Trumped by Tariffs?
Trump’s tariffs have trickled down to impact middle market companies, and nearer and dearer to our hearts, middle market deals. We have several consumer growth clients that have been impacted by the tariffs, and each company is scrambling to figure out how to respond. For any company that sources a significant portion of its products from China, the tariffs create an immediate hit to EBITDA, which of course often leads to valuation discussions. What happened here, and what is a seller to do?
Back in early July 2018, the U.S. imposed a 25% tariff on $34 billion of Chinese-imported goods, and China immediately responded with tariffs on U.S. exports in the same amount. On August 23rd, the U.S. imposed 25% tariffs on an additional $16 billion of Chinese goods (totaling $50 billion), and to no one’s surprise – China immediately followed suit. On September 24th, the U.S. upped the ante dramatically, imposing a tariff on $200 billion worth of Chinese goods, including many everyday consumer products like electronics and housewares. China again retaliated, slapping tariffs on another $60 billion of American-made products. While a tariff ceasefire has been enacted for the time being, subsequent trade talks between the U.S. and China have not yet resolved the potential trade war. As we approach the March 1st, 2019 trade deal deadline, everyone is watchfully waiting to see whether agreement can be reached.
The specter of tariffs has sent strong shock waves into the middle market, especially for consumer product companies that rely on Chinese suppliers. As a leading consumer investment bank, MHT Partners has seen companies react in different ways, and many have hit the pause button on a potential transaction to let the dust settle and to figure out how to respond. One of our clients took a very proactive approach and immediately started working with vendors to reduce costs through brute-force negotiations, decontenting of products, or vendor consolidation. As a result, they were able to quickly demonstrate that the tariffs would not ultimately have a material impact on EBITDA. Another client is actively looking to qualify vendors in other countries such as Vietnam or Thailand. Other clients responded by raising prices to offset the tariffs and many were able to delay the impact simply by selling down inventory purchased prior to September without re-ordering until an agreement had been reached.
Not all companies have been as fortunate, and many are seeing or will see a significant increase in product costs and an immediate degradation of profitability. For businesses selling into highly competitive channels (i.e., Walmart), raising prices is somewhere between a tough sell and not an option. For companies that are reliant on Chinese suppliers, it is time to re-imagine that supply chain. For those companies that are in a sale process or contemplating one, they must have a crisp answer to the question that is on every buyer’s lips: how will you be impacted by the tariffs, and what are you going to do about it?