Mergers Acquisitions Consumer Markets

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CONSUMER MARKETS

Global M&A inConsumer Markets:

Pursuing growth

in an uncertain world

kpmg.com

KPMG INTERNATIONAL


2/100 2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


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ContentsForeword 2

Executive summary 3

Whats driving deals 4

An interrupted recovery 6

Financing tightens 8

Attractive sectors 9

The BRICs and beyond 10

Valuations mixed 11

Private equity returning 12

Optimistic outlook 13

Country reports 14

Appendices 65

2012 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.


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Foreword

Consumer markets companiesinterested in pursuingmergers and acquisitions

(M&A) continue to face a largelyuncertain environment. Whilethere are pockets of activity andattractive growth opportunities,macroeconomic forces such as eurozone instability, mixed consumerconfidence, rising commodityprices, inflation and challenges inarranging financing for transactions

are complicating the ability ofconsumer-focused companiesto expand or enter new marketsthrough M&A.

2011 started off with considerablepromise for the consumer M&Amarket after favorable growth in2010, but ran into headwinds mid-year. Larger transactions becamemore challenging to complete,prompting many companies toshift their attention to smallerdeals with a narrower strategic orgeographic focus.

To gain insight into the trendsthat are likely to affect consumersector M&A in the near future, weexamined transactional data andtrends for the past 24 months, andconducted more than 30 in-depthinterviews with senior KPMG M&Aprofessionals and private equityexecutives around the world.

Our conversations revealeda range of market conditionsand opportunities across the 23countries covered in the study. Inmost countries, for instance, M&Afinancing is generally available,although the approval processmay be more stringent and takelonger than it might have undermore favorable market conditions.In some regions such as the moredeveloped economies, consumer

confidence and spending remainconstrained, while impressivegrowth continues in others.

The range of countries from whichour professionals shared theirinsights gives us a good picture ofhow M&A markets and activity areexpected to evolve over the next18 months or so. While challengesare expected to continue in theshort term, the basic reasonsfor pursuing M&A geographicexpansion and market entry,market consolidation, and supplychain considerations will keep the

pursuit of attractive transactionsnear the top of the consumersectors strategic agenda.

Our interview participantsalso indicated that, despite theimmediate challenges, they expectmarket fundamentals to producefavorable M&A conditions in thenear future.

We believe the analysis andperspectives our professionals

provide in these interviews willbe useful to anyone involved inthe consumer sector or with aninterest in the future direction ofglobal growth.

I would like to thank the M&Aand private equity leaders whocontributed to this study, and hopeyou find their insights interestingand valuable.

2 | Global M&A in Consumer Markets: Pursuing growth in an uncertain world


Willy Kruh

Global Chair, Consumer Markets

KPMG International+1 416 777 [email protected]


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Executive summaryThis collection of interviews coveringconsumer markets M&A activity in 23countries, describes a global recoveryproceeding by fits and starts but withan underlying drive that has promise forthe future.

Deal activity in 2011 started strong, withthe food, drink and consumer goods(FDCG) sectors leading the way overretail. Most active of all was the foodand drink sector, with more than 900

deals either completed or announcedin 2011, more than all the other FDCGsectors combined.

But there was a clear dip in activityin the third quarter, as companiesand consumers in Europe felt the fullimpact of financial problems in theeuro zone. European activity slumpedas businesses chose to wait for a

resolution to the crisis rather than makeplans in the face of uncertainty, whileconsumers reined in their spending.

There are signs that confidence may bereturning, with companies anticipatinggreater stability from the newgovernments in Greece, Italy and Spain.But views vary on how long it will takebefore markets return to health; somethink it might happen in 2012, whileothers say they could stay this way for

another three to five years.Although events in Europe have had adampening effect on activity outsidethe region, there has nevertheless beena steady stream of deals completed.Fragmented sectors in India, China andelsewhere have been consolidatingin search of economies of scale andbetter supply chain management,

while international acquirers have beensnapping up opportunities to win afoothold in large markets with potentialfor high growth.

Most of these deals have been in themid-market, as banks have effectivelyabandoned deals larger than 100 million.But for good quality mid-market assetswith a sound business plan, financingremains available.

One KPMG professional interviewed

summed up the current M&A picturesaying, Some consumer marketssectors have to consolidate to makesure theyre offering a wide range ofproducts for consumers, at competitive,yet profitable, prices. We are primingthe M&A environment today for thenext two to three years.

Global M&A in Consumer Markets: Pursuing growth in an uncertain world | 3



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Whats driving dealsGlobally, 2011 saw a gradual decline inM&A deals in both the food, drink andconsumer goods (FDCG) manufacturingand retail sectors, followed by signs ofrecovery in the fourth quarter.

In 2010, M&A activity had climbedsteadily and the end of that year, marketparticipants saw the growing volume

and value of deals being completed asan encouraging sign that companies andeconomies were recovering from theglobal economic downturn of the pastthree years.

However, while the momentumcontinued throughout 2011 in manygrowing markets including Brazil, Chinaand Mexico, economic disruptions,particularly the euro zone crisis in thesummer of 2011, all but stagnatedactivity in others, especially the UK,Germany and Italy.

Strong fundamentals, such as improvedcorporate earnings and strong balancesheets are still being reported in manyregions, but before M&A marketsglobally can begin to recover, a numberof macroeconomic forces, and businessand consumer confidence levels, haveto improve.

Across industries, common drivers forcompanies pursuing M&A deals include:strategic growth, geographic expansion,product diversification, investmentprofit, focus on core business orproduct lines, synergy, and costoptimization. In our interviews withKPMGs M&A professionals, thefollowing M&A drivers and trends forconsumer companies in particular,were commonly cited:

Strategic growth and expansion

into high-growth emerging markets(particularly the BRIC countries);

Shifting emphasis to moderately-sized

deals (typically under US$1billion) thatare considered easier to finance andclose than larger transactions;

Increased focus on supply chain

optimization, particularly in the face ofrising commodity prices and sourcingchallenges;

Transfer of unfavorable brands from

their traditional markets to regionswhere weakened brands may beperceived more favorably;

Growing interest in health and

wellness among consumers.

These and other trends and drivers inM&A are explored in more detail in thisreport.

0

100

200

300

400

500

Q4Q3Q2Q1Q4Q3Q2Q1

Number of FDCG companies acquired, Q1 2010 Q4 2011

2010 20112010 2011

47

Number of retail companies acquired, Q1 2010 Q4 2011

51 61 61 86 95

85 99

233 239 250 251

225 230 206 210

AnnouncedCompletedAnnouncedCompleted

0

100

200

300

400

500

Q4Q3Q2Q1Q4Q3Q2Q1

81

305

266

329307

298 290278 275

73

97 133119

116 127167

Source: Thomson SDC




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0 100 200 300 400 500 600 700 800 900 1000

Tobacco

Consumer Goods

Agribusiness

Textiles & Apparel

Food & Drink

Number of FDCG companies acquired by subsector (2011) Number of retailers acquired by subsector (2011)

AnnouncedCompleted

606 302

209

194

125

7

3

41

81

102

0 50 10 0 1 50 20 0 2 50 30 0 3 50 40 0 4 50 50 0

Discount &Department Stores

Home Improvement

Computers &Electronics

Internet & Catalog

Textiles & Apparel

Automotive

Other

Food & Drink

AnnouncedCompleted

312

186

99

74

69

55

42

34 3 1

31

30

40

79

120

17

17

Source: Thomson SDC




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An interruptedrecoveryIn our interviews with KPMG memberfirms senior M&A professionals, aconsistent theme that emerged wasthe sudden interruption in mid-2011 forM&A markets caused by a combination

of macroeconomic events. Mostprominently, the euro zone financialcrisis, falling consumer and businessconfidence, and problems obtainingdebt financing to complete transactions.

