Dealmaker’s Spotlight: Evercore
Datasite recently spoke with Alexander Asher, Vice President, Consumer-Retail Team at Evercore, to hear his thoughts and insights on market conditions, trends, and technology.
Evercore is a premier global independent investment advisory firm. Founded in 1995, the firm has advised on over US$4.7 trn M&A and restructuring transactions. Headquartered in New York, it has 17 advisory offices in 11 countries across the world.
Over the past three years, how have your team and the clients you served coped?
Alexander Asher (AA): The past three years have been very interesting for us: we started a dedicated Consumer-Retail team for Evercore in Europe in summer 2019, and so we were just getting our feet under then desk when the pandemic came along. Our business is centered around two key planks: one is working with the large-cap global Consumer-Retail names that are based in Europe, alongside our US colleagues, and the other is focused on our local markets, whether mid-cap incumbents or fast-growing disrupters.
It goes without saying that while plenty of companies benefited from COVID, many also found it difficult, and so we had a variety of engagements. Some were towards the restructuring end of things – companies that were over-leveraged going into COVID needing to find solutions to navigate the pandemic. In both of those environments, one of the critical points of discussion concerned what should be considered normalized performance for businesses and so how to price them.
Now, as we emerge from COVID, even in market conditions that are challenging in a number of ways, we’re continuing to see really strong engagement with clients, both on the large-cap side where we’ve had a number of exciting assignments, and also with fast-growing disrupters whose ambitions extend well beyond current market conditions to answer as yet unmet consumer needs.
How do the cost increases in this post-COVID inflationary environment impact the various sectors that you cover?
AA: I think you need to step back and think about how the last few years have impacted clients in our industry. There have essentially been three distinct phases. First, you had the initial period of reaction to lockdowns where businesses were very introspective, trying to understand the nature of the situation, asking themselves questions such as ‘Is this a short-term blip, or something greater? What does it mean for our businesses?’
Then you had an interim situation where, for consumer companies, the situation on the demand-side was largely normal, notwithstanding residual work from home and COVID-related precautions, with the threat of inflation still a matter of debate. Finally, we’re seeing further changes since February with the invasion of Ukraine on the one hand, and the removal of remaining COVID precautions on the other.
An amount of the inflation we’re experiencing relates to the amount of money printed during the first and second stages of the pandemic. This has been exacerbated by the supply chain disruption initially caused by the pandemic and then increased in a sustained fashion by the war in Ukraine. In particular, this has caused rising input costs both on the energy side and on the food side, which relate to sanctions on Russian hydrocarbon exports, as well as to Ukraine’s important position in the global food supply.
Most of the consumer majors have been successful at passing through costs to their clients or customers. Nonetheless, there has been some pretty well-publicized resistance from retailers. For instance, Tesco sought to leverage their market-leading position to resist price increases from the likes of Kraft Heinz for Heinz Ketchup and Mars for Whiskas pet food, both of which are ‘must stocks’ for any food retailer. This generated some positive press for Tesco, but in the end they had little choice but to accept price increases.
However, what you have seen, of course, is that volumes on branded products are generally falling as consumers trade down to private label equivalents or cheaper equivalents. For food retailers in particular private label is good news, as that’s a higher margin product for them.
What have been the biggest benefits you have seen from technology? Have you seen a significant change in gears from clients as well?
AA: Digitalization means that companies can know their customers better and are able to make more data-driven business decisions. This isn’t news. So, the question is, who benefits most? The orthodoxy back in 2020 was that e-commerce was the big winner from COVID: valuations of names like ASOS and Boohoo were sky-high. However, if you look at where they trade today versus at the end of 2019, they’re down 70% to 80%. As you know, they’ve had their lunch eaten by Shein and other such players, reflecting that although those incumbents did have a lot of data on their customers, they had not been able to translate that into customer loyalty to their brands.
Compare that with digitally-native brands like Gymshark or Castore, which are continuing to grow at pace. They have very strong brands, and are opening physical stores, in order to have more touch points with their customers. I think this is a very interesting shift – that while capturing as much customer data as possible is critical to a business, it’s also critical to build connections with your customers by allowing them to interact with your brand in the physical world. So, an omnichannel strategy is vital to building your brand.
