Food & beverage industry serves up tasty M&A

August 2016  |  FEATURE  |  MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Unlike the many industries that have borne the brunt of dire economic conditions across the globe, the food and beverage (F&B) space is one sphere of activity that has largely circumvented the world’s monetary woes and gone from strength to strength.

Comprising farming, food production, distribution, retail and catering, the F&B industry is one of the major contributors to the growth of all global economies, has historically witnessed consistent growth, and has accumulated value in excess of $7 trillion, according to the IMAP Consumer Staples Report.

Its substantial value, of course, is one of the main reasons why the industry is a particular target for mergers & acquisitions (M&A) activity, which was exceptionally strong in 2015, according to Grant Thornton’s regular review of M&A activity in the F&B industry (known as ‘Bite Size’).

The review also confirms that the strong M&A activity seen in the F&B industry last year has carried forward into 2016, with first quarter figures of 51 deals up from 49 in Q4 2015, indicating that the industry is on course for another bumper year in terms of M&A dealmaking.

M&A activity

With disclosed deal value in the first quarter of 2016 totalling £2.47bn, what are the driving factors behind this high-level of M&A activity?

“There are a number of drivers of activity in an industry which is still very fragmented – on the food side – when compared to others,” outlines Trefor A. Griffith, head of food and beverage for Grant Thornton in the UK. “These include large corporates with product portfolios that don’t always fit with consumer demand, now or in the future. This leads them to exit businesses and buy new ones which are more future proof. There is a lot of cash around, on the balance sheets of corporates, from private equity and from the banks and alternative lenders and food and beverage is seen as a relatively safe place to put your money. Also, more recently the public markets have shown a strong appetite, particularly in the casual dining space.”

Cross-border mid-market deals

In the mid-market deal category (with £50m to £250m deal value), 19 cross-border deals, 12 involving overseas acquirers investing in the UK, took place in Q1 2016.

Exemplifying the continuing interest from Asia to acquire western based businesses was the March 2016 acquisition of Premier Foods (owner of Ambrosia, Oxo, Bisto and Batchelors) by the Japanese instant noodle maker Nissin Foods. The deal saw Nissin acquire a 17.3 percent stake in Premier Foods for £89.9m.

Further mid-market deals in Q1 2016 included the acquisition of MPM Products Ltd by ECI Partners LLP for £50m and the £163m deal which saw Bakk AL Holdings Ltd acquire Bakkavor Group Ltd.

Large M&A deals

The largest M&A deal to take place in Q1 2016 was the standout $3.1bn acquisition of UK-based food distributor Brakes Group by US company Sysco, the world’s largest catering supplier, in February 2016. Sysco agreed the deal following its aborted attempt to acquire US Foods, its biggest rival.

“The Brakes deal is an illustration of consolidation in what remains a fragmented sector undergoing significant change,” suggests Mr Griffith. “Competition is increasing in wholesale and distribution as the number of routes to market multiply and existing players diversify. There is also an increasing number of specialist operators gaining market share, further fragmenting the market as it consolidates.”

Another notable M&A deal was the acquisition, in April 2016, of leading integrated poultry business, Crown Chicken, by FTSE 250-listed sausage maker, Cranswick.

Impact of the UCC

1 May 2016 was the date which saw perhaps the biggest shakeup of EU customs rules in more than 20 years: the introduction of the Union Customs Code (UCC), which contains major changes that will apply across the EU and have a significant impact on F&B companies.

In a nutshell, the UCC will affect F&B companies which use procedures such as customs warehousing and processing under customs control to mitigate the impact of duty on imported products on their cash flow. Previously, these procedures did not require a mandatory guarantee; under the UCC, however, unless a company is an Authorised Economic Operator (AEO), a guarantee will now be required.

But while the UCC has been in preparation for a long time and been reported, the Grant Thornton review notes there are a surprising number of companies that are only now considering its potential impact on their business operations.

Outlook for F&B M&A

“A lot will depend on the fallout from the UK’s EU referendum, but should that be limited, then I would expect to see continued strong activity,” says Mr Griffith. “The changing consumer landscape, convenience shopping and eating out of home is creating change and M&A is a good way of reacting to that change. Also, the UK is an attractive market for overseas buyers as are some of the products being developed here.”

For all the potential impact of change, the F&B industry is currently on a high, with M&A activity strong and expected to remain so for the rest of 2016 and beyond.

© Financier Worldwide

BY

Fraser Tennant