Industry watchers believe "go West" will be dynamic driving M&A in 2017

Industry watchers believe "go West" will be dynamic driving M&A in 2017

A year of geopolitical uncertainty awaits and there are few things business dislikes more than uncertainty. What impact could there be on M&A in the food sector? Dean Best reports.

A fortnight into 2017 and global headlines remain dominated by Brexit and the incoming Trump administration in the US.

In a speech in London today (17 January), UK Prime Minister Theresa May has announced the country plans to embark on a "clean Brexit" from the EU. What that will mean in practice is not – and cannot at this stage – be entirely clear but May this morning did indicate her hope for a "phased-in" Brexit, with a "phased implementation process" for an agreement with the EU. May said her plans mean the UK cannot remain part of the EU single market, although she said she wants the country to be part of a customs agreement with the bloc, with an "open mind" on how that could be achieved.

The UK government is set to start Brexit talks with the EU at the end of March. Any deal will be put to a vote of both Houses of Parliament in the UK, while the European Parliament will also vote on the agreement.

The inauguration of Donald Trump as the 45th President of the United States will take place in Washington D.C. on Friday. Business leaders have also been watching his public remarks closely since his election in November. Will a Trump administration look to ease taxes and cut red tape? What could his Presidency mean for trade?

In Europe, the year ahead is also set to see elections in a number of major economies, including the two largest of the ongoing members of the EU – France and Germany.

Surveying, the business sector as a whole, advisers at UK-based risk management company Willis Towers Watson believes these kinds of factors will lead to more domestic deal-making in 2017.

"Economic and political factors will drive in-country deals, as business leaders decide to look domestically for growth through M&A. The fallout from the US election will compel North American businesses to invest at home rather than internationally. Political uncertainty in Europe, with upcoming elections in France, Germany and The Netherlands, coupled with continued fallout from Brexit, and the Italian referendum, will depress deal volumes. However, deal-makers who are in the right place at the right time will be handsomely rewarded," Jana Mercereau, head of corporate mergers and acquisitions for Great Britain at Willis Towers Watson, says.

just-food's annual Confidence Survey, held in November and December, suggested a slight downgrade in expectations for M&A in our industry in 2017, perhaps an indication of a greater feeling of uncertainty among executives.

However, industry watchers believe Brexit is expected to be a driver of deals in parts of the UK food sector. The fall in the value of sterling since the UK voted in June to leave the EU has put pressure on companies' costs.

UK-based insolvency firm Begbies Traynor claimed last week 6,000 food suppliers in the country were showing signs of financial distress in the final quarter of 2016, which it said was a 13% rise on the year before. Manufacturers have been and are looking to push through price increases to offset the pressure on their costs from the drop in sterling but Begbies Traynor said supermarket customers have been playing "hard-ball".

Could that financial distress reach a stage where some manufacturers look for a buyer or a combination with others in the sector for the sake of scale? Could that distress present opportunities for buyers, both in the UK and abroad? Overseas suitors, for example, surveying the movement in sterling since 23 June could be attracted by the prospect of picking up assets relatively more cheaply than a year ago – while the need for a physical base in the UK for, say, a European business may be more pressing with the price of their exports to the UK rising.

Jonathan Buxton, head of the consumer group at London-based M&A advisers Cavendish Corporate Finance, puts forward another dynamic that could drive deals in the wake of the Brexit vote – UK food companies' need for labour.

"We've definitely seen more interest in actually UK companies looking at either setting up offshore production – even though from a currency point of view it's worse – to keep access to that flexible labour force, or looking at acquisitions in central Europe," Buxton says.

Away from Brexit, a big-picture driver of M&A in the food sector on 2017 identified by some industry watchers is a continuation of a trend we have seen for a number of years – the interest of companies based in emerging markets in western businesses.

There perhaps has not been the flurry of deals one may have expected there has each year this decade been a number of notable transactions following this dynamic and 2016 was no different, with, for example, Thailand's Charoen Pokphand Foods acquiring Bellisio Parent, the US's third-largest single-serve frozen entrée maker, for US$1.08bn, Philippines-based food and beverage group Universal Robina Corp. moving to buy Australia's Consolidated Snacks and South Africa's Pioneer Food Group striking a deal to buy Stream Foods, the UK producer of the children's snacking brand Fruit Bowl.

Cyrille Filott, a global consumer foods strategist at the Netherlands-based Rabobank, says this trend will continue as part of a broader dynamic he labels "go West".

"Asian companies like to learn certain skills around branding and technology and that's why you may see and you will see further acquisitions by Asian companies of European and US assets, whether it's certain brands or companies that have a certain supply chain. That would fit in the broader strategy of Asian companies that are very much looking into supplying their countries, or their region, with certain products and goods," Filott says.