Looking at our team, leveraging technology has brought about a lot of efficiency in our day-to-day work. There have been the obvious benefits of Teams and Zoom enabling working from home and more flexible working practices. Clearly, traveling to build relationships, on deals, and more generally, is important and will continue to be so. However, it’s not an efficient use of time (to say nothing of cost and environmental considerations) to have people traveling to conduct every last due diligence session in person, when many can be done remotely in a perfectly productive fashion. Then there are products like Datasite Outreach, which really streamlines a lot of the administrative processes in doing deals and enables our teams to focus on more productive aspects of dealmaking, but also allows them to juggle more work streams at the same time.
How are rate rises and economic headwinds impacting the sector?
AA: Diminished levels of disposable income will limit discretionary spending and see customers trading down on staples. That is already evident in many companies’ Q2 reporting and the expectation is that it’s only going to get worse over the coming months. It’s interesting that the luxury sector has so far been pretty well insulated. The tone of the LVMH results is quite different from most of the rest of CPG and retail.
In terms of rate rises, there’s a secondary effect in terms of funding markets. It’s both expensive and challenging, even for high-quality credits, to raise debt capital, with banks showing limited appetite to underwrite further issuance. This has been shown, for instance, by the Boots sale process earlier this year which foundered as prospective buyers failed to secure financing, and by the first test of the leveraged finance market post-summer – the Citrix LBO financing – which has demonstrated the continued weakness of the market.
As a result of these issues, how are M&A strategies changing?
AA: It means that very large cash deals are off the table for the time being because of these financing challenges. M&A is always going to be an important strategic tool for corporates, so they will continue to look at deals that are accretive to growth and/or profitability. Increasingly, you’re seeing M&A used as a tool to achieve other strategic goals, whether those be ESG-related or supply chain security.
The importance of the latter has been a big learning for a lot of businesses over the last few years. The weakness of globalized just-in-time supply chains has been amply shown by the impacts of the pandemic, the war in Ukraine, and the Ever Given blocking the Suez Canal.
In the short term, clearly, the M&A market remains open, but the sizes of deals are going to be smaller than in the recent past, and there’s going to be a focus on quality.
How have valuations in the consumer sector been affected in the short and medium term, and how is that impacting M&A deals?
AA: In the public markets, falls in valuations have reflected diminished earnings expectations more than a substantial reduction in forward valuation multiples, especially in consumer staples where the next-twelve-month EBITDA valuations compare pretty favorably with the 10-year average, while the broader FTSE 100, for instance, is below its 10-year average.
In the M&A arena, a similar situation applies, where precedent valuation multiples are still valid, however, the challenge – as mentioned earlier – is about what earnings number to apply those multiples to. Beyond that, the other key limiting factors are availability of funding and strength of conviction on the commercial rationale for a deal.
And what about the second half of this year? Are you bullish, bearish, or in the middle?
I’m a natural optimist, but it’s tough to be optimistic right now. I think the best-case scenario is that we are going to have a very tough winter and probably a very tough spring as energy is used as a geopolitical tool, regardless of whatever direction the Ukraine war takes.
Likewise, food costs going into the spring will be impacted by the challenges experienced in getting grain out of Ukraine, as well as reported challenges regarding harvests in the US. So, I think we’re in for a prolonged period of difficulty.
The most optimistic I can be is to say that companies always need top-quality advice, never more so than in times of difficulty. Evercore’s Capital Markets Advisory, Shareholder Advisory, and Evercore ISI US equities and research businesses together enable us to provide cutting-edge market insights to our clients across the full breadth of corporate finance situations. It is very exciting to be part of a team and collaborative platform that enable us to stay close to our clients through this period and help them to navigate it successfully.
This interview was conducted by Frazer Campbell, Senior Sales Director at Datasite. Datasite is a leading SaaS provider for the M&A industry, empowering M&A professionals around the world with the tools they need to succeed across the entire deal lifecycle. For more information, visit www.datasite.com.