Inaugural Consumer Report: Harbor View's 2023 Review & Outlook

SUMMARY & OUTLOOK

Deal financing difficulties and other macroeconomic factors led to a 17% drop in global M&A activity last year, reaching a 10-year low at $2.9 trillion. In line with broader trends, Consumer deal volumes in the US also dropped to their lowest levels in a decade.

We anticipate a recovery in 2024, based on a variety of structural factors as well as anecdotal evidence. Robust GDP growth, record-high stock market indices and improving animal spirits in America bode well for dealmaking in the coming year

We feel good about the consumer in '24 in the U.S. […] in the sense of very low unemployment. We feel good about the fact that we think wages will go higher than inflation next year. And we hope that by the summer, interest rates will go down and that will create another source of oxygen for disposable income in households

Ramon Laguarta (CEO, PepsiCo)

Q4

2023 Earnings Call

At the December 2023 Federal Open Market Committee meeting, three potential rates cuts were announced for the coming year The prospect of a rate cut was met with excitement by investors However, weeks later, the latest jobs print was so unexpectedly strong that the Fed is almost certain to keep interest rates intact until 2H24 Even if debt remains expensive by historical standards, the Fed has managed to orchestrate a soft landing, dampening the hubris of many economists who were quite convinced a recession was inevitable. That scenario did not materialize and to boot, inflation has been tamed across most sectors. Notwithstanding the timing and cadence of rate cuts, we believe a resurgence in M&A this year will be driven by three factors:

• Sustained economic growth in the US that will continue to attract investor dollars;

• A strong dollar that is expected to prompt more cross-border deals, particularly Transatlantic; and

• A thematic shift towards health and wellness is gaining momentum across the Consumer category.

Higher market valuations and sustained growth prospects will entice sellers to pursue exits, after fidgeting on the sidelines for much of last year Meanwhile, private equity will also feel pressure to deploy more capital this year With a reported cash pile approaching $2.5 trillion, we expect PE to fuel M&A in North America and overseas. After focusing on their existing PortCos in 2023 and on pursuing add-ons, PE investors are feeling the urge to realize returns for their LPs while seeking new platforms more purposefully. We expect this favorable dynamic to be partially offset by election-year turbulence and geopolitical instability in Eastern Europe and the Middle East, as consumers and corporates brace themselves for an unprecedented level of angst and vitriol

More than ever, M&A will also have to contend with two other major Capex categories for investment allocation: Innovation and Sustainability, both of which were overwhelmingly on display at the 2024 Consumer Electronics Show last month. Of course, M&A also functions as an accelerant, and we expect this dynamic to fuel consolidation in some sectors Responding to more stringent consumer and regulatory requirements, healthy products and eco-friendly packaging constitute another powerful impetus for more strategic Consumer M&A

Based on our discussions with clients and prospects, we expect Consumer M&A activity to rebound this year, especially in the middle market. Food & Beverage and Personal Care should lead the way, and the Discretionary space also strikes us as a particularly promising area, led by Luxury (where scale is paramount)

CONSUMER M&A SUMMARY

CONSUMER PRICE INDEX

Source: U.S. Bureau of Labor Statistics

Source: U.S. Bureau of Labor Statistics

CONSUMER DEAL VOLUME IN THE AMERICAS

CONSUMER INDICES

In 2023, Consumer Discretionary (CD) navigated a challenging inflationary environment to outperform other indices such as Consumer Staples and Food & Beverage This trend was driven primarily by two factors: (1) the ability of many CD brands to pass on cost increases to consumers, as demonstrated by luxury, travel services and car manufacturers, which posted massive profits; and (2) a major demographic shift towards discount stores and private label products, which was quite pronounced in Staples and Food Several tech giants further skewed the CD index’s record performance - namely Amazon, Apple and Tesla.

CONSUMER VALUATION DATA (HARBOR VIEW

EV/REVENUE

Source: Pitchbook data as of 2/14/24

EV/EBITDA

Source: Pitchbook data as of 2/14/24

PUBLIC TRADING STATISTICS (HARBOR VIEW INDEX)

APPAREL

*Weighted Mean weighted by Enterprise value

BEAUTY & PERSONAL CARE

** Excluded from the calculation of both the mean and weighted mean due to its outlier status. Source: Pitchbook, Data as of 2/14/24 ($

PUBLIC TRADING STATISTICS (HARBOR VIEW INDEX)

FMCG

FOOD & BEVERAGE

PUBLIC TRADING STATISTICS (HARBOR VIEW INDEX)

