Consumer Sector Comment – May 2014

Date

China has been the focus of plenty of attention in the financial press over the past few weeks. The Financial Times reported in April that China was on the brink of overtaking the US as the world’s largest economy, earlier than previously expected – the US has been the global leader since 1872! While there is continuing debate over the exact timing, there is no doubt that China will at some stage soon become the world’s number one economy.

The sheer scale of the consumer market in China is exemplified by some of the numbers surrounding the upcoming flotation of Alibaba. The company, which was founded by English teacher Jack Ma, began in 1999 as a business to business portal. It now has a leading share of the Chinese e-commerce market and is estimated to have handled around $248bn of transactions for 231 million active users, more than Amazon and eBay combined. Online accounts for just under 8% of total shopping in China – this compares to around 6% in the US and reflects the lack of other shopping options. Alibaba’s founder predicts that this could eventually rise to 30%. The company did not give details of the timing or size of the flotation but analysts have estimated that it could raise up to $15bn, valuing the company at more than $100bn. When Facebook floated in 2012 it was valued initially at $104bn.

Recognising the M&A opportunities which are likely to result from this economic strength, Clearwater established a China desk back in 2012. Outbound M&A involving Chinese groups in the first quarter of 2014 has seen a 21% increase in deal volume and a 10% increase in deal value compared to the same period last year. There have already been a couple of high profile consumer transactions and we expect more to follow. Bright Foods acquired Weetabix in 2012 and is on the acquisition trail again in Europe, aiming to double its international presence within the next 3 years. This year, little known Sanpower Group acquired House of Fraser, in a deal valuing it at almost £500 million. The rationale for both transactions was brand roll-out in China.

More Deals

Palatine Private Equity has backed the management buyout of GUSTO Restaurant and Bar from Living Ventures. The restaurant brand currently operates from nine sites and is looking to open more restaurants across the UK, focusing on city centre and affluent suburban locations. The Living Ventures Group was founded in 1999 by CEO Tim Bacon and Commercial Director Jeremy Roberts. It owns other well-known brands including Blackhouse, Australasia, Artisan and The Alchemist, and recorded group sales of £65m in the year to March 2014 – a 36% increase on the previous year. Both Bacon and Roberts have invested in the new GUSTO business and will stay on as non-executive directors.

Bridges Ventures, the UK-based private equity firm, acquired an undisclosed stake in Clothingsites.co.uk, an online retailer, for an undisclosed consideration. The company operates three websites in premium menswear, out of season stock at discounted prices, and trainers & shoes.

Victory Electronic Cigarettes Corporation, the US-based electronic cigarette manufacturer, has acquired 100% of Must Have (t/a VIP), a UK-based electronic cigarette manufacturer. The consideration is around £30 million. This latest acquisition follows the purchase earlier in the year of Vapestick. The company has stated its intention to be at the forefront of industry consolidation.

News Corporation acquired The Handpicked Collection, the luxury online gift store operator. Financial details were not disclosed. Anoushka Healy, Chief Strategy Officer of News Corp, stated: “Quality of engagement with readers is crucial in the digital age, and this acquisition helps to strengthen that bond through the development of a new retail platform that leverages the reach of our popular mastheads in the UK.”

Bart Ingredients Company, the herbs and spices manufacturer, acquired OTP Foods, a UK-based sauce and paste manufacturer. OTP produce a wide range of ambient products for supermarkets and independent brands. The transaction allows Bart, backed by Langholm Capital, to expand in the growth area of wet ingredients.

Daelmans Banket Koek-en Banketbakkerijen Vlijmen BV, a pastry manufacturer based in the Netherlands, acquired The Fabulous Bakin’ Boys Ltd, a UK-based cake manufacturer. No financial details were disclosed. The target’s sales amounted to £14.5m in the last financial year.

NanJing XinJieKou Department Store Company Limited of China (owned by Sanpower Group) signed a definitive agreement to acquire an 89% stake in House of Fraser, the department store group. Mike Ashley, the owner of SportsDirect, acquired the remaining 11% stake for a consideration of £50m. The acquisition is in line with Sanpower Group’s strategy to expand its business globally. The transaction will offer a platform for international growth and will enable House of Fraser to exploit Sanpower’s existing retail distribution to achieve expansion in China.

Didix BV, a gift card company and portfolio of Waterland Private Equity Investments BV, has acquired The Gourmet Society (Gourmet) and The Restaurant Choice Limited (Restaurant), both UK-based companies engaged in selling gift vouchers, for an undisclosed consideration. Gourmet and Restaurant have around 7000 and 1500 restaurants respectively in the UK. The acquisition is in line with Didix’s strategy to expand its footprint in the international market.

Endless, the UK-based private equity firm, completed the acquisition of West Cornwall Pasty Co Ltd, the UK-based pasty retailer, out of administration for a consideration of approximately £30m. In the transaction, Endless acquired the brand of West Cornwall Pasty Co and 35 of the firm’s outlets and stores.