Expect less froth and lower valuations on the mergers and acquisitions front in 2016.

Tighter credit markets and a rise in smaller — but riskier — firms with a higher degree of volatile cash flow help to bring down the froth, although deal volumes for large but low risk businesses are expected to stay at 2015 levels. The return to a more rational market creates better balance between buyer and seller, along with more reasonable deal values for higher-risk acquisitions.

Those are some of the conclusions in an A.T. Kearney report, “Has the Consumer Retail M&A Market Lost Its Froth?” The report’s conclusions are based on a 10-year analysis of retail transactions — including those in the food industry — and interviews with c-level retail executives.

The report noted that with $365 billion in transactions, 2015 saw the highest dollar value in deals in the consumer-retail sectors since 2008. Bahige El-Rayes, principal in A.T. Kearney’s consumer and retail practice and a coauthor of the report, said the expectation is that 2016 will be a bullish year and will hit 2015’s $365 billion in deal value. “We are expecting megadeals, so long as they are investment grade or higher as investment grade deals tend to be bigger,” he said.

Those megadeals also typically are transactions involving strategic buyers, since their investment grade rating gives them access to better credit terms so their cost of capital is lower. Plus, access to cheaper debt and the ability to extract synergies allows them to pay the higher multiple.

In contrast, credit markets are what investors look at to drive M&A valuations and deals. And credit tightening cycles, so long as low-interest rates continue, are driven by the commodity market, such as low crude oil prices; weak global equity markets, and uncertainty.

“Private equity investors historically look at riskier companies to justify the higher returns they try to reach. I think they will have a harder time to get deals done. Finding deals is not the problem for them. It’s finding deals with the valuations they like that is the problem,” El-Rayes said.

Because financial sponsors still have a record amount of dry powder, the deals they seek could involve the so-called roll-up and bolt-on to complement the assets already in their portfolios.

That split in opportunities available to strategic and financial buyers will result in a bifurcated M&A market, El-Rayes said. That means that better companies could see slightly higher valuations, with strategic buyers outbidding their financial counterpart. The smaller firms with riskier balance sheets could see valuations head lower, both as a function of the balance sheet risk but also because financial sponsors will be offering less since they can’t put as much leverage into the deal.

With some of that froth heading south, there are other implications for the M&A market. Some of the better firms might want to hold off on a sale until the credit and equity markets improve and valuations begin to climb again. That could give an advantage to the better firms that actually do go to market — with less competition on the selling side, qualified buyers will be targeting the same opportunities, and that could push valuations higher. That translates to deal values going up, but fewer deals getting done, a conclusion that coincides with the data found by A.T. Kearney regarding the M&A activity level for 2015.

The study said that consolidation will continue to drive M&A activity, mostly because mature sectors such as retail have a harder time finding growth. Acquisitions can be the answer to top-line growth, such as the Hudson’s Bay purchase of Gilt.com, which has the added benefits of broadening its e-commerce capabilities and expanding its reach to Millennials, the report said.

Further, Asian investors are expected to head West, eyeing potential acquisition targets in the U.S. and Europe. It’s a way for them to balance out the volatility and uncertainty in the home market, El-Rayes said.

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