Food and drink businesses have been on the frontline of supply chain disruption, inflation and rising interest rates. These challenges have taken a toll on M&A in the sector – but changed strategies are driving trade and private equity buyers. Nicholas Neveling reports.
Few industries have been as directly impacted by inflation, rising interest rates, labour shortages and supply chain dislocation as the food and drinks sector. In April, government figures reported that the number of corporate insolvencies in the food production industry had nearly tripled in the year to February in England and Wales. Beverage manufacturing insolvencies, meanwhile, were up 136%. Across the two sectors, these figures represented the biggest increases in insolvencies among major industries – materially higher than the 43% increase across the whole economy.
Russia’s invasion of key grain exporter Ukraine, poor weather and post-Brexit trade friction have combined to push up food and ingredients prices at the fastest pace in 45 years, according to Office for National Statistics figures, squeezing food and drink company profitability and pushing operators across the sector into stress or distress.
“Food and drink companies are navigating a very challenging set of circumstances,” says Phil Lane, financial advisory and consumer M&A lead partner at Deloitte. “Inflation has been especially difficult for them to deal with. There is an inflationary lag in the supply chain and many producers will be tied in to fixed price supply contracts, so it’s not easy for them to pass on costs.”
The multiple headwinds facing the sector have inevitably weighed on food and drink company M&A activity. Global food and beverage M&A value almost halved in 2022, sliding from $101.2bn in 2021 to $54.1bn, according to LSEG/Refinitiv figures. Food and beverage deals with UK involvement, meanwhile, saw M&A value slide from $16.2bn to $5bn over the same period.
There has been little respite this year so far, with year-on-year global and UK food and drink deals down by 8.2% and 15.6% respectively in Q1 2023. In addition, the FTSE 350 SuperSector Food & Beverage Index has shed 6.7% during the past 12 months to the beginning of May, versus 2.7% for the FTSE 350 as a whole.
“Earnings volatility in the sector has made it hard for prospective buyers to pin down valuations for food and drink assets and settle on what represents a fair earning multiple for a business in the sector,” says Deloitte food and beverage director Ruairí Ó Dochartaigh.
However, as challenging as the macro-economic landscape may be for food and drink companies, with headline M&A numbers down, long-term fundamental drivers have continued to support sizeable transactions across the sector. Chris Stott, who leads KPMG’s UK food and drink team, says consolidation is one driver that has continued to spur sizeable food and drink M&A: “Global food and drink companies remain on the lookout for assets that will benefit from manufacturing and distribution synergies, and also provide footholds in new markets,” he says. “Remember that up to 90% of companies in the sector are SMEs, which makes consolidation inevitable across the economic cycle.”
Opportunities open up
Recent deals driven by consolidation strategies include the £300m acquisition of UK-based brioche producer St Pierre by Mexico’s Grupo Bimbo (as featured in the March 2023 issue of Corporate Financier), and AG Barr’s £20m purchase of Boost Drinks from founders Simon and Alison Gray.
“Smaller food companies with good products and brands are open to investment from bigger players that can help them to accelerate sales into supermarkets and deliver economies of scale,” Stott says. “This has become especially important in the current environment, where consumers are cost conscious and there is a massive incentive to be the lowest cost producer.”
Large corporates are not just buying up assets, but also selling non-core divisions. US food ingredients group IFF, for example, sold its savoury solutions business to European buyout firm PAI Partners in a deal worth around $900m, to focus on meat alternatives and citrus products. Japanese conglomerate Mitsubishi, meanwhile, is considering the possible carveout of its UK food and drink business Princes.
“Corporates are definitely shuffling their decks, sharpening strategic focus and divesting less profitable divisions,” Deloitte’s Ó Dochartaigh says.
As would be expected, there is also an uptick in stressed and distressed deal flow, as the pressures that have forced some food and drinks companies into insolvency – including renowned pork pie brand Vale of Mowbray and fruit and juices supplier Orchard House Foods – push more companies into seeking rescue deals. Online meat retailer Farmison, for example, secured a rescue deal out of administration by a consortium led by former Asda chief executive Andy Clarke, while buyers have also now come in for Vale of Mowbray’s Leeming Bar factory site.
“There is stress at the bottom of the market, but buyers with strong balance sheets will see opportunities to pick up good businesses at attractive valuations,” Stott says.
Private equity shopping list
Consolidation, carveouts and distressed deals may have dominated corporate M&A agendas, but they have also sustained private equity appetite for food and drink deals. This is despite the fact that headlines have suggested buy-out firms are more interested in the less volatile sectors such as business services and software.
“Private equity interest is very much there and we see firms participating in multiple processes,” Stott says. “Industry consolidation makes food and drink a good option for a buy-and-build strategy, and food and drink does have defensible characteristics as it is non-discretionary. When you combine the sector’s defensive qualities with the scope for bolt-ons and the option to finance deals using relatively inexpensive asset-based lending finance, it offers a compelling value proposition.”
Private equity deals in food and drink during the past year include LDC’s acquisition of milkshake brand Shaken Udder and Endless acquiring poultry processor Smithfield Murray, then combining the business with portfolio company Yorkshire Premier Meat.
Growth in food and drink is also on the agenda (see Going for Growth, below), even at a time when consumers are cutting back on spending and trading down to lower-price own-label options, which saw a 47% rise in sales revenues in 2022, according to Kantar.
“Consumers are pivoting to cheaper own-label products to reduce food bills. But even in the current economic context there are still niche sub-sectors where there is revenue growth. Pet food, health and wellness, and snacking still show growth,” Lane says.
Overall, food companies with the right mix of attributes will continue to find buyers willing to pay attractive multiples. “Selling a food and drinks business is going to take longer than it did 18 months ago, and buyers are going to be pickier, but deals are progressing,” Lane says. “If a food company can show it is resilient, has been able to pass through costs to end consumers and has traded well through the dip in the economic cycle, investors are going to be interested. There are definitely deals to be done.”