The big news at the end of last week was the confirmation that China’s Hony Capital had acquired Pizza Express – the £900m deal makes this the largest transaction to take place in the restaurant sector for five years.
This is the latest in a string of high profile Consumer sector deals that Chinese companies have completed since 2012; the others being Sanpower’s purchase of an 89% stake in House of Fraser; the £274m acquisition of luxury yacht manufacturer Sunseeker International by Dalian Wanda Group; and the £700m purchase of a 60% stake in Weetabix by Bright Food Group.
Rise of the Chinese middle class
The main reason behind Chinese appetite for heavyweight deals is the structural change in the Chinese economy. The country’s focus is shifting from a manufacturing-led to a consumption-driven economy underpinned by rapid urbanisation and the simultaneous swelling of an affluent middle class. The Chinese have rapidly rising levels of disposable income, are more refined in their purchasing habits, willing to pay more for premium products (which they trust) and have an increasing penchant for international brands.
Implications for UK lower mid-market M&A
But what does this mean for the UK lower mid-market Consumer sector M&A? Will the Chinese look to step down a rung or two of the ladder and become serious participants in the market at the sub-£150m enterprise value level?
It is not immediately obvious why the Chinese will become more active participants in the lower UK mid-market in the short-term, explains Baoshan Bao of Livingstone Beijing. Their fundamental rationale for acquiring UK companies is to exploit the brand, know-how or manufacturing expertise in their own domestic market – all of which leads them to gravitate towards pursuing ‘trophy’ branded assets with a global profile. The scale of the opportunity in the Chinese market is evident from research conducted by McKinsey, which estimates Chinese upper middle class consumers (those with a household income of $17,000 – $37,000) to account for 54% of urban households by 2020, up from their current level of 20%.
So while we recognise that any UK business owner would welcome Chinese interest in their sale process, we do not yet see the Chinese supporting smaller UK Consumer businesses on their growth curve in the UK domestic market, particularly if their international brand profile is currently either fledgling or non-existent. With such vast opportunity available in their homeland, it will be critical mass and a well-established global audience which will capture the attention of Chinese acquirers considering UK assets.
Despite this, we expect further high profile deals in the Consumer sector (such as the upcoming United Biscuits auction) to be well represented by from Chinese and other international acquirers – which fit the criteria mentioned above. Whilst it is always good to see British assets being in such high demand from international acquirers, this interest is likely to be limited to the very biggest of ‘trophy’ assets for the time being.