just-food's outlook for 2013: Mega deals unlikely as consolidation continues
M&A prospects give food industry plenty to chew over
There may be caution over the prospect for blockbuster deals in a dilapidated economic environment, but the food sector mergers and acquisitions table still has plenty to whet the appetite. Chris Mercer reports.
Standard & Poor's data shows that food product mergers in 2012 totaled US$28bn, up from $7.7bn in 2011 and $21bn in 2010, according to Richard Peterson, director of global markets intelligence at S&P Capital IQ.
Predicting the future is a mug's game. Yet, there are some clear trends to pick out in food M&A as we move into 2013.
In the year ahead, expect many ingredients firms, processors and food retailers to continue recalibrating their portfolios towards premium, health and emerging markets.
At the same time, the economic gloom and ongoing profit margin squeeze should focus more boardroom minds on what constitutes core business, as well as drive further consolidation in mature western markets.
Then, there are the wild cards. Could private equity rekindle its appetite for deals after a rather subdued 2012? Contrary to the health trend, Euromonitor analysts see snacking going global. Lastly, looking east, Chinese producers are already showing their stomach for more foreign forays after Bright Food's swoop on Weetabix last year.
Having said that, the scope for those jaw-dropping, tectonic plate-shifting deals in the food industry's upper echelons looks more sedate, according to some observers.
"Within major global groups we expect further fine tuning, bolt-on acquisition and non-core disposals, but we are less certain about scope for mega-mergers noting the re-rating of equity and few distressed companies," says Shore Capital analyst Clive Black.
Some of the industry's big hitters are still chewing through changes enacted last term. For example, it seems likely that one slice of M&A for 2013 will emanate from Nestle attempting to flog Latin American assets, particularly in Mexico, in order to gain approval for its acquisition of Pfizer nutrition in those markets.
It's a deal that encapsulates the recalibration towards health and emerging markets. Nestle has described the regulatory process as "ongoing", although Mexico's competition authority told just-food earlier this month that it had yet to receive a fresh application from the Swiss food giant for consideration of the Pfizer deal.
Elsewhere, Hillshire Brands is still getting its house in order after the break-up of Sara Lee, having agreed to sell its Australia and New Zealand bakery business, Kitchens of Sara Lee, to McCain Foods for A$82m. (US$85m). Meanwhile, Mondelez, the international snacks arm cut loose from Kraft, is busy reinvigorating business in Russia and Latin America.
If the likelihood of mega-deals in 2013 is subdued, the prospect of bolt-on acquisitions, both close to home and further afield, appears relatively strong.
"International groups are expected to continue to target acquisitions in developing & emerging markets in 2013 in food, household goods and personal care, although suitors are [a] vary of price multiples," says Black.
Law firm Freshfields Bruckhaus Deringer (FBD) said that China attracted US$35bn of M&A investment in 2012, proving that its magnetism has not been depleted by recent economic turbulence in the country. Globally, M&A rose by 5% in value in 2012, recovering some of the ground lost in 2011, with food and beverage dominating alongside infrastructure and banking.
FBD's global head of corporate, Edward Braham, said of emerging markets: "After a period where many investors have been concentrating on matters closer to home and have held off investing in higher growth markets, we are seeing a gradual return of corporate appetite for more sizeable investments in these economies.
"2011 proved slow, 2012 was more active and the early signs for 2013 point to deal flow in higher growth markets picking up further."
Regulatory challenges should not be underestimated, but the deal flow envisaged by FBD is likely to include several food and retail companies. For example, Tesco and Wal-Mart are edging closer to establishing subsidiaries in India due to expected changes in foreign direct investment rules. Several companies, including dairy group Arla Foods, Barry Callebaut and spice seller McCormick have already talked up their ambitions in emerging markets this year.
In assessing emerging markets' potential, Africa is also moving into view. Africa as a whole was named as the world's second-fastest growing economy at last week's World Economic Forum in Davos, with continent-wide GDP growing at an average 5% year-on-year.
Currently, Africa is only 3% of the global M&A market by value, but the African Development Bank sees strong prospects for consumer goods amid a "surging" middle class.
Returning to mature markets, there is good scope for small-to-medium deals across Europe and North America in 2013.
Food ingredients suppliers, processors, manufacturers and even some retailers are seeking greater efficiencies of scale, pockets of growth in sectors where they are under-represented and also looking to cut the proverbial fat from their portfolios.
