Dean Best

2011 in review - M&A activity fails to meet expectations

By Dean Best | 22 December 2011

A year ago, there was consensus that M&A activity would pick up in 2011. As we look back on the last 12 months, there were some major deals but concern over the economy meant the numbers of deals fell short of expectations. Dean Best reports.

As 2010 closed, the indications were that the M&A environment in the food and drink sector would be more active in 2011. The last few months of 2010 had seen an increase in the size of transactions when compared to the earlier part of the year and industry watchers suggested there was renewed confidence in M&A markets. These trends were expected to continue in 2011. However, looking back at the year, there is a feeling that that optimism was doused by the reality of the prolonged economic stagnation in the US and Europe.

Trefor Griffith, director of corporate finance at Grant Thornton in the UK, said there had been more deals in 2011 "than in any other year since the credit crunch". However, he admits that the level of transactions was lower than he expected.

"I think we were all a bit more hopeful 12 months ago around the economy and that looked to be well-founded up until the half way stage, but it's been a bit more difficult since and this has led to there being less activity than I expected at the start of the year," Griffith tells just-food.

Concern over the economy has led boardrooms to, perhaps, be more reluctant to sign off plans to acquire businesses. Across the Atlantic, Erin Lash, an analyst at US investment research firm Morningstar, agrees. "The macroeconomic environment has remained highly uncertain and conditions in Europe haven't painted a bright picture either. As a result, firms could be operating with a degree of conservatism," she says.

"We expected further activity, particularly in the packaged food and alcoholic beverage industries, as we thought larger players would look to bolt-on acquisitions in order to achieve production and distribution synergies. In addition, we anticipated that private-equity firms would also target food and beverage companies that generate strong free cash flow and limited financial leverage, given their vast pools of undeployed capital. While activity overall might have been a little less than we initially expected, both types of deals occurred throughout the year, with probably a great slant towards larger players putting their excess cash to use to drive further consolidation at home and abroad."

Industry consolidation was a key driver of a number of the deals just-food reported on in 2011. However, one major transaction lined up in November 2010 that would have highlighted this trend did not occur.  As 2010 drew to a close, the UK food sector was mulling Greencore's plans to merge with rival own-label supplier Northern Foods. In January, those plans were derailed when Greencore was gazumped by Boparan Holdings, the UK poultry supplier owned by tycoon Ranjit Boparan. By April, Boparan had secured competition clearance for the deal.

Operating in different segments, Boparan and Northern did not bring about consolidation in a specific sector, although throughout the year there were deals in the UK that did bring about consolidation in parts of the food sector, as suppliers looked for scale to battle volatile commodity costs and give them greater bargaining power when dealing with the country's powerful retailers. Greencore licked its wounds after failing to land Northern and snapped up sandwich maker Uniq and, later in the year, Boparan did consolidate parts of the chilled foods sector with the acquisition of Premier Foods plc's own-label unit Brookes Avana. Meanwhile, Kerry Group's acquisition of frozen ready meal rival Headland Foods and Findus Group's purchase of Cumbrian Seafood consolidated other parts of the UK food sector.

In Ireland, Valeo Foods Group said it wanted to lead the consolidation of that country's food industry following its acquisition of a major competitor Jacob Fruitfield Food Group. In Europe, just a week ago, Swedish confectioners Cloetta and Leaf International announced plans to merge - the first major deal in that sector since Kraft Foods' takeover of Cadbury at the start of 2010, which many had argued would spark a wave of activity across the confectionery industry.

In the US, there were examples of some consolidation - bakery giant Flowers Foods acquired rival Tasty Baking Co. - but the predicted deals in some fragmented categories like private label did not occur. ConAgra Foods failed in its attempt to buy own-label supplier Ralcorp Holdings, which decided instead to look to divide its business in two - private label and branded cereals maker Post Foods. "We had thought that it was in the best interests of Ralcorp's shareholders to come to the table with ConAgra," Lash says.

Lash's comments bring to a mind a common occurence in the US food sector this year - the demerger. Ralcorp's move followed Sara Lee's decision at the start of 2011 to divide itself in two companies selling meats and coffee. Lash questions the value Ralcorp's shareholders will get from the decision to spin off Post, a business, she argues, that will continue to struggle against its competitors in the US cereal category. "We aren't convinced that Post's competitive position will improve as a stand-alone operation, particularly given that Kellogg and General Mills are intently focused on enhancing their position in this highly competitive category," she argues.

The Morningstar analyst acknowledges there was a "strategic rationale" to Sara Lee's decision to split itself in two but argues the company's shareholders would have been "better served by a sale of the business - in whole or in parts - to larger companies". In any case, now the split is in train, she thinks Hormel Foods could be interested in Sara Lee's meats company and JM Smucker could look to Sara Lee's coffee operations to add to its existing coffee business.

Of course, Kraft Foods is also looking to demerge its business. In August, Kraft said it would create two companies - a North American grocery business and a global snacks maker, including brands like Oreo and Cadbury. Both, it said, would benefit from greater focus. The move raised eyebrows as Kraft, when it was trying to convince Cadbury's shareholders of the benefits of its takeover bid, said the UK confectioner would benefit from its greater scale. The Cadbury board touted the benefits of being a focused, pure-play confectioner. Eighteen months on, news of Kraft's split suggested Cadbury was right all along.

Fellow US food group PepsiCo has faced calls from some analysts and investors to conduct its own demerger and divide itself into a snacks business and a drinks supplier. So far, PepsiCo's senior management have said the two operations complement each other and questioned the value in a split. However, chairman and CEO Indra Nooyi is under pressure over the results of PepsiCo's moves into healthier categories and could face an uncomfortable few months.

In any case, looking at the US food sector more broadly, Lash argues demergers will remain under consideration in boardrooms across the industry. "Management teams continue to take a hard look at their product portfolios in an effort to unlock value, so spin-offs are likely to remain centre stage in the consumer products arena," she says.

So, even if the level of activity did not quite meet expectations, there has been plenty for M&A watchers in the food sector to chew over. There is not the space to mention all of the significant deals in the industry this year (Kerry buying Cargill's flavour ingredients arm, Nestle's acquisition of a majority stake in Chinese confectioner Hsu Fu Chi and Lactalis's success in buying dairy rival Parmalat are just three - and let's not forget Diamond Foods' bid to buy global snacks brand Pringles, which has yet to be finalised amid allegations over some of the buyer's financial practices).

Whether activity will pick up is, as we head into Christmas, a matter of debate. "With ample cash on hand and minimal debt, we expect M&A activity will stay heated heading into 2012. However, concerns about the European debt crisis, a weakening US economy, or tight debt financing could stall potential consolidation," Lash says.

Over at Grant Thornton, Griffith is also hedging his bets. "We are talking to private equity and trade at the moment around their plans for next year and both are looking at M&A in the sector as a strong opportunity. It should [pick up] but we can't underestimate what is happening in Europe right now and what kind of impact that may have on 2012."

Sectors: Chilled foods, Meat & poultry, Mergers & acquisitions, Private label, Snacks

Companies: Greencore, Cadbury, Sara Lee, Kraft Foods, Northern Foods, Boparan Holdings, PepsiCo, Uniq, Premier Foods plc, Kerry Group, Findus Group, Valeo Foods Group, Cloetta, Leaf International, Flowers Foods, Tasty Baking Co., ConAgra Foods, Ralcorp Holdings, Kellogg, General Mills, Hormel Foods, JM Smucker, Cargill, Nestle, Hsu Fu Chi, Lactalis, Parmalat, Diamond Foods, Pringles

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