By Michael Rudnick
NEW YORK–Merger-and-acquisition activity for home goods manufacturers is poised to continue its strong pace this year, despite the tightening in deal finance due to the credit crunch.
While larger acquisitions and full-company buyouts may decelerate due to the lack of debt lending to finance these deals, smaller-scale acquisitions and the piecemeal sale of product lines and brands are expected to remain at high levels, said Nick Pavlidis, managing director of consumer products investment banking at Robert W. Baird & Co. “In 2007 we saw larger deals—a lot over $500 million—but in 2008 we will see more product line divestitures by strategics and we will see less buyouts,” he said.
The debt market squeeze should also help strategic buyers to get back into the running in the acquisition universe, which has seen significant private-equity activity over the past few years. In times of tight lending, strategics with healthy balance sheets have an advantage against private-equity buyers that rely largely on debt to finance transactions.
A large part of the new midmarket acquisition activity will stem from the home decor, gifts, accessories and housewares industries, Pavlidis said. “Home decor, gifts and collectibles have been extremely strong over the past four to five months in terms of mergers and acquisitions,” he said. “Even though there has been general market concern over consumer spending, there is still strong growth for lower-ticket items,” he added.
The housewares industry activity is currently and will continue to be driven by the fragmentation within the space. “There are a couple of [housewares] transactions out there now,” Pavlidis said. “Even with all of the consolidation, there is still a large amount of fragmentation for suppliers,” he said. “There are still a lot of suppliers with under $100 million in sales who find it difficult to compete, but they would be strong additions for larger strategic players,” he said. “Because mergers and acquisitions are still strong from a historical perspective, strategic players should continue to divest product lines that may not fit with their core operations.”
Pavlidis expects the number of mergers and acquisitions in 2008 to be consistent with the prior year. “I don’t see a slowdown in terms of the number of deals, but do see a slowdown in $500 million-plus transactions by private-equity firms as well as strategics,” he said. For the first 10 months of 2007, the consumer products arena saw 169 transactions with a total value of roughly $34.19 billion, according to Baird. The firm did not have final statistics for November or December by press time. He added that sellers of larger companies may also be hesitant to put themselves on the auction block in fear of lower valuations on the diminished strength of the big spending private-equity firms. “Sellers of large assets may be less willing to go to market if they think private equity is not as strong leading to lower pricing.”
