Where are the best acquisition opportunities of 2021?

At Plimsoll, our clients often ask us which industries have the hottest M&A targets and most opportunities. Historically, the answer was simple: those with distressed companies that could be bought cheaply, restructured, and folded into an existing business.  

However, the lasting effects of the last 12-18 months has added nuance to the traditional M&A strategy. Between Brexit and COVID-19, the landscape has changed, the reasons to buy another company have changed, and the urgency to act has amplified.  

As companies look to the future, many are using M&A to bring in new expertise. Rolls Royce’s recent purchase of Siemens electric hybrid air propulsion business shows a company operating in a sector deeply affected by COVID-19 using acquisition to bypass expensive in-house R&D, and position themselves for a greener and, hopefully, more profitable future.  

Elsewhere, companies are looking to diversify their portfolio through acquiring a competitor. Pharma giant AbbVie recently acquired Allergan, the manufacturer of Botox. The timing of the acquisition coincided perfectly with the expiration of the patent on AbbVie’s blockbuster arthritis drug Humira – the worlds largest selling drug. In the aftermath of COVID-19 companies of all sizes need to reassess their dependencies and look to bring in new growth and revenue stream.

Brexit and the resulting trade deal have made it a priority for many to protect existing supply chains, reduce trade friction, and retain unfettered access to the single market. UK packaging giant DS Smith’s takeover of Spanish company Europac ensures seamless trade continues within the EU, but also lowers distribution costs and provides other synergies by acquiring an established business.  

The motivator for many acquisitions is ultimately a quest for growth and profitability. Buying another established company, their customer base, order book, product portfolio, market knowledge and brand identity can be cheaper than starting from scratch. Plimsoll works with clients to find the acquisition targets that meet their needs. We eliminate much of the search work and allow anyone to build a simple, easy to process list of their best options.  

Moving into a brighter 2021/22, these are the three industries that could see heightened consolidation or strategic acquisitions over the next few years: 

The Spirits market 

The UK’s spirits industry could lay claim to all the reasons acquisitions are made. It is a market that has been rocked by the shutdown of pubs and bars during lockdown, innovated with direct to consumer / home-based consumption, and could be caught up in the maelstrom of Brexit trade friction. 

Plimsoll’s latest assessment of the UK market shows a dynamic young market full of innovation. The average directors’ age across the market is a relatively sprightly 43 as new, boutique producers grow alongside the old guard. Many of the established purveyors could look to buy in some of the “cool” of these up coming brands. That is certainly true across the gin market where the average age of directors is just 31.  

Those looking for acquisitions across the spirits market will notice the differences across specific categories. The difference in strategy and focus between gin and whiskey is stark, as shown below. While gin appears to generate lower gross profit, it is a relatively independent market with many companies attractive for takeover, making it fertile hunting ground for those looking for an easy deal. Whiskey, on the other hand, enjoys higher profit but companies are more likely to be part of a wider group: 

	Rated Highly Attractive	High Gross Earnings	Independently Owned
Spirits	16%	11%	72%
Gin	41%	7%	81%
Whiskey	23%	31%	53%

 

Our financial and valuation assessment across the spirits market shows the number of companies with a large difference between current and future value is high. 61% of companies Plimsoll have analysed in the market fall into that category, which is a clear sign that the market is ripe for consolidation in the coming years.  

As providers of a heavily licensed, taxed and regulated commodity, UK spirit producers may look into the EU for M&A opportunities. The drinks sector across the EU could be set for heightened M&A activity with more than 30% of companies on the continent presenting Plimsoll’s classic acquisition characteristics.  For UK spirit companies looking to acquire a competitor across the supply chain, Portugal, Spain and Italy have a large number of companies that appear to be attractive acquisition prospects. 

The Chemicals market 

The chemicals market underwent a period of consolidation in the early 10’s with a few mega-mergers such as the deal between Dupont and Dow Chemicals. However, the market could be set for further consolidation as a reaction to Brexit and as companies look to capitalise on new, future looking opportunities as economic conditions evolve. As If demand for health and hygiene related chemicals softens as the pandemic wanes, will those used in manufacturing and construction boom in the recovery?  

