Data suggests pressure on deal-making in the packaged food industry in 2019. M&A advisor Stefan Kirk puts forward some possible reasons.
The value of announced food M&A deals in the nine months to the end of September was 55% down on the previous year, according to figures from UK-based data, research and analytics firm GlobalData.
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Meanwhile, PitchBook Data, a US company covering the private capital markets, noted in its third-quarter review the value and volume of European M&A deals is set this year to be the lowest since 2014 and 2010 respectively.
An uptick in the third quarter, reported by GlobalData, was two-thirds, thanks to a handful of mega-deals – but that was more about money-management than underlying economics.
These declines are perversely reassuring to me, because it confirms the trend that I’m experiencing in my own M&A practice.
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As a partner in an M&A firm that’s part of an international advisory network, in the last 12 months I’ve been running nine mandates across the food-and-beverage spectrum, involving six European countries as well as South Africa, China and Japan.
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By GlobalDataIn my 30 years in the M&A business, I’ve rarely been so busy with mandates but nor have I experienced such a low conversion rate to concluded transactions – with so many deals either terminated at an advanced stage, kicked into touch or suspended until next year.
What’s the reason for this decline in M&A transactions at a time when everything’s going okay in the global economy?
My diagnosis encompasses one, a sector-specific reason to do with consumer trends in the food-and-beverage market; two, a more micro factor to do with the way decision-making in companies has evolved thanks to technology; and, three, a macro reason to do with changes in the global economy since the financial crisis of 2008.
The millennials factor
It could be argued the mega trends among millennial consumers are so powerful now, from superfoods to plant-based proteins, that mainstream M&A activity has somehow been sidelined. Try finding a buyer for a mainstream dairy or meat business these days.
True, several food groups have taken to investing in food start-ups, through in-house venture funds. Danone has invested in an organic dairy-free yoghurt start-up in US, not a mature yoghurt business as you’d expect. Thai Union Group has invested in an Israeli insect-larva protein venture, rather than just keep consolidating global seafood. The list goes on.
However in my view this factor, although significant, is the least important of the three reasons for the slowing down of global food M&A. Big food companies quietly know most of those trends will end up as fads or niches, not transform their markets.
Meanwhile, the sums involved in funding food start-ups are relatively small, and the teams involved are separate to those working on M&A deals.
And the fundamentals that drive mainstream M&A activity, notably consolidation and geographic expansion, are as compelling today as they’ve ever been.
Granular knowledge
Decisions are based on more information and transparency than ever before. This granular knowledge means greater de facto accountability, causing greater apprehension among senior execs when confronted with the inevitable go- or no-go decisions in M&A transactions, particularly over the critical question of pricing.
Most of us know the volume and velocity of information flow in an M&A transaction is far greater than before, thanks to technology. Accompanying arms-length M&A deals these days are reams of Excel-based financial controlling and management accounting information, breaking down revenues and costs in every possible permutation.
Less obvious is the related increase in decision-making transparency, up and down hierarchies. ‘Micro-management’ has become so universal in companies that the term itself has fallen out of usage. If I’ve chosen too high a valuation multiple for a deal, my analyst can call me out – just as I can call him out, if he’s neglected to subtract net debt from EV. This is the inevitable result of everybody working on the same documents, at the same time, with the same access to data sources.
Relating back to my M&A deals, in many cases the transaction didn’t happen not because differences in price expectation were great but because granular knowledge – and the apprehension that creates – silted up negotiations.
“In the past, senior execs in the boardroom would agree to that extra 25% to the valuation in order to make the deal happen”
In the past, senior execs in the boardroom would agree to that extra 25% to the valuation in order to make the deal happen. There was less granularity back then, so the decision could be justified on the grounds of gut feel, or a strategic premium, or alignment behind the transaction. The rest of the company, outside the boardroom, would just accept the judgment of their elders, deferring to greater wisdoms that they themselves weren’t privy to.
Financial re-regulation
From the micro-organisational to the macro-economic; I wonder whether we’re now living in an era where, after the financial re-regulation frantically enacted to stem the crisis of 2008, we’re no longer subject to the decadal business cycles that began in the 1980s.
Financial de-regulation in the 1980s gave rise to boom-bust cycles that culminated in 1989 with over-heating and inflation, in 2000 with the bursting of the dotcom bubble, and in 2008 with the collapse of Lehman Brothers and so. But where, at the end of 2019, are the portents now?
A friend who works at the IMF recently sent me an article showing how the banking system is better capitalised now than in the 2000s. Another friend, at Morgan Stanley, recently told me investment banking had become a boring but reliable job. All good news, generally.
The trouble is that, weaved into those decadal cycles, was also an unprecedented increase in global M&A activity. During the booms, buyers were keen to acquire prized assets before an economic downturn made them out-of-bounds; sellers were keen to cash-in while the cashier’s desk was still open. During the busts, companies needed to shed assets in restructurings. If that cycle no longer exists, then a major impetus behind M&A transactions disappears.
Relating back to my own, unconsummated, M&A mandates, there’s indeed been a strong element of ‘why take the risk of this acquisition, when our business is doing so well without it?’ One buy-side client has pulled a deal, even though it would have represented a break-through in the company’s international expansion, because their consolidated EBITDA had anyway more than doubled, and they can always return to the table in a few years’ time.
The moral of my story is this: everything has to be perfect these days for an M&A deal to go through. Because deals rarely are perfect, buyers, afraid of the spotlight and not under significant time pressure, aren’t always executing – and hence the slowdown in global M&A.
Not interested in paying strategic premia, not interested when only 50% of the target’s portfolio fits fully; if the ball isn’t hitting the ‘sweet spot’, then the stroke isn’t played.
