Estimated reading time: 4 minutes
The article in brief:
- The acquisition of storied brands is one of the driving forces in the M&A market.
- Determining a fair price to pay for a brand and valuing it requires careful analysis.
- Brands are intangible assets often a collection of the trademark, trade name, copyright, and secret formulas; intangibles can also include unique shapes, colors, size, and tastes, which adds to valuation complexities.
- Potential acquirers of brand assets need to evaluate them on several qualitative and quantitative factors. This process can help provide a road map for post-deal value optimization and value enhancement.
Consumer product brands are usually a staple of the M&A market.
Notwithstanding the global pandemic, the last year has seen several significant transactions involving global consumer product companies, including:
- PepsiCo’s (NASDAQ: PEP) $3.85 billion purchase of Rockstar Energy,
- Kraft Heinz’s (NASDAQ: KHC) $3.2 billion sale of a slice of its leading cheese brands to Groupe Lactalis,
- Avon’s $2 billion sale to Natura & Co. (NYSE: NTCO) in a stock deal, and
- Anheuser-Busch InBev’s (NYSE: BUD) sale of Australia’s Carlton & United Breweries to Japan’s Asahi Group Holdings for a cool $11 billion.
Strengthening stock markets and significant private equity dry powder levels promise more deal activity as the economy re-opens. Companies anticipating an improving economy may be opportunistic in acquiring well-known brands at attractive prices, where values may still be reduced due to depressed earnings, reduced multiples, or general market uncertainty.
For strategic buyers, acquisition rationales may include some combination of strengthening product portfolios, growing market share, entering new markets, improving sourcing, or manufacturing capabilities. Given the strength, importance, and expected use of the brands, many of the acquired brands will have an indefinite life for accounting purposes. As such, many transactions will be accretive to earnings regardless of how the deal is financed – another powerful incentive to be acquisitive.
While opportunities abound, determining whether or not to add a brand to your product portfolio requires careful consideration. We’ll review the methods and approaches commonly used to value consumer product brands in the context of an M&A transaction.
Global Capabilities. Local Expertise.
Multinational firms pursuing M&A strategies face international financial & tax reporting requirements.
Valuing Companies’ Most Significant Assets
For many consumer product companies, their brands are the most significant asset. A strong brand influences the choices of customers and can lead to loyal and durable followers. Brand values can account for three-quarters or more of the purchase price. Indeed, as many companies have scaled back the value they assign customer relationships in their distribution channels (after some well-publicized cases of overvaluation of those assets in the CPG space), VRC has observed brand generally becoming a more significant component of overall enterprise value.
Unlike fixed assets such as inventory or PP&E, a brand is an intangible asset whose value is often more nebulous. The value drivers of a brand, such as market perception and customer loyalty, can be difficult to estimate and even more difficult to translate into value. In valuing brands, cost- and market-based approaches are generally less effective methods. Because brand development is often unpredictable and difficult to replicate, a cost approach (for example, one utilizing replacement cost estimates) is subjective and not necessarily reflective of the asset’s future value. Market transactions involving truly comparable brands may be rare, making specific comparable market metrics on brands largely unreliable. As such, brands are often best valued using an income or cash flow-based approach.
To value a brand, the valuer must consider a variety of quantitative and qualitative characteristics. The value is often a reflection of the current and/or future economic benefits derived from brand ownership.
Key quantitative characteristics to consider include:
- The rate of historical and projected growth
- Market share
- Pricing premiums related to the brand
- Advertising and promotion expenses required to maintain brand value
Key qualitative characteristics to consider include:
- History, heritage, and longevity of the brand
- Perceived quality
- Brand recognition in the market
- Potential to extend the brand into adjacent areas
- Ability to preserve brand integrity
- Brand’s breadth of distribution
Some brands are valued using the relief from royalty method. This method is based on the theory that if the company did not own the brand, it could license it from a third party in exchange for a royalty. Royalties are generally calculated by applying a royalty rate to revenue. The hypothetical royalty fee is then tax-adjusted, projected over the brand’s remaining economic life, and discounted to present value to arrive at the brand value.
The excess earnings method considers the cash flow generated by a brand net of taxes and charges for the use of contributory assets. Cash flows are projected over the expected economic life of the brand and discounted to present value.
What's In a Name?
Any brand valuation presents a strategic planning opportunity to understand more about what drives value to the underlying company.
Uncertainty Around Accounting Treatment
The acquired brands’ fair value will be reflected on the acquirer’s balance sheet in a business combination. This value becomes the book value going forward and is either amortized over the asset’s useful life – if determined to have a finite life – or tested for impairment – if determined to have an indefinite life.
ASC 350 provides guidance for determining useful life. Factors to be considered include legal rights, regulatory or contractual provisions or limitations, external economic factors, and the required maintenance. (It should be noted in this context that financial accounting standards setters appear to be gravitating toward an approach that calls for the amortization of all intangible assets, though details have not been finalized.)
Evaluating a Prospective Purchase
In evaluating the acquisition of a brand or collection of brands, the acquiring company should consider the following:
- Price – Is the potential purchase price reasonable?
- Brand Portfolio – Is the acquisition complementary to the existing brand portfolio? Historically, successful deals seem to bring together like products or allow a company to divest assets to focus on its core brand portfolio. For example, as part of InBev’s 2008 acquisition of Anheuser Busch, it acquired the rights to the Budweiser brand.
- Synergies – Does the acquisition result in synergies that can boost sales and reduce costs? Synergies can result from cross-selling opportunities, added distribution capabilities, sourcing or manufacturing advantages, or exposure to new customers. Can the acquirer expand the brand to new products and reduce barriers to entry to establish the new product lines? Depending on the industry and the brand, some successful deals have been accretive to earnings in the first year due to the synergies achieved in the transaction.
- Strength of the Brand – How strong is the brand? A brand with a significant market share can become even stronger. In the case of InBev’s 2008 purchase of Anheuser Busch, Anheuser Busch had more than a 50% market share. Notice the name change – InBev became Anheuser Busch InBev.
- Financing – How will the deal be financed? Properly structuring an acquisition can have a meaningful impact on the economics and, ultimately, the transaction’s success.
- Taxes – Are there tax benefits? This could be a good time for buyers to take advantage of the net operating losses of businesses they’re considering acquiring.
- Life – Will the brands be determined to have an indefinite life for accounting purposes, or will the brands have a finite life and need to be amortized?
Maximizing Brand Value
Before making a purchase, acquirers should make sure a plan is in place to maximize the value of the acquired brand, including:
- A careful financial forecast of the earnings that can be derived from the newly acquired brand,
- A projection of potential demand for the product and market share growth,
- A competitive analysis of similar brands, and
- Projections for any brand extensions or new market strategies.
This analysis is part and parcel of any thorough brand value calculation. But it is also essential as the acquiring company will define the roadmap for the strategic use of the acquired brand.
Questions About International Business Combinations?
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