Annual Consumer M&A Report – Middle Market M&A Activity and 2024 Outlook

Consumer M&A Market Prepares for a Rebound in 2024

Capstone Partners’ annual Consumer Industry M&A Report and 2024 Outlook examines public market valuations, macroeconomic trends, and deal activity driving sectors within the Consumer space. The majority of transactions completed by our Consumer Investment Banking Group are for privately-owned businesses accessing long-term investors for the first time. Our team knows strategic buyers drive the highest valuations and we are razor focused on getting to know each of their sweet spots in mergers and acquisitions (M&A). Using proprietary data, we will work closely with you to prep your company and put you in the ideal position for the best possible outcome.

A Tale of Two Cities in 2023 Leads to Interesting Opportunities in 2024

The overall pullback in Consumer industry transaction volume reflected what many market participants anticipated equity markets to encounter at the onset of the year, to an exaggerated degree. However, artificial intelligence-driven euphoria defied forecasts and catapulted the S&P to new heights, while middle market Consumer M&A struggled to gain traction—particularly in more discretionary sectors. Total middle market Consumer industry transaction volume fell 29.5% year-over-year (YOY) in 2023, falling below 2020 levels that saw dealmaking drop 17.8% YOY.

Financial buyers, hindered by several factors, largely sat on the sidelines during 2023. These factors included: difficulty building investment thesis during uncertain economic conditions, more expensive financing costs, lower valuation of their own portfolio companies, and a tough fundraising environment. The caution among private equity firms to deploy capital towards the Consumer space and to sell their own portfolio companies exacerbated declines in dealmaking. Following 525 basis points of tightening, transaction financing costs became a significant factor in evaluating investment opportunities. While a higher rate environment often facilitated hesitancy among sponsors, uncertainty over the direction of rates provided even more headaches. For much of 2023, the market was unsure of where the terminal interest rate would land. This caused difficulty for private equity firms modeling out returns, resulting in total financial buyer activity declining 37.7% YOY. Platform investments registered deeper declines, falling 38.7% YOY. Smaller add-on transactions were most preferred by financial acquirers and comprised 17.2% of total transaction volume.

While private equity saw difficulty, many strategic buyers saw opportunity. Buoyed by the ability to pass on rising costs to the consumer and favorable stock market valuations, many strategic buyers remained aggressive and comprised 72.1% of total consumer M&A activity in 2023. Public markets favored leading industry players, with total return among Consumer Discretionary constituents of the S&P 500 reaching 42.4%. As inflation eased and consumers became more selective in their purchases, organic top-line growth slowed for many players. As such, M&A served as a valuable tool to drive continued sales growth. Wall Street continued to reward such strategies with healthy stock market valuations.

Hidden behind the decline in overall Consumer deal volume were several bright spots of the market. Nondiscretionary sectors including Convenience Stores, Food Processing, Food Distribution, and Pet recorded healthy YOY increases in deal volume. The unrelenting spending behavior of the consumer for much of the year even drove certain discretionary sectors towards gains. Notably, the Apparel, Footwear & Accessories and Home Goods sectors also experienced strong increases in M&A activity compared to the prior year.

Why do we remain optimistic about the M&A environment for 2024? First, strategics have shown they are willing to pay premiums for the right assets, regardless of the macroeconomic backdrop. This is especially good news for privately-owned, middle market companies which comprise the bulk of strategic buyer interest. Second, private equity buyers will return to the market—sponsors need to exit investments, recycle capital, and deploy resources towards acquisitions to generate returns for investors. The important question is, when? Lastly, for the first time in months the market has visibility over the direction of interest rates. The cost of money will still be meaningful, but debt markets are expected to be much more accommodating over the next six to 12 months than the preceding period. For privately-owned businesses contemplating a liquidity event—2024 will bring significant buyer appetite and may usher a new bull market in Consumer dealmaking.

Consumer M&A Valuations Soften

M&A valuations in the Consumer industry encountered downward pressure in 2023 with the median purchase multiple amounting to 9.4x EV/EBITDA—more than a full turn lower than the prior year. An elevated rate environment caused debt financing to become more expensive, which often impacted M&A pricing, or reduced the appeal of acquisitions for select acquirers. However, high-quality companies continued to garner premium valuations, despite a challenging operating backdrop. Privately-owned businesses in recession resilient markets with robust profitability, customer retention, and revenue visibility continued to garner healthy valuations from strategic and financial buyers.

Many buyers prioritized smaller deals amid market uncertainty in 2023, with transactions below $100 million in enterprise value accounting for 78.1% of total disclosed transactions. This marked a slight increase over 2022 levels (77.8%) but a notable uptick above 2021 (74.7%). The median enterprise value in 2023 largely reflected this trend, amounting to $19 million, a 25.5% YOY decrease. However, there were several instances of buyers paying healthy sums to close transactions. This indicates that when acquirers had conviction and confidence in their investment thesis, they were willing to aggressively commit capital. A handful of large deals pulled average enterprise value paid forward, which reached $264.6 million in 2023. This demonstrates two key trends—first, the lower middle market comprises the vast majority of deals which bodes well for privately-owned businesses. Second, despite a volatile market, strategics and financial buyers were willing to facilitate large deals despite challenging financing markets.

In 2024, prospective sellers are expected to encounter a more favorable valuation environment. The emphasis on the highest-quality assets likely left a number of quality sellers on the sidelines that had minor imperfections in operating performance. With a resurgence of private equity activity anticipated, middle market Consumer players are likely to enter an active M&A environment.

M&A Activity Trends by Sector

The full report, available for download below, includes M&A commentary and analysis on 12 key sectors within the Consumer industry:

• Apparel, Footwear & Accessories
• Automotive Aftermarket
• Beauty
• Convenience Stores
• E-Commerce
• Food Processing
• Food Distribution
• Home Goods
• Outdoor Recreation & Enthusiasts
• Pet
• Sports Technology
• Vitamins & Supplements