Several recent deals fit these three moulds. Among others, we've already seen in the following M&A activity in a fledgling 2013:
- Swiss Emmi has taken a 70% stake in goat's cheese specialist AVH Dairy Trade;
- Ireland's Total Produce has got its claws into Canada's Oppenheimer;
- Hostess Brands is is being broken-up by McKee Foods and United States Bakery;
- Norgesgruppen has taken a stake in Danish retailer Dagrofa;
- Barry Callebaut has acquired Sweden's ASM Foods;
- Vion has agreed to sell its frozen vegetables, fruit and potato products firm Oerlemans Foods to fresh vegetables producer Baltussen Holding;
- Italy's Granarolo has agreed to buy French cheesemaker CIPF Codipal.
Shore Capital's Black added: "A considerable amount of sorting and focusing in national markets has taken place over recent years, particularly by channel, [such as] proprietary brand vs private label - and category, [such as] ambient, chilled & frozen. Expect more to come."
In addition, we've seen some global re-jigging by western agri-food giants in the past few months, seemingly keen to spring clean their portfolios. Key among the deals would be Dole's decision to sell its global packaged food and Asian fresh businesses to Japan's Itochu Corp, Glencore's deal to acquire Viterra and ConAgra's near-$7bn deal for Ralcorp to form one of the largest packaged food companies in North America.
In North America specifically, Standard & Poor's said late last year that "fourth-quarter 2012 has been one of the busiest periods for US merger and acquisition (M&A) announcements since the 2008 credit crisis".
Looking at the M&A pattern in the UK specifically, analyst group Experian's business development manager, Wendy Driver, told just-food: "The food and drink industry has proved a key driver of overall M&A activity in the UK in recent years and we would expect to see continued high levels of deal flow within the sector in 2013."
Analysts at Oghma Partners said this month that M&A transaction volumes in UK food and beverage rose by 20% in 2012 versus 2011, to an estimated 87 deals. This was driven by inward investment from overseas and is the highest total since 114 deals were recorded in 2007.
Like Experian, the Oghma analysts also see volumes holding up in 2013, despite the "subdued" overall outlook for food sector M&A. "Certain transactions have already been flagged for 2013," they said, highlighting that the "break-up of United Biscuits has begun". Some in the snacks sector think premium crisp brand Tyrrells could also be ripe for a sale.
One key development at the M&A dinner table in 2013 could be private equity's renewed appetite. Those bidders currently closing on R&R Ice Cream are all thought to be private equity, for instance.
On the UK, Oghma analysts said that, "while growth expectations have been tempered, many corporates are identifying opportunities to strengthen their businesses and are seeking longer-term expansionary initiatives.
"Against this background many financial/private equity owners of businesses in the food and beverage sectors are experiencing increased investor pressure to realise assets, consolidate credentials and raise new funds. This ownership class could prove an increasing source of M&A activity in the coming 12 months."
Private equity, then, could be a catalyst for both buying and selling in 2013. Already, in North America, we have seen a Cerberus Capital-led consortium sink its teeth into five chains belonging to mid-market grocer Supervalu. It could soon gobble up the rest, in accordance with the deal terms.
Private finance could also be one possibility as a home for Tesco's Fresh & Easy, as the retail giant looks to retreat from the US grocery market. Trade buyers, including Aldi, have also been touted as potential suitors, however.
Last but not least in this overview of M&A, the next 12 months could be marked by the stronger presence of Chinese companies in the international food and beverage sector.
"We took particular notice of the Bright Foods acquisition of Weetabix, a cash rich Chinese player seeking brand heritage and know-how," said Shore Capital's Black. This is an interesting strand to China's foreign investment strategy, which has thus far focused on securing supply, rather than acquiring big foreign brands.
In terms of sourcing, China has already been active in 2013, largely by planting stronger roots in New Zealand dairy. Inner Mongolia Yili Industrial Group will join compatriots Bright Food and Yashili International in the country.
If you could describe the 2013 M&A outlook as a meal, it would resemble tapas more than a whole spit-roasted hog. Blockbuster deals may be missing, but there are still some rich trimmings to look out for.
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Sectors: Advertising & labelling, Baby food, Bakery, Canned food, Cereal, Chilled foods, Commodities & ingredients, Condiments, dressings & sauces, Confectionery, Dairy, Dried foods, Emerging markets, Financials, Food safety, Fresh produce, Frozen, Health & wellness, Ice cream, Meat & poultry, Mergers & acquisitions, Natural & organic, NPD & innovation, Private label, Retail, Seafood, Snacks, Sustainability & the environment, World foods
Companies: Nestle, Pfizer, Sara Lee Corp., Barry Callebaut, Weetabix, Bright Food, McCain Foods, Tesco, Arla Foods, Emmi, Total Produce, Hostess Brands, Norgesgruppen, Vion Food Group, Granarolo, United Biscuits, Tyrrells, R&R Ice Cream, Fresh & Easy, Aldi
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