Following the announcement of the Amazon/Whole Foods merger, one telling footnote deserves more attention: Private equity was eyeing Whole Foods, but due to a rapidly evolving industry, didn’t really have a chance against Amazon. In an interesting scoop, TechCrunch reported that after hearing PE firms were trying to start exploratory conversations, “Amazon put pressure on Whole Foods not to talk to them.” Normal jockeying aside, industry professionals in the consumer sector point to a broader trend affecting the entire US market: Consumer product companies have become more hesitant to partner with PE suitors. Why?
The historical leveraged buyout/financial engineering approach no longer works with B2C companies like it once did. PE investors are expected to fundamentally transform the value of those businesses through add-on acquisitions, alongside executives with tangible turnaround experience in today’s market. PE firms that don’t have transformational plans laid out ahead of time are having trouble winning auctions.
The chart above shows a clear decline in US PE deal activity over the past two years. Another data point worth mentioning: Of all listed consumer companies that have been bought out this year, only 19% of those were purchased by financial sponsors. The rest were bought by strategic competitors. The trend goes back exactly one year—PE firms represented only 26% of take-private deals in the consumer industry in 2016, a big drop from the 50/50 split between PE and strategics dating back several years. In other words, PE appears to be behind the curve. Firms are struggling to keep up with a rapidly evolving consumer sector, and the numbers are starting to show it.