price point that’s accessible to a large number of consumers. We’re going to see more growth in businesses like Honest.

Risky Business for Larger Conglomerates
Organic and natural businesses may thrive when they’re small, but they don’t always do well under large conglomerates. Campbell’s presents a cautionary tale. It’s Campbell’s Fresh line has struggled following its 2012 acquisition of Bolthouse Farms and 2015 purchase of Garden Fresh Gourmet.

Distribution poses some unique challenges. The one-size-fits-all approach that works so well in prepackaged food is exactly what many health-conscious consumers with to avoid. Consumers may also be attracted to the unique messaging, small size, and independence of organic brands. They’re less drawn to large corporations. Large companies specialize in driving down costs and accelerating distribution. This is what consumers dislike about large companies, so it’s important to balance convenience with the mission of the original brand.

Effects on the Lower Middle Market
Companies in the lower middle market with “kitchen cook” owners, clean eating missions, and novel formulations are thriving. So too are personal care products with an earth-focused and health-driven mission. We’re witnessing an elusive breaking point where companies transition from home businesses to million-dollar-plus companies with penetration across multiple channels.

As with larger deals, integrity of the original brand is key. The found must remain present, and that means significant rollover equity and seller financing. This improves financial leverage, but it also maintains brand alignment and protects customer loyalty.

Larger brands are unlikely to reach down for smaller brands. This may be a good thing, since smaller companies must ensure the acquirer offers a good cultural fit. Family businesses are often a good starting point, since they have the flexibility to pursue smaller companies, and can generally preserve the integrity and story of the brand.

In this segment, as in all others, quality and price are key. The product must be better than something out there at a lower price point if it is going to thrive.