Most companies felt that we werebeginning to see some light at the endof the economic tunnel, but what wefound instead in the second half of theyear was just the opposite, says JorgeRioperez, Head of Corporate Finance atKPMG in Spain.

Following a growing lack of confidencein Europe, M&A activity slowed in mostregions. As visibility into economicconditions declined, companies foundit more difficult to make or implementgrowth plans. The euro zone problemsare clearly impacting corporatesthinking, but there is a bigger dynamic inthe consumer space where consumershave been readjusting their familybudgets, pushing back discretionaryspend, and driving to value in what

they buy, says David McCorquodale,European Head of M&A, ConsumerGoods and Retail, with KPMG in the UK.

David Simpson, Global Head ofM&A with KPMG in the UK, saysmacroeconomic factors and the eurozone crisis have introduced considerableuncertainty and some hesitation to theM&A market in the UK. The threat ofnegative events and conditions might

turn out to be more damaging than whatactually materializes, and companiesjust want to see a solution around whichthey can plan, Simpson says.

A number of in-progress transactionsand auctions were either stalled orstopped altogether, and companiesare waiting to see how the situationevolves, says Bjorn Hallin, M&APartner with KPMG in Sweden.Were seeing uncertainty in thefinancial markets, which translates tonervousness.

Deals larger than 100 million(US$132m) simply arent happeningtoday, says Julian Parsons, Executive

Director, M&A, at KPMG in France.There was a wave of largertransactions in late 2010 and early2011 that attracted bank financing, butmore recently, weve seen a number oftransactions that were underway thathave been stopped.

Weve noticed this year that moretrade-to-trade deals involve corporatebuyers that are themselves privateequity-backed, McCorquodale says.Private equity investors are more

active this year, but possibly puttingmoney out behind their existing portfoliobusinesses that may be better able todeploy leverage.

The sovereign debt crisis in Europeresulted in new governments beingformed in Greece, Italy, and Spain,increasing expectations that austeritymeasures and the potential forincreased political and economicstability will improve predictability for




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business executives and help promotean increase in M&A activity.

Macroeconomic conditions are alsoinfluencing M&A activity in growingor recovering regions such as Mexico.Foreign direct investment into Mexicohad dropped more than 40 percentfrom 2008 to 2009. It then reboundedby 27 percent in 2010, although fellby an estimated 4 percent in 2011.There may be growth prospects andhealthy companies to acquire here,but multinational corporations are notnecessarily in acquisition mode, saysVictor Esquivel, M&A Partner withKPMG in Mexico.

Along with falling business confidence,companies are also concerned aboutcontinued weakness in consumerconfidence. In 14 of the 23 countriesstudied, the Neilson ConsumerConfidence Index (CCI) fell during 2011.The most significant declines were seenin Switzerland, Singapore, Belgium andSouth Africa -- all declining by doubledigits. Both China and the US saw adecline from January to October, butrecovered to original index levels bythe end of the year. Brazil had the

highest index jump, going from a CCIof 95 to 112 in just 12 months.

Some companies have had successserving high-end consumers or thoseat the lower end of the market, butcompanies targeting the middle markethave increasingly been squeezedby shrinking consumer incomes.Weve seen a perfect storm developaround consumer confidence where

the macroeconomic environment isworsening, inflation is growing, andconsumers face rising unemploymentand high levels of personal debt, saysTim Clifford, Consumer Goods & Retail

Partner with KPMG in the UK.

While the economic news is generallyless encouraging than at the start ofthe year, the renewed slowdown isntaffecting all countries. In South Africa,for instance, overall M&A activity levelsare down, but in the consumer goodsand retail space, M&A activity rose in2011 over 2010, and continued to risethroughout the year. South Africa isincreasingly being seen as a base forexpansion into the rest of the continent.

One of the big transactions in the regionthis year occurred when Wal-Martpurchased a majority stake in retailerMassmart for US$2.4 billion. JohnGeel, Managing Director, Transactionsand Restructuring Advisory at KPMGin South Africa, says the deal marksa fundamental indication of marketconfidence in the region.

Meanwhile, in Poland, a growingnumber of well-known private

businesses that were established 15 or20 years ago are coming onto the M&Amarket because the private ownershave decided its the right time to sell.

James Murray, an M&A Partner at KPMGin the UK, says the fundamentals forM&A remain in place, despite fallingconsumer confidence. Companies havestrong balance sheets and a considerableamount of cash, theyve started to pursue

A number ofin-progresstransactions andauctionswereeither stalled

or stoppedaltogether, andcompanies arewaiting to seehow the situationevolves.

focused strategies, and they remainoriented toward growth, Murray says.

In some economies, strategic buyersthat have spent the past three yearsfocusing on their own balance sheetsare starting to return to the M&Amarket. [More companies] understandthat M&A at the right price can be aclear opportunity, and this could bea good time to make a deal, saysBastiaan De Weers, Associate Director,T&R Corporate Finance, KPMG inthe Netherlands. Now that there ismore stability in the market, there isa rationalization of normal values, andsellers expectations are more realistic.




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Financing tightensThe availability of deal financing variesconsiderably from market to market,with most strong markets saying thatfinancing is available, although lenderscrutiny is generally tighter and theprocess takes longer than in the

recent past.Tim Clifford of KPMG in the UK saysbanks are requiring a greater amountof due diligence and scrutiny thancustomers would have seen three orfour years ago, and lenders are moreinterested in examining the targetcompanys customers.

Similarly, in the US, credit standardsremain very tight. Its still hard toget debt because of the generalnegative market conditions and the

unpredictability of revenue, says RobCoble, National Leader, Corporate

Transactions and Restructuring forKPMG in the US. The banks say thereis a lot of credit availability, but theunderwriting standards are stricter.

In markets largely unaffected by theeuro zone crisis, or for large blue-chip

companies with strong balance sheets,the availability of financing is generallygood for companies pursuing attractivedeals.

Were seeing competition amongbanks to put together structuredfinancing deals for the right assets,says Jonathan Farnell, a TransactionServices Partner at KPMG in Norway.Lenders are saying the competitiontoday is as heavy, if not heavier, than itwas in the pre-crisis days, and lenders

are being pushed to keep termsreasonable.

The bankssay there is alot of credit

availability, butthe underwritingstandardsarestricter.




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Attractive sectorsIn 2011, the bulk of M&A activitywas seen in the food and drinkmanufacturing and retail sectors. AsKrzysztof Klamut, an M&A Partner atKPMG in Poland says, those sectors arefragmented in most markets, makingit easier for domestic or internationalcompetitors to find attractive targets

with established market positions andgood brands.

Food sector sales are more drivenby trade-to-trade consolidation ratherthan being PE-induced, says DavidMcCorquodale of KPMG in the UK.Were still seeing reasonable multiples,because more of those deals arebeing driven by cash-rich companieswith decent availability of finance. Weare seeing strategic investors talkingsensibly about valuation and the

synergies they are able to achieve in acombination.

Mexicos food and drink sector, forinstance, was the most active consumersector for M&A in 2011. One notabledeal included Heinekens acquisition ofthe beer operations of brewer and softdrinks producer Formento EconomicoMexicano SAB de CV (FEMSA) forUS$710 million.

Despite a growing climate of

uncertainty, M&A activity remains quitestrong in Brazil, says David Bunce, Headof Corporate Finance Latin Americaand Brazil at KPMG in Brazil. Dealsare being done, and in the consumermarkets space, sectors such as food,beverages, supermarkets and shoppingcenters are quite active, Bunce says.

As one of the leading factors drivingM&A activity in these sectors,consolidation can help improveoperating efficiency and profitability

by reducing market fragmentation andincreasing scale. In the grocery space,

weve seen a number of domesticcompanies looking to build, develop,and consolidate their positions, saysJames Murray of KPMG in the UK.There are a number of US playerslooking at the UK market, given thenumber of opportunities that areavailable to establish a platform in the

UK, and use that as a bridgehead towardEurope.

