The global food sector has seen an array of M&A in recent quarters, ranging from the mega deals such as the merger between HJ Heinz and Kraft Foods Group to the more commonplace bolt-on acquisitions as large corporations gobble up smaller players to plug gaps in their portfolios. While the food sector has seen a busy period for deal-making, according to research from Ernst and Young, this could actually intensify in the next 12 months. Katy Askew reports.
The latest EY Global Capital Confidence Barometer, a biannual survey of executives in 54 countries, makes for some interesting reading. More than half of CPG companies surveyed – 54% – suggested they expected to pursue acquisitions this year, compared to 39% two years ago.
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EY noted the "growing appetite" for M&A was the result of a "surge in economic confidence". Eighty-four percent of respondents noted improved global economic conditions as a cause for optimism.
As one M&A specialist tells just-food, acquisitions are also rising up the agenda in response to the global pressures that companies are facing. "Transactions are of growing importance to our customers as they respond to pressures on growth and margins, globalisation and challenging regulatory environments."
However, EY advisor Gregory Stemler says, while there is optimism in the air, there is also a good degree of caution. This is reflected in the size of potential targets, as food companies manage their investment expectation.
"The barometer points to increased optimism in the global economy and a growing appetite for M&A. But today, intense cost scrutiny and efficiency are central tenets of corporate strategy. Consumer products and retail companies in particular are extending caution in their M&A planning by focusing on the lower middle market, despite the trend toward a small number of big ticket acquisitions," he notes.
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By GlobalDataThe vast majority of respondents – 82% – are allocating capital to M&A in the lower middle market, with 79% prepared to make an acquisition of up to US$250m and only 1% putting aside more than $1bn for M&A.
While transformational strategic deals might be looking less likely to materialise in the next 12 months, smaller bolt-on deals perform an equally significant role in the context of food sector strategy.
Rapidly evolving consumer habits in developed markets – notably in North America but also increasingly in western Europe – have led to a shift towards innovative M&A investment to plug holes in the portfolio.
A recent investor note from Credit Suisse estimated the top 25 US food brands have lost $18bn in market value since 2009. This share is being taken by smaller, innovative brands that deliver on growing consumer appetite for foods that are healthier, more transparent, have stronger provenance messages or "cleaner" labels. The legacy brands have fallen behind the curve and legacy brand manufacturers are now looking to M&A to help them play catch up.
Categories and sectors attracting the most interest are therefore those that cater to these emergent trends. Natural and organic food companies are high on the hit-list, as are protein providers, free-from food makers, snack firms and companies whose products offer 'on the go' options.
According to Mark Lynch of M&A advisory Oghma Partners, a strong sales trajectory, the potential for margin improvement and branded or specialist positioning are important for buyers.
"What is clear from our perspective as M&A advisors is that there is no shortage of interested buyers for businesses with a good top line growth story, improving or satisfactory margins and a branded positioning or specialist position," he wrote in a review of M&A activity through the beginning of this year. "However, in a number of sub-sectors where returns are sub-optimal and private-label rather than brand is the order of the day, the appetite for assets is less robust."
While many small but high-growth takeover targets deliver on top line potential, their margin structure is frequently well below that of the 'big food' manufacturers. With the mega deals such as Kraft-Heinz placing significant pressure on the food sector as a whole to deliver stronger margins, the synergistic potential of smaller bolt-on acquisitions as they are integrated into larger corporate structures is certainly front of mind. Strategic portfolio optimisation is key.
Indeed, according to EY's barometer, almost half of respondents – 42% – are elevating cost reduction and improved margins on the boardroom agenda.
Stemler says: "Achieving the right balance for profitable growth is still the main focus for the consumer products and retail sector. Companies are seeking to create value and are pursuing mergers both to improve their bottom line by cutting costs, and also to grow their top line in a low-growth environment through portfolio optimisation."
Packaged food makers in developed markets have woken up to a reality where they have lost consumer relevance. They tried to put a finger in the dyke only to discover the flood gates have opened. For this reason, M&A activity over the next year could well focus on bolstering the presence of the big food corporations in their largest markets as well as expanding in key emerging markets.
EY found 44% of respondents are focusing their M&A efforts on existing markets and, according to the Barometer, the UK, China, Australia, India and the US are the top five countries for M&A activity.
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