Consumer sector and megadeals prop up deal market as Q1 Index falls

As we round off the first quarter of 2017, political turbulence and economic uncertainty are becoming the new normal for dealmakers. And while there has been a dip in the M&A Index compared to the past quarter, it has not been as steep as many expected thanks to a rash of megadeals in the consumer and energy sectors.

The triggering of Article 50, uncertainty around the Trump administration and bruising electoral campaigns in the EU have coalesced to exert downward pressure on the M&A market in Q1 2017. There were 1,238 cross-border deals worth US$331.2bn – a fall of 18% in volume but only 3% down in value compared with Q1 2016.
With the drop in volume, it is unsurprising that the Baker McKenzie Cross-Border M&A Index slipped to 218 in the first quarter – down 17% on Q4 2016 and 9% year on year. However, with the exception of 2016, the Index for Q1 2017 is well above all other Q1 figures.
While political issues have provided shaky foundations, it is deal-making fundamentals that have caused the Index to slip. A number of high-profile deals have failed or look doubtful, including Kraft’s move for Unilever and the merger between the Deutsche Boerse and the London Stock Exchange. Additionally, there has been a decline in mid-market deals, and outbound activity from China has fallen significantly as the government enforces stricter cross-border deal regulations.
However, despite the challenges, there have been a number of bright spots in the first quarter. On the sector side, consumer leads the way with 142 deals worth US$113bn – fast-moving consumer goods were highlighted as the sector to watch in the last edition of the Index. The biggest deal of the quarter saw UK-based British American Tobacco agree to acquire the remaining 57.8% stake in US rival Reynolds American for US$60.7bn. Meanwhile, in the luxury goods sub-sector, French brand Essilor International announced a merger with Italian eyewear specialists Luxottica Group worth US$25.4bn. Energy and utilities and pharma were the second and third highest sectors in terms of value, contributing US$51bn and US$49bn respectively.
While China’s retreat from the deal table and the French election make the outlook for Q2 unpredictable, corporate confidence and a rising deal value average – US$537m, up 15% on Q4 2016 – mean that M&A value should continue to be strong, even if volume remains low.