Mark Sievers, an M&A Partner at KPMGin Germany, says theres also a strongneed for consolidation in the Germanretail sector. We have a number ofprivately owned brands in Germany thatlead in particular niches, which are, andwill continue to be, under pressure,Sievers says. Companies run intodifficulties if they are not large enoughto foster economies of scale.

As Russian consumers start to focusmore on modern retail formats, thoseretailers get bigger and they start topress their suppliers for improvedcontract terms, says Shawn McCarthy,an M&A Partner at KPMG in Russia.With growth in the sector, scalematters, and you are starting to seenational retailers getting involved intaking over niche companies, McCarthysays.

Another factor driving consolidation isrising raw materials and commoditycosts. German retailers and food anddrink companies, for instance, arepressured by cost increases in cottonor sugar, while Russian food companiesreport challenges in sourcing rawmaterials like milk, beef, pork, or poultry.David McCorquodale of KPMG in theUK says higher commodity pricesare prompting food retailers to putpressure on manufacturers, which inturn is opening the door to consolidation

among food producers.

In the groceryspace, weveseen a numberof domestic

companieslooking to build,develop,andconsolidatetheirpositions.




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The BRICs and beyondThe emerging BRIC (Brazil, Russia,India and China) economies remainan attractive destination for largercompanies interested in drivinggrowth outside their home markets.Unlike organic growth, which can takeconsiderable time to develop in distantand foreign regions, M&A can provide

a faster, although sometimes moreexpensive, way to enter promising newmarkets.

For an international competitor lookingto expand into Russia, M&A is likely tobe a much more practical option thanpursuing organic growth, both in termsof the time and resources it takes toget established here, says ShawnMcCarthy of KPMG in Russia. Its anattractive market to outside investors Russia represents the largest consumer

market in Europe but its very capital-intensive to build a retail or distributionnetwork from scratch.

Many multinationals are deciding toleverage strong balance sheets andinvest outside of their home marketsinto emerging regions with highergrowth rates. For instance, with stronggrowth prospects, Brazil remains on theagenda of several international groups.There are still quite a few groups inthe consumer space that have looked

at Brazil quite seriously, but have yetto make a move, says David Bunce ofKPMG in Brazil. Based on what wereseeing and the work were currentlyinvolved in, we think we think we willbegin to see international companiesmake that move towards investment inthe next one to two years.

In markets such as Japan or Switzerlandthat have experienced strong currencygrowth, comparatively lower valuationsoutside their home markets allow

them to pursue acquisitions on morefavorable terms. Japanese companieslook at their currency, which isextremely strong, and they say they

have to go overseas, says ThomasWhitson, a Transaction Services Partnerwith KPMG in Japan. Companies thatwant to be bigger are using their strongcurrency to position themselves ingrowth markets such as China, India andthe ASEAN (Association of SoutheastAsian Nations) countries.

Anti-monopoly regulations in Chinainhibit both inbound and domesticM&A activity but deals are still gettingdone. Nestls acquisition of a majoritystake in candy maker Hsu Fu Chi inDecember for a reported US$1.7 billion,for example, surprised a number ofobservers who thought regulatoryapproval would be withheld.

In India, there have been severalmarquee transactions in the past twoyears, although the number of M&Adeals has been falling. In the retail sectorhowever, recent government approval toallow full ownership for single brand retailis expected to stimulate some M&Aactivity, as overseas investors start tobuy out their local joint venture partners.

For a growing number of companies,attractive international targets may notnecessarily be the BRIC countries, butcan also include markets like Turkey orCentral Europe. Those markets have

reasonably strong GDP growth, andlarge European companies with strongbalance sheets think they can get valuein the long term by buying businesses,says Tim Clifford of KPMG in the UK.

In notable transactions, Diageo purchasedTurkish distiller Mey Icki Sanayi ve TicaretAS in August for US$2.1 billion. In anothertransaction, SABMiller announced in lateOctober a US$1.9 billion asset swap withTurkeys Anadolu Efes to create a regionalbeer producer serving Russia, Turkey, the

former Soviet republics, Central Asia andthe Middle East.

Companies are also showing a growinginterest in Africa. In addition to the

Wal-Mart/Massmart transaction, SouthAfrican retail chain Woolworths Holdings,which is active in 10 countries in Africa,signed a joint venture agreement inOctober 2011 with Nigerias Chellarams.John Geel of KPMG in South Africa saidcompanies can expect to see continuedgrowth of large established international

consumer groups moving into the Africancontinent, as well as the expansion intoemerging market territories by SouthAfrican entities.

Botswana is already on the radar forcompanies, as are Nigeria, Mozambique,and other countries that offer high-growthopportunities, Geel says. We thinkcompanies using South Africa as a basewill be able to move into other parts of thecontinent that offer attractive growth.

In Mexico, Victor Esquivel says thereare about 15 to 20 Mexican companieslooking for acquisitions within Mexico,but they are also looking for acquisitionsacross other parts of Latin America asa strategy to consolidate in the region.Other attractive targets for Mexicancompanies are acquisitions in the USwhich can be used to penetrate thelarge Hispanic population and leveragebrand recognition of their products inthat market, Esquivel says. Within thenext two years, we expect to see more

Mexican companies becoming regionalplayers.

Outbound investment from BRICcountries such as China has includedthe buying of prestigious drink orcosmetic brands from countries like

France, and bringing them back to theirhome markets. Were seeing Chinesecompanies starting to come [to Japan]looking for technology and industrialknow-how, says Thomas Whitson.We expect they will eventually be

interested in strong Japanese brandsthat can be helpful to a Chinesecompany that wants to go global.




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Valuations mixedKPMGs M&A leaders report seeinga broad range of deal valuations, withsignificant variation from market tomarket. Valuations are holding up wellin growing or recovering markets, butare decreasing in markets experiencingfinancial uncertainty or turmoil.

In general, M&A valuations aretrending up in the US, says Rob Cobleof KPMG in the US. Theyre not at 2007

levels, but values are up from 2010,which shows a good market. The gapbetween the buyers valuations and thesellers valuations is getting smaller,which tells you that deals are going toget done.

In Poland, recent deals have beenmarked by strong valuations and highmultiples for sellers. In most situations,local companies are valued abovelevels seen in Western Europe. Some

strategic investors from Western Europemay suggest a multiple of six timesEBITDA, for example, but well tell themif they propose a multiple below sevenor 7.5, the seller wont talk to you, saysKrzysztof Klamut of KPMG in Poland.

In other markets, however, valuationsand expectations are moving inopposite directions. On the sell side,companies hoped to retain higher

valuations supported by the higherprofits and margins earlier in the year,but on the buy side, investors didntnecessarily follow that earlier positivetrend, says Mark Sievers of KPMG inGermany. Theres a gap that needs tobe bridged.

As growth has slowed, a huge valuationbarrier has developed in the markettoday, and that barrier is inhibitingM&A, says Nandini Chopra, Executive

Director & Practice Head for Consumerand Retail, Corporate Finance, KPMG inIndia. Sellers have huge expectationsabout values, especially the owners ofsmaller, family-owned businesses.

Julian Parsons of KPMG in France saysthat average valuations have declined20 percent from the beginning ofthe year. In discussions with somecompanies, particularly smaller or

midsize companies that are family-owned or management-owned, we hadadvised them to wait until 2012 to sell,when purchasers financing capabilitieswill be stronger. There are a numberof businesses that have good growthtrends and should command highprices, but 2011 was not a good market,Parsons says.




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Private equityreturningAn important health indicator of theconsumer markets sector can be thewillingness of private equity firms toinvest in the sector. In 2011, private equityinvestment returned to a moderate level,

according to David Simpson of KPMG inthe UK.