Not every deal works out as intended and, in the last few weeks of 2016, there was speculation China's Bright Food was looking to sell its 60% stake in UK breakfast cereal producer Weetabix, a holding it acquired in 2012. Weetabix declined to comment and Bright Food was quoted in the Chinese media as saying it had no plans to sell up.

And there is some debate about how active Chinese companies could be. Filott suggests China's restrictions on the outflow of capital could limit the participation of its companies in food M&A, while Buxton believes businesses there are taking stock and reviewing whether what they could buy would, in fact, work back home.

"I could be wrong but my feeling is the mad M&A rush out of China is going to become a lot more nuanced and a lot more selective," Buxton says. "There was a big feeling of 'Let's go and buy things' and I think it's a bit more tempered now. They're looking much more closely whether whatever they're buying will actually have the ability to sell through into China."

Filott does not limit the "go West" dynamic to Asian companies buying assets in Europe or North America. He expects to see more European companies looking to acquire business across the Atlantic, citing Greencore's recent purchase of US private-label convenience food group Peacock Foods.

"I found it very interesting to see Greencore to make this acquisition in the US recently," Filott says. "More broadly, I think European companies are looking for ways to leverage their technology and go-to-market, which they have in some aspects. For example, the well developed private-label processes and technologies and leverage that into the US market. It's not necessarily about branding but it's much more leveraging certain other assets of these food companies in the US market and I expect – and whether it's 2017 or 2018, that's difficult to predict – but it wouldn't surprise me if more European companies are going to the US."

Meanwhile, could European food majors, working on their M&A strategies, be looking across the Atlantic in another way in 2017? The last 12 months saw a wave of large US companies, facing to varying degrees pressure on their top lines and/or looking to stay on top of changing consumer trends, set up in-house investment funds to back up-and-coming businesses.

In December, US meat giant Tyson Foods announced the formation of a $150m fund, Tyson New Ventures; its first investment was in plant-based protein business Beyond Meat.

2016 also saw Campbell Soup Co. establish a $125m venture capital fund to invest in start-ups participating in what it said was the "disruption" of food trends. The vehicle, called Acre Venture Partners, was part of the company's efforts to expand in rapidly growing areas of the food sector, such as natural and fresh foods.

Kellogg, which, similar to Campbell in soup, has struggled to drive meaningful sales growth in its core product of cereal, set up its own fund in June. Eighteen94 Capital, Kellogg announced, would make "minority investments" in companies pioneering "next generation innovation" in the food sector.

Last week, the fund announced its first investment, leading a round of financing in US firm Kuli Kuli, a company making bars and powders from plant food moringa.

Filott says such moves have been seen in other industries and make sense for US companies. "In other sectors, this works. In the technology sector, companies like Cisco and Intel have always had venture capital firms to look at new technologies and they would spin them in, if it would be deemed relevant for their company. In food, it is sort of untested, to a degree, but it does make sense given the enormous amount of start-ups that you see in the food sector, especially in Silicon Valley, but also in the Boulder area and Brooklyn or Chicago," Filott says.

"US consumers are much more interested in smaller brands and not necessarily in big brands. If you look at the last five years, big brands lost about 70% of all categories' market share and small brands were the big winners in that game in the US. Small brands are taking share, they're getting shelf space from retailers who are looking for differentiation. One way to get them in tune with new, exciting things is to set up these venture funds."

Alongside the possibility of more US food majors entering the fray, it will be interesting this year to see if companies that have made investments through their VC-style funds - think the likes of General Mills - will decide to invest further in a business or exit.

There has yet to be the same level of activity in this field in Europe. Last summer, Danone announced the formation of its own fund, Danone Manifesto Ventures, itself based in New York, to "support the development" of high-growth, innovative companies. Its first move was to take a stake in French biscuit-to-dessert maker Michel et Augustin. 

Unilever has its Unilever Ventures arm, set up way back in 2002, but, while not excluding food, its most recent fund, launched in 2014, is focused more on personal care and on digital.

"The big question is: what is Europe going to do? Because in Europe, you don't see this. The food companies in Europe are not really playing this game yet. I believe that they should," Filott says. "It gives these companies a way to get in touch with the consumer with new innovation." He noted branded European food companies have seen a similar erosion in their market share as their US counterparts have seen, albeit to private label, rather than smaller brands.

The rise of US consumer interest in natural, organic, simpler foods is perhaps yet to be seen to the same extent in Europe, nothwithstanding the rapid growth of the organic sector in markets like France. Consumer interest in smaller brands is building in Europe but the market, broadly, remains dominated by larger brands and by a more significant own-label sector. That perhaps is one reason why Europe's food manufacturers have yet to follow their US peers in using in-house investment funds to buy into smaller businesses.