Could sovereign wealth funds and pension funds become more active participants in deal-making in the FMCG industry?
It’s a question cropping more and more among M&A watchers. Earlier this month, The Qatar Investment Authority – already the owner of Harrods and the largest single shareholder in UK grocer Sainsbury’s – made another significant investment.
Hassad Food, set up by the QIA in 2008 to secure food supplies for Qatar through agricultural investment, acquired a majority stake in Bush Foods Overseas, an Indian firm that supplies worldwide to retailers including Wal-Mart Stores, Carrefour and Ahold and to manufacturers like Associated British Foods and Riso Gallo. That India is an attractive market for investment hardly needs explanation but Bush Foods’ position as a global supplier of products in the buoyant ethnic foods category would have proved compelling to Hassad Food.
Nasser Al Hajri, Hassad Food’s chairman, said the deal was “a strong testament” that his company was “on the right track towards achieving its vision in becoming a leading global provider of high quality food products”.
The transaction is the latest of its kind in India’s FMCG sector. Last year, for example, Singapore’s Temasek Holdings made investments in the consumer goods and agriculture arms of Indian conglomerate Godrej.
Qatar-backed funds are also reportedly in talks to buy French department store chain Printemps. As well as the stake in Sainsbury’s, funds from the emirate also own shares in luxury goods group LVMH.
Globally, M&A in the food sector has remained muted in recent years. Sure, there have been the big-ticket deals we all know about and there have been signs of increased activity in certain markets but 2012 was another year marked by caution throughout company boardrooms.
However, there is the belief among M&A analysts that there could be an increase in activity on the horizon and attention is turning to which actors could drive an upturn in deal-making. And now, alongside the usual suspects of trade buyers and private-equity firms, there is discussion that wealth funds could become more active.
“If you look at the wealthy regions of the world, the Middle East and so on, consumer companies look very, very attractive because they have got that guaranteed cash flow,” Andrew Cosgrove, global lead analyst for consumer products at Ernst & Young, told the Consumer Analyst Group of Europe conference last month.
Pension funds are also a potential alternative source of capital that could rival trade buyers and private equity for consumer goods assets.
Funds like The Ontario Teachers’ Pension Plan Board in Canada have risen in international prominence in recent years. The fund owns stakes in a number of infrastructure assets in Europe and, in 2010, bought Camelot, which has the licence to run the UK National Lottery. The fund has held shares in the food companies in the past – think Canada’s Maple Leaf Foods – and could look at the FMCG space again.
“I view the Canadian pension funds as a more active constituent versus the Middle East or Asian SWFs in consumer goods M&A,” Magnus Scaddan, head of the consumer and retail practice for the EMEA region and M&A advisors Houlihan Lokey, says. “SWFs have traditionally focused on the FIG, natural resources and industrial industry sectors. A number of them would also prefer emerging market transactions. Consumer has not really featured heavily to date.”
He adds: “Furthermore, SWFs are less attracted to auction situations and prefer bilateral opportunities so this has ruled them out of a number of transactions in recent years. In addition they tend to prefer investing in liquid, public securities with a sizeable minority rather than control transactions. Given their minimum ticket size they tend to take positions in corporates with multi tens of billions market capitalisations. SWFs seem to be put off by the high multiples enjoyed by the largest listed consumer goods companies, versus other industry sectors.”
That said, as he recognises, there are one entity that is “effectively” another state-backed fund that has been very active in food recently: China’s Bright Food. Last year, Bright Food acquired 60% of UK-based cereal firm Weetabix. It was Bright Food’s first major investment in Europe and followed investments in New Zealand (Synlait Milk) and Australia (Manassen Foods) in recent years. A month later of announcing its plan to buy a majority stake in Weetabix, it snapped up a majority stake in Bordeaux wine merchant Diva.
Trade buyers and private equity are likely to continue to be the most active acquirers of businesses in the consumer goods space. However, government-backed wealth funds, in possession of vast resources, and pension funds, attracted by the steady returns of FMCG, could prove stiff competition for some assets.