Most activity is taking place in the middlemarket, largely because debt financingis more readily available for smallertransactions, says Simpson. To reducerisk, funds today are more willing topurchase a higher quality asset at a higherprice than a medium quality asset at amedium price.

As with strategic investors, private

equity firms say the unpredictability ofthe current environment makes planningand evaluating potential investmentschallenging. Until recently we have notbeen sure whether we are peering overthe edge of a precipice, or whether wevehit the bottom and the market is goingto trundle along for the next three to fiveyears, says Oliver Wyncoll, a partnerwith Langholm Capital. If a qualityasset comes along, they can receiveexceptional pricing because there are justso few of them. If that is not the case,

valuations can plummet quite sharply.

With the tighter availability of funding,investors are cautious, but they are stilllooking to take advantage of opportunities,says Tim Clifford of KPMG in the UK.Weve seen some leading private equityhouses willing to look at deals of a slightlysmaller size than they would have three orfour years ago, he adds.

We are seeing more middle marketdeals because the capital isnt available to

buy bigger companies, says AlexanderWalsh, principal at CapVest Ltd. Its a

challenge to raise debt financing rightnow. That slows the market by affectinginvestors ability to value companies andto obtain the financing to buy them.

Theres still a reasonable level of activityin the lower midmarket that is driven bya number of smaller businesses that, forwhatever reason, may have to sell, saysLangholms Wyncoll. But as you shiftup to the midmarket, the deal flow hasdeclined sharply.

In Sweden, a decline in PE investmentis seen as one of the major factors in thedecline in overall M&A activity. Withthe turmoil in the financial markets, itis difficult for PE firms either to launch

IPOs or to sell assets, says Bjorn Hallinof KPMG in Sweden. It is also lessattractive to invest at the terms thatsellers want, if a company is interestedin buying something.

Similarly, private equity deal-makingactivity within the Asia Pacific cluster excluding Australia, Japan, and SouthKorea has decreased, according to VishalSharma, Corporate Finance Partner withKPMG in Singapore. That may be due toa lack of quality assets within the region,

or it might be due to private equity housesnot finding the right exit for the desiredmultiples.

Jonathan Farnell of KPMG in Norway saysprivate equity activity is increasing amongdeals that were made in the 2005-2007period. There was a wave of acquisitionsin the consumer markets space that arenow entering the exit phase, and over thenext six to 12 months, we expect to see agreat deal of activity as those investmentsare sold, either to other private equity

firms or industrial owners, Farnell says.

Most activityis taking place

in the middlemarket, largelybecause debtfinancingis morereadily availablefor smallertransactions.




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Optimistic outlookDespite the short-term macroeconomicuncertainty and its effects on businessand consumer confidence, KPMGs M&Aleaders interviewed believe a numberof factors including strong corporatefundamentals and balance sheets, pent-up demand for deals, and the availabilityof good targets in consolidating markets

will help M&A activity rebound andgrow in 2012 and 2013.

Were priming the M&A environmenttoday for the next two to three years,says Rob Coble. Some of the consumermarkets sectors will have to consolidateto make sure they are offering a widerange of products for consumers.

Looking ahead, I think we will overcomethis crisis, says Mark Sievers. Part ofthe challenge now lies in determiningwhich companies are truly solid andhealthy, but may be temporarily affectedby external factors.

M&A is likely to increase after thefinancial situation stabilizes becausewe have a clear need for concentrationin retail, restaurants, and some otherconsumption-driven sectors that havebeen affected by this years instability,says Jorge Rioperez of KPMG in Spain.Most of these companies have good

brand names, but do not have criticalmass to expand internationally or thefinancial muscle to grow profitably, andsooner or later, many of them are likely tobe acquired by larger players.

We believe the euro situation willbe addressed, says Bjorn Hallin ofKPMG in Sweden. Confidence willreturn, and we will see the underlyingbusiness development take off...We doexpect to see confidence return to theunderlying market, replacing the general

nervousness of today, but we dont knowif that will take six, 12, or 18 months.

Some of theconsumermarketssectors will haveto consolidatetomake sure they areofferinga widerange of productsfor consumers.




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Country reports

The following section includes detailed interviews with KPMGs

senior M&A professionals in 23 countries. They discuss the

current conditions in their markets, their near-term views on the

underlying developments affecting M&A activity in the consumer

markets sectors and their outlook for M&A activity in the 12-18

months ahead.

Americas

Brazil 16

Canada 18

Mexico 20

US 22

Asia-Pacific

Australia 24

China & Hong Kong 26

India 28

Japan 30

Philippines 32

Singapore 34

Europe, Middle East and Africa

Belgium 36

France 38

Germany 40

Italy 42

Netherlands 44

Norway 46

Poland 48

Russia 50

South Africa 52

Spain 54

Sweden 56

Switzerland 58

UK 60




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Brazil

China

Hong Kong

Japan

India

Philippines

Singapore

Belgium

Netherlands

France

UKGermany

Poland

Sweden

Italy

SwitzerlandSpain

Norway

Russia

South AfricaAustralia

Canada

Mexico

US




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BrazilDespite a growing international climate ofuncertainty, M&A activity remains strong inBrazil. Companies are putting some of theirinvestment plans on hold while they wait to seehow things play out, but its still a reasonablypositive market. Deals are being done, and in the

consumer market space, sectors such as food,drink, supermarkets and shopping centers arequite active.

David Bunce

Head of Corporate Finance/M&ALatin America and BrazilKPMG in Brazil+55 11 3245 [email protected]

Brazil and South America still possess a strong growth dynamic.With a few exceptions, the whole region continues to grow andthe overall outlook remains positive with 2011 GDP growth of2.9 percent, and a forecast of 3.5 percent by the IMF in 2012.

That being said, there was undoubtedly some effect in theM&A market in the third quarter of 2011 coming from the

global financial crisis. Obviously, there is the perception ofgreater uncertainty as several companies some international,but even some local are waiting to see how things settledown before proceeding with their acquisition plans.

Actual Forecast

2011 2012 2013 2014 2015 2016 5-yr growth forecast

GDP (PPP, bn) 2,283 2,414 2,573 2,759 2,937 3,129 37%

Population (m) 192.8 194.7 196.5 198.2 199.8 201.4 4%

Inflation rate 6.6% 5.5% 5.3% 4.9% 4.7% 4.7%

Average corporate tax rate 34.0%

Consumer spending per capita

(constant 2000, US$)

3,122

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Global rank

Consumer confidence index 95 96 112 112 5

2006 2007 2008 2009 2010 2011

Foreign direct investment

(BoP, current US$bn)18.78 34.58 45.06 25.95 48.44 65.50

Sources: GDP, Inflation rate, Population Economist Intelligence Unit; Average corporate tax rate KPMG, Corporate and Indirect Tax Survey 2011;Consumer spending per capita, Foreign direct investment World Bank; Consumer confidence index Nielsen.

Data fact sheet

16 | Brazil


Most of the deals this year have been more in the US$50 millionto US$100 million bracket, rather than the US$2 billion bracket.Weve seen more of a concentration this year in the small tomedium part of the market.

In larger transactions, Brasil Ecodiesel announced its mergerwith soybean, cotton, and corn producer Vanguarda for

US$75 million.

Cargill Inc of the US acquired the tomato products business inBrazil of Unilever Braz for an estimated US$370 million. J&Facquired the cosmetics division of Grupo Bertin, a Sao Paulo-based holding company, for an estimated US$180 million.


19/100

One of the ongoing challenges with the Brazilian market isthat acquisition financing is not as widely or easily available aswould be the case in many parts of the world, for a number ofreasons. Brazilian interest rates are still high for a medium-size company looking to obtain financing, theyre likely going

to pay around 20 percent nominal or 14 percent real annualinterest for unsecured financing, which is a significant cost.

