NEW YORK--(BUSINESS WIRE)--High levels of market liquidity, extremely low interest rates, and very strong balance sheets are all catalysts for potential increases in merger and acquisition (M&A) activity in the U.S. and EMEA consumer products sector in 2015, according to Fitch Ratings. We believe it has become a sellers' market, as multiples are at very high levels.
Many issuers have generally spent the years since the credit crisis pruning their portfolios and re-orienting towards growth categories and regions given the high household penetration in their home markets. We expect that trend to continue.
As an example, this was a boon to Unilever as it disposed of its food brands. In fact, the largest participant in the industry (P&G) is selling brands at an excellent time with its sizable salon professional business rumored to be up for sale. We believe that Henkel or Unilever could be strategic acquirers for that or other personal care brands as they have both expressed an interest in increasing their exposure to faster growing personal care categories.
How issuers balance growth via acquisition while maintaining good credit protection measures will be key to maintaining current ratings. Fitch expects that any transformative acquisition could negatively affect ratings. However, in a stable sector, definitive plans to achieve pre-acquisition metrics in one or two years may stave off negative rating actions.
The sector's high margins and strong free cash flow generation provide flexibility to manage capital structures and credit metrics appropriate for current ratings. Both the Rating and Sector Outlooks is Stable for 2015.
We expect margin and cash flow growth will be enhanced in 2015. Generally supportive are dwindling restructuring expenses related to earlier large scale programs whose costs were mainly front-end loaded. Additionally, there should be limited drains on cash flow from pension contributions given strong equity market results. More modest increases in commodities, particularly oil derivatives, should also bolster margins compared with last year.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research: 2015 Outlook: EMEA and U.S. Consumer Products (Good Year for Margins and Cash Flows)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=839708
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