Best bits: Private-equity returns to the table

As each day goes by, there seems to be more evidence of the revived appetite of private equity for deals in the food sector.

After the news on Friday (21 May) that Michael Foods, the US food group, was set to change hands and fall into the ownership of a private-equity unit of Goldman Sachs, yesterday Norwegian food maker Rieber & Søn said it had agreed to sell seafood business King Oscar to a private-equity buyer.

Nordic acquisition fund Procuritas Capital Investors has agreed to buy King Oscar, which has operations in Norway, Poland and the US, for up to NOK255m.

Those two deals come amid heightened speculation that private-equity funds, hampered by the global downturn, are ready once again to tuck into the food sector.

In Italy, Unilever is looking to sell frozen-food business Findus Italy and a clutch of private-equity firms have been mentioned as potential suitors - including Birds Eye Iglo owner Permira and Lion Capital, already the owners of Findus assets elsewhere.

In Spain, one of the country's largest bakery groups, Panrico, itself already owned by private-equity firm Apax Partners, could, according to reports, be set to change hands.

And meanwhile in France, private-equity companies are said to be eyeing MWBrands, the owner of brands including John West tuna.

The raft of speculation comes after UK discount retailer Poundland and herbs supplier Barts Spices were both sold in deals involving private-equity firms this month.

The drying-up of finance amid the credit crunch and then global recession put the brakes on M&A in the food sector. However, the tightened conditions had a particularly acute impact on private equity, a sector so used to - and previously so successful at - funding deals though debt finance.

Corporate consultants at Zolfo Cooper agree that the food sector is now witnessing private-equity firms returning to the fold.

Private equity has long been attracted to the defensive nature of the food industry and Robin Knight, a partner at Zolfo Cooper, says funds are drawn to non-core assets at larger multinationals - as well as certain categories where there is excess capacity.

"Private equity is attracted to non-strategic assets of larger FMCG businesses as there is the obvious opportunity to make instant margin gain through taking a sword to the usually fatty overhead structures put in place by the corporates," Knight says.

"In addition, certain sub sectors of the food industry require significant consolidation to take capacity out of the market, improve manufacturing efficiency and quality of service to customers. Such sectors include frozen food, cake and confectionery.

"Private-equity houses have acknowledged this and will look to use the fire-power advantage they have over corporates to drive through these efficiencies before selling them on three to five years later post-operational restructuring."

However, economic conditions remain challenging. While there are signs that access to funding has improved since the depth of recession, the banking sector has held on to much of the state-backed funds pumped into the institutions to keep it afloat. As a consequence, finance remains hard to come by in comparison to those heady, pre-Lehman days.

"The lack of available leverage, used to deliver super returns for private-equity houses and de-risk exposure, means many deals are being underwritten with large equity cheques," Knight says.

Under those conditions, private equity has to shoulder more of the risk of an investment, even in a sector as recession-resilient as food.

After a quiet 12-18 months for private-equity deals in the food sector, there are signs that private equity could be back in the game. The deals already signed and the promise of more indicate that.

However, financial conditions remain problematic, giving private equity and those in the trade, be they potential buyers or sellers, plenty to chew on.