There is still a relatively small market here in terms ofacquisition finance. The private equity (PE) houses active inBrazil more typically do deals with pure equity, which is verydifferent to the model prevalent in North America or Europe.

That does limit, to a degree, the capacity of the Brazilian PEhouses to transact. It also requires a high level of confidencethat theyre going to get the returns they need from that pureequity play as opposed to a leveraged play. Its not uncommonfor the PE houses here to look at 50 or even 100 deals for

every one they actually execute.According to the Latin American Venture Capital Association,61 private equity deals with a total value of US$3.8 billionoccurred in the region in the first half of 2010. In the first halfof 2011, there were another 65 deals, but they were for onlyUS$2.6 billion.

Also with buyers being more strategic this year, were seeingmore or less the same number of deals taking place, but theaverage value has come down.

Business confidence remains strong, but fell during thesecond half of 2011. People are concerned about volatility in

international markets.Consumer confidence remains relatively high, despite risinginflation inflation in 2011 was at 6.6 percent in fact BrazilsCCI rose by more points, from 95 to 112, in 2011, than any ofthe 23 countries covered in this report.

With strong growth prospects, Brazil is on the agenda of a lotof international groups. There are still quite a few groups in theconsumer space that have looked at Brazil quite seriously, buthave yet to make a move. Based on what were seeing andthe work were currently involved in, we think we will beginto see international companies make that move towardsinvestment in the next one to two years.

With strong growth prospects, Brazil is on the

agenda of a lot of international groups.




20/100

CanadaM&A activity in Canada was strong during thefirst half of 2011, fueled by a vibrant economyas well as strong capital and debt markets. TheCanadian economy has shown a greater resiliencythan what weve seen in the United States, so forcompanies interested in M&A, Canada is being

seen as an attractive environment where they canaccess capital easily.

Actual Forecast


GDP (PPP, bn) 1,384 1,442 1,510 1,577 1,646 1,719 24%

Population (m) 34.4 34.7 35.0 35.3 35.6 36.0 5%

Inflation rate 2.9% 1.9% 2.2% 2.3% 2.3% 2.3%




16,006.1

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Global rank


2006 2007 2008 2009 2010 2011Foreign direct investment

(BoP, current US$bn)60.29 117.65 57.88 22.46 23.59 30.26


Data fact sheet

18 | Canada


Peter Hatges

Head of Corporate Finance/M&AKPMG in Canada+1 416 777 [email protected]

Business confidence has also remained very strong this year.People cant avoid watching the volatility embedded in thestock market because of whats happening in Europe, but themood in Canada has remained positive.

The Canadian economy depends, to an extent, on the globaldemand for commodities, which remains strong. As a result,

Canada is seen as a safe haven, and the nation is attractinginternational investment.

Canada also boasts a healthy and vibrant real estate market,so demand for home-related products is high. Unlike in theUnited States, consumer sentiment has remained favorable.The IMF recorded GDP growth of 2.3 percent for 2011 and isprojecting a growth rate of 1.7 percent in 2012.

In notable transactions, US retailer Target acquired Canadianretailer Zellers Inc. for US$1.8 billion in September, and, inAugust, Canadian Tire Corp. acquired sporting goods retailerForzani Group for US$761 million.

If you look at the Canadian Tire transaction, the play therewas sporting goods and apparel. That transaction was

thoughtful and not necessarily obvious. The companies didnthave a lot of overlapping products, but they did have a lotof overlapping buyers. There are a lot of Canadian men whoshop at Canadian Tire.

M&A transactions in Canada today nearly always have asignificant cross-border component. We dont know ofmany companies in Canada that are looking for growth thatdont look to international markets, with the first logical steptypically being approaching the US market.


21/100

Similarly, in the middle market, we are seeing companiespursuing growth, as well as an increasing number ofentrepreneurs looking to sell or monetize their businessesfor transition or estate planning purposes.

Business owners understand there are benefits that come witheconomies of scale not just in having a bigger business, butalso in having a business with access to foreign markets. Scaleis a huge factor in the success of companies going forward.

Right now, there are a number of US private equity firmslooking at Canadian companies for potential acquisitions.Those investors are sitting on cash that has not yet beendeployed, and the number of transactions they haveparticipated in since 2008 have been below normal so they areactively seeking opportunities.

The availability of financing in Canada remains sound.Larger, blue chips are perceived as being able to weather

global economic storms, so they have access to a broaderamount of capital.

For smaller companies, the high-yield market has becomeunpredictable. If a company serves a market thats beenimpacted by the foreign debt crisis, they may need toapproach the unsecured debt market, which carries debtcovenants and high interest.

Another factor driving M&A activity is consolidation in foodproduction and distribution sectors. For example, late last

year, Switzerlands Aryzta bought out its joint venture partner,Tim Hortons Inc., to acquire Maidstone Bakeries for anestimated US$456 million.

In October 2011, Sara Lee announced plans to sell its NorthAmerican foodservice coffee and hot beverage unit toJ.M. Smucker Co. for an estimated US$350 million.

Were also seeing Canadian companies willing to investin production and logistics. If you want to be a world-classsupplier or manufacturer and deliver consumer productsglobally, you have to make sure you have the latest technologythat increases efficiency and reduces reliance on labor inputs.

Looking at the next two or three years, we expect to seecontinued economic growth and deal activity. Canadahas shown consistent economic performance, and thegovernment isnt running a deficit, so those are positivefactors for inbound investment.

When companies look at economic growth from 2008 to2011, its been strong and favorable in Canada, and ourcurrency is on par with the US dollar.

When the impact of the European debt crisis is reduced,and the United States is better able to manage its economyand get its deficit under control, in my opinion that willinspire consumer confidence and lead to resurging marketsin North America.

Canada is seen as a safe haven, andthe nation

is attracting international investment.




22/100

MexicoAfter more than a decade of moderateeconomic growth fueled by favorablepolitical and economic stability, Mexico hasexperienced only a slight downturn in M&Aactivity in 2011.

Actual Forecast


GDP (PPP, bn) 1,939 2,048 2,180 2,305 2,437 2,574 33%

Population (m) 113.8 115.0 116.2 117.5 118.8 120.1 6%

Inflation rate 3.3% 3.8% 3.9% 3.6% 3.5% 3.6%




4,364.8

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Global rank


2006 2007 2008 2009 2010 2011


(BoP, current US$bn)20.05 29.73 26.30 15.33 18.68 17.90


Data fact sheet

20 | Mexico


Victor Esquivel

Partner, Advisory+52 55 5246 [email protected]

Mexicos economy has benefitted from growing regionaland international trade, as well as M&A growth throughoutthe region. Those positive trends, including forecastedGDP growth of between 4 and 5 percent, have decreasedonly slightly in the face of this summers financial marketuncertainty.

Notably, Mexicos food and drink sector was the most activein M&A in 2011 as Heineken acquired the beer operationsof brewer and soft drinks producer Formento EconomicoMexicano SAB de CV (FEMSA) for MXN93.3 billion.

In other soft drink mergers, Embotelladoras Arca SAB de CV(Arca) merged with Grupo Continental SAB de CV (Continental),a soft drink and water producer in a stock swap transactionvalued at MXN27.68 billion; and Coca-Cola Femsa SAB de CV(CC Femsa) agreed to merge with Consorcio La Pureza deBebidas SA de CV for MXN9.762 billion and to acquire GrupoTampico for MXN9.3 billion.

Similarly, Embotelladoras Arca SAB de CV of Mexico acquireda 75 percent interest in Ecuador Bottling Co. Corp., a Quito-based producer of soft drinks, for US$345 million as part of ajoint venture with Grupo Nobis.

