Data driven: Savvy M&A buyers respond to dramatic changes in consumer behavior
It’s no surprise that M&A activity has fallen off of a cliff in 2020, but if the public markets offer a glimpse of what’s to come, the window for buyers to find value could close quickly. This has both corporate acquirers and financial sponsors turning to alternative data to find conviction against such an uncertain backdrop.
To be sure, any recessionary environment is going to trigger changes in spending. And the abruptness at which the rolling shelter-in-place restrictions were implemented created pronounced shifts in spending patterns. Beyond just the hoarding of toilet paper, food and groceries went from 52% of spending activity in April 2019 to 66% this past April, according to data published in Facteus’ recent Consumer Signals report. The shift, of course, came at the expense of tourism and travel, dining out, and “experiential” categories – areas investors had previously turned to as an antidote to the retail apocalypse.
This shift may have been predictable given the constraints of the quarantine. But investors, when possible, have taken advantage. Witness the decision of Cerberus Capital Management to score a partial exit of grocery chain Albertson’s through an IPO in the last week of June. Perhaps more notable is how buyers – at least the few who are active -- are using transaction data to get an early read on how spending patterns will either return to normal or shift once the country officially re-opens.
Take pizza. In looking at the weekly restaurant spend by category, the Covid-19 disruption has actually been a boon for certain formats. In the last week of May, the pizza category experienced a 42% jump versus the comparable period in 2019, with year-over-year spikes well above 50% in the third week of April and the first week of May. The strength of pizza, coupled with a smaller rebound in the quick-service-restaurant (QSR) category, helped to lift the entire sector, offsetting significant weakness in formats directly impacted (casual dining) or have seen throughput challenged by social-distancing measures that add significant friction to the consumer experience (coffee).
KKR’s investment in pizza-ordering and delivery platform Slice in the second week of May should benefit from the newfound stability of pizza as well as the accelerated adoption of digital ordering. The company caters to independent pizza chains, who collectively control about 40% of the market.
Corporate acquirers are just as reliant on transaction data, but insights can support defensive strategies in addition to opportunistic plays. Uber Technologies, to cite one example, experienced weekly year-over-year spending declines of nearly 80% in its ride-hailing business in mid-April, during the depths of the Covid-19 shutdown. While its Uber Eats division has helped to offset the shortfall, Uber’s $2.65 billion all-stock acquisition of Postmates solidifies its positioning in the food-delivery category. Postmates, this year, had experienced year-over-year declines in weekly spending through April, but since has experienced steady increases in weekly spending that culminated with a 57% year-over-year jump in mid July.
Lululemon’s $500 million acquisition of Mirror could be considered another “counter-Covid” play. While the retailer has seen its in-store spending plummet, online sales have been going gangbusters for the yoga lifestyle brand. This may buck conventional wisdom, as yoga studios could be among the hardest hit even when the economy fully re-opens. But work-from-home mandates have apparently goosed online sales as people trade in their work clothes for more comfortable lounge wear. Lululemon had already been experiencing strong digital sales, but post Covid, weekly spending grew in some cases by as much 350% year over year.
Mirror, a relatively new entrant to the streaming in-home workout category, will serve multiple purposes for the retailer, bolstering its omnichannel business, amplifying the reach of its ambassador program, and providing an option for yoga practitioners seeking new alternatives outside of the studio. Lululemon, it should be noted, was already an investor, joining a series B funding round last year.
Given the dramatic slowdown of deal activity, observers are keen to know where buyers may turn their attention to next. The most recent trends in spending data suggest the video game segment could become the next hot spot for investors.
According to the latest First Report from Facteus, spending in this segment has held steady throughout July even as narrowing declines in lodging and travel bookings suggest consumers are venturing out of their homes again. During the first two weeks of the month, weekly spending on video game purchases showed year-over-year increases of 51% and 64%. A recent report from Houlihan Lokey suggests the pandemic even helped to mainstream gaming, and that the sector represents the “social network of the future.” Acquirers, however, will be keen to see how the industry holds up once the economy returns to normal and will likely turn to state-by-state spending data to get a jump on the rest of the market.
From a 30,000-foot view, any deal activity conducted during such an unprecedented and uncertain time might be considered a contrarian bet. Through data, however, acquirers are tilting the odds in their favor, and gaining conviction to not only move ahead with deals, but also enhance value creation initiatives and exit timing. And through the granularity provided by spending and transaction data, no investor would bill themselves as contrarian when they can see the trends are working in their favor.
- Investors and Corporate FP&A teams are relying on transaction-level data to find clarity against an uncertain backdrop
- Data is being applied to entry valuations and helping investors bid up when necessary to win deals
- Data is being used to inform value creation strategies and diversify revenue streams given new risks
- Data also helps optimize exit timing, to maximize value for investors