Changing priorities in M&A activity in food sector
Although the global slowdown has taken a bite out of M&A activity in the food and drink sector, deals are still being driven by changing consumer behaviour and the need for big companies to shed debt. Anna Blackaby uncovers the key trends.
According to Mergermarket research, 2008 saw a decrease in global deal volumes in the food and drink sector although the average transaction value climbed slightly to £85 million.
The changes in the global food and drink landscape are being driven by four key trends, according to Simon Peacock of Catalyst Corporate Finance in Birmingham.
He said: “One of the big things that we are picking up is the portfolio realignment and the deleveraging associated with that.
“Consumers are showing a flight to value as well as a flight to well-known recognised brands so they have stopped trying new things.
“Consumers are just saying ‘I’m either going to buy the cheapest thing possible or I’m going to buy the one that I trust’.
“If you are a company that has a lot of products in the B and C brands in the middle of the value chain then you are suffering.”
The need to deleverage following the heady period up to 2007 which saw a run of acquisitions fuelled by cheap debt is also a contributing factor in companies realigning portfolios.
“A lot of the large companies are now pretty highly-leveraged as well and are turning to deals to try to sell off these companies, firstly to pay off leverage and because they are not really driving growth.”
Examples of firms doing this are French companies Pernod Ricard and Danone as well as food and household goods giant Unilever.
Another trend that Mr Peacock picked out was the rise of the discounters as people go bargain-hunting in the face of the recession.
He said: “I use the example of my mother-in-law who regularly shops at Waitrose but now buys her salmon from Aldi and Netto.
“The stigma of going to the discounters has disappeared.
“So companies that have been selling to the discounters have all of a sudden experienced pretty strong growth and are becoming themselves targets for acquisitions.”
Global brands also continue to thrive as people retreat to recognised names, said Mr Peacock.
Companies such as Coca Cola have made a significant number of acquisitions recently – the fizzy drinks giant has been buying up firms both to boost its bottling capacity and to secure control of the carbonated beverage markets in many countries.
Mr Peacock also picked out the trend for “national champions” in the food and drinks sector, such as beef processor JBS in Brazil and tea manufacturer Tata Tea in India.
These companies are increasingly shopping around for acquisitions abroad, including in the UK as demonstrated by Tata’s purchase of Tetley Tea.
“Some have saturated themselves in their own markets and recognise that UK consumers will still pay a premium price – we still like to treat ourselves,” said Mr Peacock.
Here in the UK, although there has been a slowdown in M&A activity since 2007, there have still been some big-name deals since the onset of the credit crunch, such as Associated British Food’s taking control of Jordans and Scottish & Newcastle’s acquisition by a Heineken and Carlsberg joint venture vehicle.
“Up until 2007 the UK had been a fantastic home for innovation in all sectors and that’s also true in food and drink,” said Mr Peacock.
“We have seen some fantastic food businesses like Maximuscle, Tyrrells Potato Chips and Dorset Cereals grown by entrepreneurial management teams and they have been getting the backing of private equity.
“They have done well because consumers are pretty sophisticated and there is a lot of segmentation in the market,” he said.
“What has happened since then is the typical private equity model or 50 per cent of it is broke because of the lack of liquidity. So they have not been able to do those deals.”
Mr Peacock said increasingly trade buyers, such as Associated British Foods, were taking the place of private equity, with many behaving more like venture capitalists on transactions.