The country itself has stable conditions and very good growthprospects in certain areas. Specifically, the consumer marketsector has fueled growth in GDP and the economy, providingsound conditions for transactions. At present, there areabout 15 to 20 Mexican companies that are actively lookingfor acquisitions within the country, but they are also looking

for acquisitions across other parts of Latin America as astrategy to consolidate in the region. Other attractive targetsfor Mexican companies are acquisitions in the US whichcan be used to penetrate the large Hispanic population andleverage brand recognition of their products in that market.Furthermore, we also see Mexican companies looking forexpansion into other international markets.


23/100

The majority of companies in Mexico tend to be family-ownedand run. We have seen trends in M&A from both internationaland domestic companies entering or expanding into Mexicothrough the acquisition of these private companies.

Mexicos leisure services sector, including restaurantchains, is extremely attractive for M&A by local players andamong private equity firms trying to build chains and driveconsolidation in highly fragmented sectors. For medium-sized companies, there is acquisition financing available,but conditions have tightened due to the global economic

environment. Mexico has very low financing and corporatedebt ratios, compared to other developed countries, and thatis a source of financing for acquisitions that has started tobecome more available for transactions.

Macroeconomic conditions are also influencing M&A activityas foreign direct investment into Mexico had dropped over

40 percent from 2008 to 2009, rebounding by 27 percent in2010 and declining again slightly in 2011.

Mexican consumer markets companies present healthygrowth opportunities to potential buyers, and multinationalcorporations have been actively pursuing transactions toexpand their presence in the country.

Within the next two years, we expect to see more Mexicancompanies becoming regional players. Most of thesecompanies have very healthy balance sheets and will

incorporate inorganic growth into other geographic regions aspart of their strategy.

With the opening of local capital markets and the availabilityof financing for domestic companies fast becoming a reality,companies now have the ability to use these funds to supporttheir international expansion.

The consumer market sector has fueled growth

in GDP and the economy,providing soundconditions for transactions.




24/100

USIn the United States, consumer marketscompanies are motivated again by their expansiongoals after hunkering down for the last two or threeyears to cut costs, remain profitable, and keeptheir stock prices up. Now theyre looking for waysto create revenue growth in an economy where

consumer demand and consumer confidenceisnt that strong, so there is likely to be more M&Aactivity in the consumer markets sectors.

The US has a lot of companies that are confident about the deal market andneed to grow both geographically and with respect to new products. Theyneed to expand their customer base.

Companies are looking at increasing their total addressable market, and

theyre doing so both organically and inorganically.

In notable transactions this year, Del Monte Foods Co went private inMarch following a leveraged buyout involving Kohlberg Kravis Roberts &Co LLP, Vestar Capital Partners, and Centerview Partners Holdings LLC.The value of the transaction was US$5.16 billion. Wal-Mart purchased amajority stake in South Africas Massmart for US$2.4 billion.

VF Enterprises acquired footwear and apparel producer TimberlandCompany in September for US$2.2 billion, and Colgate-Palmolive

Rob Coble

National Leader CorporateTransactions and RestructuringKPMG in the US+1 404 222 3014

[email protected]

Actual Forecast


GDP (PPP, bn) 15,006 15,565 16,167 16,866 17,622 18,396 23%

Population (m) 313.2 316.3 319.3 322.4 325.5 325.5 4%

Inflation rate 3.2% 2.1% 2.3% 2.1% 2.2% 2.2%




26,803.3

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Global rank


2006 2007 2008 2009 2010 2011


(BoP, current US$bn)35.46 47.84 21.33 20.08 2.61 210.70


Data fact sheet

22 | United States


John Cummings

Global Business EffectivenessService Line LeaderPrincipal, KPMG in the US+1 214 840 [email protected]


25/100

purchased the Sanex brand of oral and personal care productsfrom Unilever in June for US$950 million.

We are seeing organizations working to shift from beingstrictly product-focused to providing solutions and serviceswhich can involve transactions designed to broaden theirofferings or increase growth.

In general, M&A valuations are trending up. Theyre not at2007 levels, but values are up from 2010, which shows abetter market. The gap between the buyers valuations and

the sellers valuations is getting smaller, which tells you thatdeals are going to get done.

What we need to get through, though, is a muddy economicenvironment where consumer and CEO confidence is low.If we can get through that, because of the favorable debtmarket and pent-up demand for deals, because of cash on thebalance sheet, and because there are good targets that needto be purchased or need a partner to survive, well see a spurin M&A activity.

Most of the major economic indicators are still trendingunfavorably in the United States. GDP growth was reported at1.8 percent by the IMF in 2011, and is projected to remain at

1.8 percent in 2012. Similarly, the Consumer Confidence Indexissued by Neilson was at 83 in December 2011, just a slightimprovement from lows of the 2008 and 2009 recession.

We have clients that have been through a long period ofmaking their business model more efficient, starting whenthe economy declined. Conditions are still far from ideal inmany ways, but were seeing a shift away from efficiency andcost takeout. Organizations today are working more closelyon their overall effectiveness, because you can only get so farwith an efficiency play.

Companies are also placing a broader focus on growth and

were seeing an increased emphasis on improving businessplanning and operational design as well as becoming better atsourcing and procurement.

Tight Financing

In the United States, financing is generally available, butcredit standards remain very tight. The debt markets haventimproved substantially, unless your company has very reliablecash flow. Its still hard to obtain debt due to negative marketconditions and the unpredictability of revenue. Banks mightsay there is a lot of credit availability, but the underwritingstandards are stricter.

Were priming the M&A environment today for a resurgence

in the next two to three years. Some of the consumer marketsectors will have to consolidate to make sure they are offeringa wide range of products for consumers who are now morefinicky with less brand loyalty. Instead, theres a shift to Howcan I get the most value at the best price? so companies willhave to offer new or more products to deliver greater value atcheaper price points.

We think that more consumer market companies will have toconsolidate in the future to provide their customer base withthat value.

Among private equity investors, we had an active first half of2011, and then with the debt ceiling issues in the US, there

was a pause in activity. Private equity is in position to pickback up sometime in the first half of 2012.

We foresee large companies that want to make atransformational change looking at other large companies.And we also expect to see large and middle marketcompanies buying low to middle market companies. If youlook at the most volatile companies in the marketplace now,its the low to middle market companies that are havingtrouble with financing and volatility of their revenue streams,and those are the companies that are going to be targets.Larger companies, just because of their breadth and theirability to scale and de-scale, could weather the storm a lot

better.

Were priming the M&A environment today for

a resurgence in the next two to three years.




26/100

AustraliaThe M&A environment in Australiahas been relatively subdued this year.Although there is a reasonable level ofactivity at the midmarket level, the largerend of the market has been very quiet.

Actual Forecast


GDP (PPP, bn) 920 970 1,022 1,076 1,131 1,190 29%

Population (m) 22.5 22.9 23.2 23.5 23.9 24.2 7%

Inflation rate 3.4% 2.7% 3.1% 2.6% 2.9% 2.8%




N/A

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Global rank


2006 2007 2008 2009 2010 2011


(BoP, current US$bn)26.41 41.08 47.28 27.25 30.58 42.80


Data fact sheet

George Svinos

Asia Pacific Head of RetailKPMG in Australia+61 3 9288 [email protected]

24 | Australia


Peter Turner

Director, M&A AdvisoryKPMG in Australia+61 3 9288 [email protected]

We are seeing volatility in the equity markets and little appetite for initial publicofferings. As such, the majority of M&A activity is occurring in the privatemarket.

The availability of debt financing has improved for quality businesses, such asthose with high-growth prospects, effective barriers to entry, or unique sellingfeatures. While the availability of debt has improved, the amount of leveragebeing offered remains reasonably conservative.