Plimsoll’s latest assessment of the chemicals industry shows a fragmented market with a wealth of acquisition options. Around a quarter of all chemical companies in the UK are vulnerable takeover due to a sizeable difference between their current and future value. Those companies are particularly grouped in the fluoropolymers and solvents specialities, where 41% and 32% of companies have been rated as “Highly Attractive” respectively by Plimsoll.  

Conversely, the paint and dyestuff companies were those with the lowest number of acquisition prospects. For those looking for acquisition opportunities with a sizeable difference between current and future value, the following is a breakdown of specialities across the chemicals industry: 

	Rated Highly Attractive	High Gross Earnings	Independently Owned
Chemical manufacturing	24%	27%	57%
Adhesives & tapes	16%	15%	69%
Aerosols	32%	32%	50%
Polymers	41%	23%	66%
Paint	11%	22%	60%
Masterbatch & compounds	26%	32%	62%
Dyestuffs	13%	28%	46%
Speciality chemicals	24%	39%	44%
Solvents	31%	31%	52%
Soaps	21%	13%	57%

 

British companies involved in the production of polymers and solvents potentially offer the most attractive acquisition opportunities. They have the highest discrepancy between current and future value, have healthy gross margins and a high propensity to be independently owned.  

As another heavily regulated industry, there may be an increased likelihood of companies looking to buy into the EU as a means of navigating new import regulations. For those so inclined, France and Poland represent the highest number of good acquisition opportunities. Across the whole of the single market, 1 in 5 chemical companies is an attractive acquisition prospect according to Plimsoll‘s latest analyses. 

The Baked Goods market 

The retail element of the UK’s love affair with all things bakery has bore the brunt of the pandemic, culminating in Greggs posting its first loss in 36 years. However, that doesn’t mean that the market is not awash with acquisitions opportunities, and as companies look to diversify and eliminate some of their narrow dependencies could we see significant consolidation? 

Latest research from Plimsoll has rated 27% of all the UK’s bakery related companies as being attractive takeover targets. The industry historically returns low gross margins of just 17% and almost three quarters of protagonists across the entire market are independently owned.  

Large plant bakeries in particular look set for a period of consolidation. Almost half of companies across that part of the market are rated as attractive in a Plimsoll Analysis. Pastry and Sandwich making companies also have a higher propensity to acquisition with a third of businesses in both areas similarly ranked. Here is the latest breakdown by speciality: 

	Rated Highly Attractive	High Gross Earnings	Independently Owned
Bakery	27%	13%	77%
Confectionery	26%	25%	66%
Biscuits	26%	19%	74%
Wholesale bakery	27%	18%	77%
Pastry foods	29%	27%	60%
Sandwiches	30%	17%	76%
Bakery ingredients	28%	33%	59%
Large plant bakeries	46%	54%	31%

 

With a third of companies rated as attractive by Plimsoll, low gross margins and two thirds of protagonists independently owned, buying a sandwich making company could represent the easiest acquisition opportunity across the UK bakery market.  

While the bakery market is more domestic facing, there are still opportunities across the channel. Opportunities in the food sector are particularly prevalent in Spain, Portugal, Poland and Belgium. Overall, 1 in 5 food companies across the continent are ripe for takeover, so worth considering for those companies looking to acquire outside of the UK. 

There is potential for a major surge in acquisition activity as companies and markets consolidate in the wake of the pandemic and the consequences of Brexit become increasingly clear. Planning is the key to ensuring you have the best chance of success. Merging two companies together across varying specialities and sometimes different territories can be a massive undertaking. Getting the first steps right will ensure you start on the right footing.  

Plimsoll specializes is helping companies build their acquisition list. We make the process easy, completely bespoke to you and reduce the process from months to minutes. Why not see for yourself? Tell us your size, value, industry of interest and location and we will tell you how many companies meet your criteria free of charge.  

Call 01642 626400 to talk to our team of dedicated search specialists today.