HEALTH & WELLNESS LUXURY

DEAL OF THE YEAR

$41.55bn

AUG 2023

SPUN-OFF BY

Source: Reuters, FiercePharma

Last August, Johnson & Johnson (NYSE: JNJ) finally pulled the trigger, spinning off its portfolio of iconic consumer brands (Band-Aid, Tylenol, Visine, Rogaine, Neutrogena…) under the name Kenvue. The $41bn IPO was the largest carve-out in years and, by far, the largest Consumer deal of 2023 The move allowed JNJ to establish itself as a pureplay Pharma and MedTech company while generating over $13bn in cash to revitalize its M&A strategy. This strategic decision mirrors those of other pharma companies (including Merck and Pfizer) who took similar measures to separate business that typically command different valuations. This spinoff allows JNJ to focus on its highergrowth, more profitable core business while maximizing shareholder value.

SWEETEST OUTCOME

$5.6bn NOV 2023 ACQUIRED BY

Source: SEC filings & FoodBusinessNews

The snack food segment (sweet and salty) has grown considerably over the past decade, driven principally by increasingly health-conscious consumers’ appetite for nutritional foods Popular snacks centered on grains, nuts and proteins have outperformed traditional processed foods, and captured most of the M&A activity in this category, but Twinkies, HoHos and Ding Dongs remain popular Strategically, this deal boosts Smucker’s presence in the convenience snacking segment and expands its reach, as well as its production capabilities. Naturally, the size and timing of this major J M Smucker (NYSE: SJM) acquisition defied expectations SJM’s winning 11th-hour bid (in what was reported to be a robust auction) reflected a 45% premium

IMPULSE BUY

$500m JAN 2024

ACQUIRED BY

Source: Financial Times, Modern Retail, Business of Fashion

A victim of its own success, lost its way after raising far too much capital Its initial strategy was centered on creating a global tech platform to match smaller brands and boutiques with consumers online. It executed that strategy, building marketplaces in a dozen languages that offered worldwide shipping Then bought a luxury retailer in London before acquiring a popular fashion eCommerce website. After going public in 2018, Farfetch promptly embarked on a series of aggressive (and some would say undisciplined) investments including Stadium Goods, Wannaby, and Violet Grey, before springing for Net-à-Porter in 2022. As difficulties mounted and it crumbled under its debt load, fire sales began. Ultimately the company was saved in extremis by an unlikely suitor: Coupang South Korea’s $20bn eCommerce giant offered $500m for Farfetch, seeking to penetrate the elusive e-luxury segment. With Kering announcing that it will pull its brands from Farfetch’s platform, other luxury brands are now rumored to follow suit Farfetch has gone so far as to consider providing ‘complete anonymity’ to third party retailers in exchange for sourcing specific luxury brands.

SELECT CONSUMER M&A TRANSACTIONS

SELECT CONSUMER M&A TRANSACTIONS

With the market stabilizing somewhat and returning to a healthier state, I believe 2024 and 2025 are going to be extraordinary years for beauty M&A. New exciting cohorts of innovative beauty brands are growing up and reaching interesting threshold revenue stages yet still offer considerable expansion and development opportunities to the acquirer.

Deborah Benton Founder

& Managing

Partner,

Willow Growth Beauty Independent (January 22, 2024)

Health & Wellness (USA)

Buy-Side Advisory

Fairness Opinion Luxury (France)

Sell-Side Advisory Juvenile/Apparel Zorbit (UK)

Kitchen Equipment (France, USA, Mexico)

Sell-Side Advisory

Capital Raise Fashion (France)

Programmatic M&A OTC (Pan-European)

Personal Care (France, Ireland)

Sell-Side Advisory

*Includes engagements executed with previous firms

MANAGING DIRECTOR

Capital Raise

Edutainment (USA) Area 1

Capital Raise Food & Beverage (USA)

Anthony heads the Consumer practice at Harbor View. Drawing on his international background and experience, he has executed transactions in 15 countries. In addition to his extensive M&A experience as a banker, Anthony also has considerable experience as a business operator

www.harborviewadvisors.com

The material in this report is for information purposes only and is not intended to be relied upon as financial, accounting, tax, legal or other professional advice. This report does not constitute and should not be construed as soliciting or offering any investment or other transaction, identifying securities for you to purchase or offer to purchase, or recommending the acquisition or disposition of any investment. Harbor View Advisors does not guarantee the accuracy or reliability of any data provided from third party resources. Although we endeavor to provide accurate information from third party sources, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.