Food and beverage businesses are continuing to attract M&A interest,particularly from private equity and overseas investors. Notable transactions

included Asahi Group Holdings acquisition of New Zealand brewer FlavouredBeverages Group in late September for an estimated US$1.3 billion andtheir acquisition of soft drinks producer P&N Beverages Australia Pty Ltd.in September for US$202 million; SABMillers US$10.15 billion acquisitionof the Australian listed brewing company, Fosters Group Limited; AffinityEquity Partners US$463 million acquisition of New Zealand poultry producer,NZ Poultry Enterprises Ltd, and their US$490 million acquisition of goodsmanufacturer, P&M Quality Smallgoods; and Paine & Partners acquisition of50 percent of fresh fruit and vegetable provider, Costa Group.


27/100

Traditional retailers have had a very challenging 12 monthperiod. Australian retail activity continues to grow, although ata lower rate than historical levels, resulting in dissatisfactionamong retailers. M&A activity in the retail sector has beendriven by a number of distressed sales, such as the sale of

clothing retailer Satch Clothing, and strategic acquisitions,such as the acquisition of high-end fashion retailer, sass &bide, by leading department store Myer.

Sportswear/active wear retailing has been a hot sector thathas seen a number of transactions including the sale of bigbox sportswear retailer Rebel Sport to Super Retail Group,the sale of a minority stake in the specialist sport apparelwholesaler and retailer 2XU to Lazard Private Equity and thepotential sale of specialist sports apparel wholesaler, Skins, bythe Australian private equity firm, Equity Partners.

In contrast to traditional retailers, online retailers have

performed strongly over the last 12 months. Notabletransactions include the acquisition of 40 percent of theleading daily deals company Catchoftheday/Scoopon by TigerGlobal Management and James Packer and the investment inonline fresh grocery home delivery business, Aussie FarmersDirect, by Equity Partners. The M&A outlook for online retailbusinesses continues to look attractive.

Discretionary retail categories continued to be challenged inthe absence of innovation. Zara opened its first two storesin Australia in Sydney and Melbourne to great consumeracceptance, resulting in the two stores being among thestrongest traders in the world on a per-square-meter basis.

Other local retail groups such as Lorna Jane and Cotton Oncontinued to expand overseas. This contrasts with the privateequity-owned Colorado Group, a 600-store chain of clothingand footwear stores, going into administration and failing tofind a buyer before banks completed a debt-for-equity swap.

The non-discretionary retail sector, particularly supermarkets,continues to enjoy good growth, with the Coles Groupcontinuing to improve their offer and closing the gap on themarket leader Woolworths.

The agriculture sector continues to be a target of foreignplayers with a number of acquisitions occurring during theyear. Generally speaking, business and consumer confidence

have both been rather moderate, but have remainedconsistent. Companies and consumers appear not to beexpecting a big downturn, but they are cautious.

The consumer is clearly cautious in the current environment.Despite historically low levels of unemployment, consumer

confidence is at levels not seen since the early days of theglobal financial crisis and the stock market is subdued.

Consumers are also worried that housing prices may fall,resulting in consumer savings at a 20-year high.

Looking at the next few years, our expectation is thatconditions are going to remain tight until global economicfactors start to improve, which is going to drive confidence.In the short term, there are concerns about growth, and weexpect only a slow recovery over the next couple of years.The IMF recorded GDP growth of 1.8 percent for 2011 and isprojecting growth of 3.3 percent in 2012.

Consumer markets companies need to use caution movingforward, as there are certainly opportunities in the market

accompanied by a number of risks.Notwithstanding the economic outlook, the balance sheets ofmany Australian companies remain strong and the private equitysectors remain active. These factors will continue to drive areasonable level of M&A activity in the Australian market.

Food and beverage businesses are continuing

to attract M&A interest, particularly from privateequity and overseas investors.




28/100

China andHong KongWhile multinational companies remain extremelyinterested in China, theyre aware of the difficultiesthat are involved in getting a deal done here.

Ryan Reynoldson

Partner, Transactions &RestructuringKPMG in China+86 (21) 2212 [email protected]

New anti-monopoly regulations are a concern for many ofthe larger established consumer multinationals in China,potentially limiting growth through acquisitions. But whilemany observers expected the regulations to be applied toprotect domestic companies from international competition,the regulators appear to be equally concerned about ensuringfair competition exists among domestic companies as well.

Those concerns aside, deals are still getting done. In onenotable transaction, Nestl acquired a majority stake in

domestic candy maker Hsu Fu Chi International in Decemberof 2011 for a reported US$1.7 billion. That was a large dealwith a high valuation, and a lot of observers were somewhatsurprised Nestl was able to receive regulatory approval forthe transaction. Also in 2011, Nestl acquired domestic foodcompany Yinlu.

For their part, Chinese consumer companies have been moreinterested in pursuing domestic growth than in internationalM&A. We have seen some transactions, primarily among the

Chinese consumer companies that feel there are opportunitiesin Europe to buy brands they can utilize in the Chinesemarketplace. These are typically brands that have fallen out offavor in Europe, but that Chinese companies believe have somecachet and the potential to succeed in the domestic market.

Liquidity for domestic SME companies has become tighterrecently, in part because of domestic efforts to rein ininflation by squeezing credit. At the start of the 2008 globalfinancial crisis, the Chinese government launched a number

of stimulus activities largely delivered through bank lending.The government, concerned with potential bad debt levels,has since raised the banks capital requirements, which hasrestricted new lending.

In many of Chinas consumer sectors, there are a tremendousnumber of smaller companies and markets that are verycompetitive. Because these companies operate with verysmall margins, weaker companies are finding it difficult tosurvive. As a result, we are seeing some consolidation, but

Actual Forecast


GDP (PPP, bn) 11,385 12,626 14,028 15,482 17,075 18,766 65%

Population (m) 1,320 1,328 1,335 1,342 1,349 1,349 2%

Inflation rate 5.6% 3.8% 4.5% 4.3% 3.9% 4.1%

Average corporate tax rate 25%



852.5

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Global rank


2006 2007 2008 2009 2010 2011


(BoP, current US$bn)124.08 160.05 175.15 114.21 185.08 124


Data fact sheet

CHINA

26 | China and Hong Kong



29/100

it is taking place more through attrition than through M&Aactivity.

There is also a concern that if there is a new global financialcrisis in 2012, China will be more impacted this time asthe government appears to have more limited options tostimulate the economy through bank lending. This couldimpact consumer spending in China, and potentially createopportunities in the M&A market.

Private equity houses would like to be more involved in China,but they too encounter challenges to completing deals. Thereare a limited number of companies that are actually for sale orare looking for PE investments, and differences in valuationsbetween buyers and sellers are often difficult to reconcilegiven the high PE ratios in Chinas capital markets.

In addition, international PE houses face competitionfrom the emerging Chinese domestic PE sector, with

domestic PE investors frequently more willing to pay highervaluations than more experienced foreign PE houses may becomfortable with.

12.5Instead of making an acquisition per se in China, PE housesare more likely to make growth capital investments. Theymay acquire a minority stake in a business with hopes thatthe company can grow large enough to support a tradesale or a public listing. In that way, PE investing in China

HONG KONG

Actual Forecast


GDP (PPP, bn) 349 371 399 425 453 483 38%

Population (m) 7.1 7.2 7.2 7.2 7.2 7.3 2%

Inflation rate 5.2% 3.4% 2.9% 3.2% 3.3% 3.3%




19,497.2

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Global rank


2006 2007 2008 2009 2010 2011


(BoP, current US$bn)45.05 54.37 59.61 52.40 68.91 78.40


Data fact sheet

often represents somewhat more of a venture capital-styleapproach to investing.

Business confidence remains sound. Companies in theconsumer sector face the challenge of getting Chineseconsumers to spend more. Since there is less of a socialsafety net in China than in many Western countries,domestic consumers tend to have higher savings rates thanwhat we see in other nations. Government policies aimedat addressing medical and pension gaps and increasingconsumer spending are being implemented. Spendingis increasing, but perhaps not at a rate that multinationalcompanies would like to see.

