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LONDON (Reuters) - Europe's food and consumer goods groups are on the verge of a new wave on acquisition activity as they exploit exposure to emerging markets to protect themselves from the looming downturn.
M&A activity in the consumer goods industry normally follows the economic cycle but Thomson Reuters data shows that this link could be breaking, with the sector's share of total M&A rising over the last year or so.
As the global economy stands on the edge of a new recession, this industry is distinguished by low debt and an increased presence in fast-growing emerging markets that will buffer it against dwindling revenues in mature markets.
The companies are targeting areas like baby foods, haircare and skincare for expansion.
Groups like Nestle NESN.VX, Unilever (ULVR.L) (UNc.AS), Danone (DANO.PA), Reckitt Benckiser (RB.L) and Henkel (HNKG_p.DE) are gearing up for deals, and they see less pressure on their businesses as commodity price pressures ease.
"The pace of M&A is set to accelerate with these consumer goods companies better placed than in 2008, but the challenge is to find targets with good brands and if possible good exposure to emerging markets," said one banker working in the sector.
These groups, due to their "defensive" nature in downturns and low debts, are seen better placed to do deals than those in many other industry sectors, as debt and recession worries pre-occupy European and North American stock markets.
With debt now a relative non-issue, bankers say the focus will be on growth, fueled by a concern that the global economy is entering a long period of stagnation.
"Those consumer companies which are cash-rich and growth-deprived are likely to be able and willing to pay up for attractive targets," said another industry banker.
Some of these groups, like Danone and Henkel, entered the 2008 slowdown with hefty debts after big recent deals and when times got tough acquisitions for them were off the agenda. But now balance sheets are repaired and they are ready to move.
The worst performing consumer goods stocks after the 2008 downturn were brewers like Anheuser-Busch InBev (ABI.BR), Heineken (HEIN.AS) and Carlsberg (CARLb.CO) due to high debts taken on from previous big deals, while Nestle and Reckitt saw smaller falls as they had made more modest acquisitions.
Unilever, the Anglo-Dutch maker of Dove soap and Lipton tea, is back on the acquisition trail, and Goldman Sachs analysts suggest it may well look at Colgate-Palmolive (CL.N), Beiersdorf (BEIG.DE), Japan's Shiseido (4911.T) which has good exposure to the Chinese skincare market, and Brazilian haircare and cosmetics groups Hypermarcas (HYPE3.SA) and Natura (NATU3.SA).
Acquisitions will be a key part of Unilever's target to double its annual turnover to over 80 billion euros in the coming years as it aims for 75 percent of its turnover from emerging markets by 2020 from around 55 percent currently.
Analysts say with 15-20 percent of this planned doubling of sales likely to come from M&A then Unilever could be spending up to $18 billion on acquisitions, and will follow deals to buy TIGI haircare in 2009 and then Sara Lee's personal care business and Alberto Culver in 2010.
The world's biggest food group Nestle, maker of Nescafe coffee and KitKat chocolate bars, is stepping up its focus on bolt-on acquisitions as its debt fell to 14.5 billion Swiss francs by end-June compared to 29.6 billion a year ago, due largely to the sale of its Alcon eyecare business in 2010.
With lower debts, an AAA credit rating and share buybacks on hold, Nestle has plenty of scope for deals and has been linked to a bid for Pfizer's (PFE.N) Wyeth baby formula business if it eventually comes up for sale, the larger Mead Johnson Nutrition MJN.N or Russian juices and baby foods group Progress.
French food rival Danone is also gearing up for acquisitions after paying down debt since its last big deal to buy baby food maker Numico in 2007 for 12.3 billion eruos. The Paris-based group is number two in the world of baby food to Nestle and is keen to expand here, especially in emerging markets.
Its Chief Financial Officer Pierre-Andre Terisse has said it is looking to enter the Mexican baby food market and wants to expand in six mainly emerging markets currently growing at over 10 percent, namely Mexico, Russia, Indonesia, China, Brazil and the United States. Danone has also been linked with Wyeth.
For Reckitt, the focus is on its fast-growing health and personal care business after buying Boots healthcare in 2006, cough remedy group Adams in 2008 and condoms to footcare group SSL in 2010, and this area now accounts for a quarter of sales.
Analysts say the group is focused on this area to supplement its slower-growing dishwash, fabric and surface care businesses, but bankers have not completely ruled out the chance of a linkup with Colgate, which was widely rumored in late 2009.
Henkel has been paying down debt since its acquisition of Akzo Nobel's adhesives and electronics material business for 3.7 billion euros in 2008, and in May this year rating agencies upgraded the group's credit to its targeted single A rating.
This may give the group, still controlled by the Henkel family, scope to look at add-on deals such as Right Guard deodorants which it bought in 2006, and the U.S.-based detergent and soaps group Dial purchased in 2004, analysts said.
Fellow German group Beiersdorf has the financial means to do deals of up to 5 billion euros to add to its current brands like Nivea and also address its heavy dependence on mature European markets for 90 percent of its profits, they added.
Maxingvest, the vehicle through which the Herz family owns just over 50 percent of Beiersdorf, has said its investment is a long-term one, but if ever the family changed its mind then analysts and bankers say the Hamburg-based group would likely be of interest to Procter & Gamble (PG.N), Unilever or Colgate.
Reporting by David Jones; Editing by Chris Wickham and Hans-Juergen Peters