2012 - Supermarket battles to drive supplier M&A
By Dean Best | 6 February 2012
Pressure from major retailers will lead to consolidation as suppliers look for cost savings, analysts say
The early weeks of 2012 have underlined just how challenging some of the world's largest food retailers found 2011.
Carrefour confirmed its annual profits would fall by almost 20%. A disappointing Christmas meant Metro Group expects sales and earnings to be lower when compared to 2010. And continued declines in domestic sales led UK retailer Tesco to issue a surprise profit warning.
The world's retail titans, then, found the going tough last year. But what about 2012? Carrefour and Metro have new CEOs in place, who will be desperate to revitalise struggling businesses. Philip Clarke marks his first year as Tesco chief executive in March and, after the retailer's successful years under predecessor Terry Leahy, will be uncompromising in his quest to turn around the retailer's fortunes in the UK.
What could this mean for suppliers? Ultimately, it could mean the industry witnesses more consolidation in 2012.
2011 was a year in which an expected flurry of deals did not materialise. Prolonged economic stagnation in the US and Europe - with the latter's problems exacerbated by the sovereign debt crisis on the Continent - led to a mood of conservatism among manufacturers that could have been looking to expand via acquisition.
There is, of course, pessimism about the economy in 2012, especially in Europe, where the fears of a double-dip recession in some markets are very real. However, despite muted M&A markets last year, the underlying trend towards further consolidation remains. And some industry watchers believe intensifying competition between major food retailers could mean more deals among food manufacturers this year.
"There will be consolidation across the board as businesses look to cut costs, especially as the retailers look to pass on the cuts they are making as they battle for market share," Trefor Griffith, corporate finance director at UK-based financial services firm Grant Thornton, tells just-food.
The link between intense retail competition and industry consolidation has already been exemplified in the early weeks of 2012 with the sale of Robert Wiseman Dairies, the UK's largest supplier of fresh milk, to German yoghurt giant Müller. With Wiseman focusing on liquid milk and Müller largely on yoghurts, the deal, which is likely to close in the coming weeks, does not represent true consolidation in a particular category, it does bring together two key dairy suppliers into the UK retail trade.
Müller chief executive Heinier Kamps said the company's bid for Wiseman was a "strategic move" for the German firm; Wiseman chairman Robert Wiseman insisted the deal would create a "leading, integrated dairy business in the United Kingdom". Some industry watchers were sceptical about how much real clout the combined business would have when faced with retailers battling for a subdued UK consumer but there is little doubt that the need to serve customers locked in fierce competition - and the promotional demands and pressure on margins that entails - was a key underlying factor behind the deal.
The first seven weeks of 2012 have seen a number of larger players snap up smaller rivals in their sectors. UK crisp maker Tyrrells has acquired Glennans to add to its vegetable crisp business. Irish food maker Kepak, the owner of convenience foods business Rustlers, bought rival burger brand Feasters. And Tangerine Confectionery snapped up local rival Smith Kendon. The latter deal, announced last month, came three months after Tangerine's last acquisition, which saw it buy the Highland Toffee and Wham brands following New McCowans' collapse into administration.
Griffith said he expected more "distressed activity" in the food sector last year and thinks there could be more in the year ahead. "Distressed M&A in the sector has also been less than some expected and I think this will change at some stage," he says. "There is a lot of debt that is due to be refinanced in 2012 and 2013 and probably more than the market can deal with - this must lead to more distressed activity."
Potential buyers do not only come from the trade; private equity remains a competitor for manufacturers looking to acquire, although finance is not as readily available to buy-out houses as it was before the financial crisis of three years ago. In the week before Christmas, US private-equity firm Manfield Partners acquired two businesses - UK canned food firm MCM Select Partners and Dutch tinned products firm MCM Foods - but Mark Lynch, partner at corporate finance firm Oghma Partners, believes trade buyers will generally have the upper hand in deals.
"According to a chart in The Economist recently, deal leverage has declined from 90% to 50% on average across private equity global M&A - so this reduces the firepower of the private-equity players," he says.
Griffith concurs that private equity will be at a disadvantage in the middle of the market but takes a more nuanced view. "Private-equity firms are professional buyers of businesses and can outmanouevre trade buyers when they haven't got much M&A experience. This tends to be more the case at the lower end of the market," he says. "At the larger end there is clearly finance available for the right transactions as is evidenced by the Northern [Foods] deal and the recent follow on to that."
Looking ahead to the rest of 2012, although industry watchers believe M&A should pick up, there remains a degree of uncertainty, not least about just what impact the prolonged economic stagnation in Western markets could have on the readiness of some suppliers to act.
"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," says Morningstar analyst Erin Lash.
At Grant Thornton, Griffith is similarly cautiously optimistic. "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," Griffith says. "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."
In the UK, Premier Foods plc looks set to offload more businesses, which could lead to more consolidation in sectors like jam and pickles. Speculation around the future of United Biscuits reappears every few months, with rumours that private-equity owners Blackstone and PAI Partners could look to break the business up to make it easier to sell. China's Bright Food has been interested in buying United Biscuits in 2010 but a deal never happened.
Nevertheless, Griffith believes companies in emerging markets could look to up their investment in the markets like the UK. "I think 2012 may see the emergence of some more consolidators in the sector and these may come from some of the developing economies as the changes in consumer spending in their own territories drive a requirement to buy in the high technological, hygiene and distributions skills that have been built by UK F&B businesses," he says.
And, of course, the announcements last year by US food groups Sara Lee, Ralcorp Holdings and Kraft Foods of plans to split in two could lead to the constituent parts of each business looking to acquisitions to grow.
On the other hand, the splits could lead to some of the new businesses being acquisition targets themselves. "We think that Hormel Foods might be interested in Sara Lee's domestic meats business, while JM Smucker could look to add to its international coffee operations," Lash says.
Companies: Müller, Carrefour, Tesco, Metro Group, Robert Wiseman Dairies, Tangerine Confectionery, United Biscuits, Premier Foods plc, Bright Food, Sara Lee, Ralcorp Holdings, Kraft Foods, Hormel Foods, JM Smucker
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2012 - Supermarket battles to drive supplier M&A