The economy continues to grow at nearly 9 percent a year,so there are considerable opportunities, but it is also anextremely competitive market. Domestic companies areconcentrating their efforts on growth and maintaining market

share, so there is generally less interest in outbound M&Aactivity than we see in other sectors of Chinas economy(e.g. energy and natural resources).

Looking ahead, we expect to see continued growth inChinas economy overall, but perhaps not as much growth inM&A activity. We also expect to see increased penetrationby multinational consumer companies in the smaller,so-called third and fourth-tier cities that have sizeablepopulations of their own and are emerging as importantconsumer markets and opportunities for growth.

Companies in the consumer sector face the

challenge of getting Chinese consumers tospend more.




30/100

IndiaIn 2011, India witnessed a lower volume oftransactions as compared to 2010. Whilegrowth may have somewhat slowed down,the economy continues to be underpinnedby domestic consumer demand and dealactivity is expected to pick up over the

next few years. However, in the immediateterm, scope for M&A in the consumerspace seems subdued.

Actual Forecast


GDP (PPP, bn) 4,559 4,963 5,482 6,056 6,704 7,420 63%

Population (m) 1,202 1,220 1,238 1,256 1,274 1,292 7%

Inflation rate 8.9% 7.8% 7.9% 7.7% 7.5% 6.7%




492.6

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Global rank


2006 2007 2008 2009 2010 2011


(BoP, current US$bn)20.34 25.48 43.41 35.60 24.16 34


Data fact sheet

Nandini Chopra

Partner & Practice Headfor Consumer and Retail,Corporate FinanceKPMG in India

+91 223 [email protected]

One of the issues in India is that despite slower growth,there remain significant valuation barriers in the market,inhibiting M&A activity. Sellers continue to have unrealisticexpectations about values, especially the owners offamily-owned businesses. This is driven by target scarcitywhich in turn has led to hotly-contested auctions driving up

valuations.There have been a few marquee transactions in the pasttwo years. In late 2010, India witnessed one of the largesttransactions in the consumer goods space when UK-basedhousehold products company, Reckitt Benckiser, acquiredpersonal care products company Paras Pharmaceuticals forUS$722.44 million. The sellers, led by Actis Private Equity,achieved a multiple of nearly 7x sales.

In September 2011, US-based spice producer McCormick& Company, Inc. (McCormick) formed a 85:15 joint venturewith rice maker Kohinoor Foods, for a consideration ofUS$115 million. McCormick had been present in India for awhile but had fairly small operations. They were looking foradditional assets, and through this acquisition, McCormick

was able to add a leading rice brand to its portfolio. Theacquisition will help McCormick expand and enhance itsbusiness in order to strengthen its position in the emergingmarkets and its presence in the Asia-Pacific region.

In June 2011, Jyothy Laboratories (Jyothy) acquired thepersonal and household care brands of Henkel India(Henkel), in a complex situation. Henkels brands willprovide Jyothy with a healthy platform to grow their existinglaundry and household care business.

28 | India



31/100

Another transaction that witnessed significant presscoverage over the last two years was Wockhardts disposalof its infant nutrition business. The French dairy and nutritionmajor, Danone, acquired Wockhardts nutrition businessfor 250 million marking its entry into the growing babyand medical nutrition market in the country. In July 2009,Wockhardt was to sell the same business to US drug majorAbbott Laboratories for a lesser value. The deal, however,was called off following opposition from WockhardtsFCCB holders. We expect other companies to sell non-corebusinesses in a bid to repay their debts.

Currently, companies interested in M&A in India facea number of challenges. High inflation (8.9 percent in2011) has led to significant price increases, reducing bothconsumer and business confidence. Discretionary spendingis also down as consumers face higher mortgage paymentsand food costs.

According to the IMF, GDP growth in 2011 was 7.4 percent,while 2012 GDP growth is forecasted at 7 percent. Asa result of slowing growth, deal cycles are becomingelongated. For instance, potential targets are reportingless favorable financial results leading to deals beingrenegotiated and closures being drawn out. These areresulting in longer deal cycles.

Another challenge for the M&A market is that attractiveassets are scarce in the domestic consumer space. TheIndian market is at present untapped and barring a few,most domestic companies have little or no interest inmarket expansions beyond India. Hence they competeequally fiercely with multinationals when an attractive assetdoes come into play. We expect the trend to continue.

Indian companies with outbound interest are morelikely to invest in other emerging markets with similardemographics. Indian companies believe they understandhow to provide value-driven products at a lower cost, andtypically aim their products towards the economy segment

of the consumer goods market. Markets such as Africa,Latin America, China, Turkey and Indonesia are of interest.

In the retail sector, international players seeking to acquireIndian retailers will find themselves constrained by thefact that in multi-brand retail, no foreign direct investmentis permitted. There have been international lobbyingefforts to permit up to a 49 percent investment, but so farthe government has not been willing to change existingprohibitions.

In single brand retail, the Indian government has justpermitted full ownership it is expected that some of the

joint ventures will witness transaction activity as overseaspartners buy out the local ones.

Despite the challenges, Private Equity (PE) investorsremain active in the Indian market. Most PE funds have

consumer and retail as part of their investment thesis, asthey see demand being underpinned by Indias attractivedemographics. Consumer consumption remains onthe uptick, especially in tier two, three, and four cities investors expect significant growth to come from thesemarkets in the near future.

Private equity investors are also interested in regionalassets. There are a number of companies that have createdsignificant businesses in their regions, and PE funds believethat with additional capital, discipline, and professionalmanagement, these regional players can scale up to achievesuccess on a pan-India level.

The quick service restaurant sector in India has seenconsiderable PE interest. According to the Food FranchisingReport 2011 brought out by Franchise India and FICCI,private equity players are increasingly developing anappetite for the restaurant business (burgers, pizza orspeciality restaurants). As of the second quarter of 2011,the food sector had attracted more than US$100 millioninvestments through PE investors.

Recent examples of PE investment in the food sectorinclude ICICI Ventures US$33 million investment in RJCorps Devyani International (which runs the KFC, Pizza Hutand Costa Coffee chains across the country), India Equity

Partners investment of US$35 million in Sagar Ratna, anethnic Indian food chain, and New Silk Routes investmentof US$75 million in Coffee Day Holdings.

Another prevailing theme within the food services segmentthis year has been the entry of global fast food/coffeechains in India. Prominent among these were the Seattle-headquartered Starbucks partnership with Tata Coffee forsourcing and retail in India. US-based donut and coffeechain, Dunkin Donuts, too, announced its entry in India inFebruary. Under the agreement with its franchisee, JubilantFoodWorks, there will be 500 Dunkin Donuts outlets set upin India over the next 15 years.

M&A outlook

Looking ahead, fast-moving consumer goods companies aregoing to continue to see a considerable degree of interestfrom potential buyers. We expect to see regional companiesbecome larger, and begin to give multinationals a run fortheir money.

The current softness in the M&A pipeline, both amongstrategic and private equity investors, is likely to create alagging effect on M&A deal volume in 2012 and potentially into2013 as well.

We also expect the multi-brand retail sector in India to beopened to international investors. This is expected to bringsignificant international investment into the country and result inmuch needed supply chain disintermediation. Modernizing retailcould also help reduce food prices and settle down inflation.

While Indian consumergoods companies are more likely to invest inother emerging markets with similar demographics, Indian retailerswill continue to focus on the untapped domestic potential.




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JapanAs Japan recovers from the 2011 earthquakeand tsunami, internal consolidation in severalsectors and Japanese companies lookingto expand abroad largely dominate theJapanese M&A market.

Thomas Whitson

Transaction Services PartnerKPMG in Japan+81 (3) 5218 [email protected]

Lost production from the Tohoku disaster, flooding ofJapanese factories in Thailand, an aging population, andpolitica

Mergers Acquisitions Consumer Markets

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