In recent years, the food industry has been characterised by increasing levels of consolidation, with acquisition activity extending beyond small to medium-sized enterprises. Some of the sectors largest players have changed hands, but where do we go from here? Leatherhead Food International comments.

In recent years, the food industry has been characterised by increasing levels of consolidation, with acquisition activity extending beyond small to medium-sized enterprises. The last couple of years have witnessed the purchase of large food manufacturers, such as Bestfoods, Nabisco, Quaker Oats and Keebler. As a result, sales of food and drink from the world’s top ten manufacturers have increased from US$233.2bn during 2000 to almost US$270bn two years later, representing a rise of almost 16% during this relatively brief period.

Merger and acquisition activity has occurred in most of the world’s regions, although the major deals have involved companies based in the US and Europe. Many of these have been sizeable in financial terms, with five exceeding US$10bn, and many worth over US$1bn.

The largest occurred during 2000, namely Unilever’s purchase of Bestfoods (worth US$21.3bn), Kraft’s deal with Nabisco (worth US$19.2bn) and PepsiCo’s acquisition of Quaker Oats (valued at US$13.8bn). These three acquisitions, together with many more in the food and drink industry, have involved a change in brand ownership, thereby granting access to previously unexplored markets for the acquiring companies.

Companies have made acquisitions such as these for a variety of reasons. Some of the more common are listed below:

  • Entering new markets/countries
  • Extending the range of products/brands
  • Achieving economies of scale
  • Adding to internal capabilities, such as R & D, distribution
  • Countering increased buying power by retailers

Acquisitions have also formed a major part of the recent trend of food manufacturers seeking to reduce their product ranges and focus on fewer business areas. As part of this strategy, non-core businesses have frequently been sold off, or other companies acquired with the aim of developing market positions even further.

Many of the leading companies have sold off parts of their business now viewed as non-core – for example, Danone has recently divested its brewing operations, while ConAgra has sold off its beef and pork processing business. In some instances, companies have used proceeds from divestments to finance acquisitions elsewhere.

Analysed by industry, there have been a large number of sizeable acquisitions in markets such as bakery products, dairy products, confectionery, pet foods and beer. Within the international dairy industry, three leading companies have now emerged as a result of merger and acquisition activity, namely Dean Foods, Fonterra and Arla Foods. Two of these companies have since embarked on joint ventures, thereby broadening the geographical scope of their activities even further.

Falloff of M&A activity since 2001

After the sizeable deals witnessed during 2000, the years 2001 and 2002 have witnessed a drop in acquisition activity. During 2001 and 2002, the total volume of merger and acquisition activity in both Europe and the US has fallen, although this was not quite so dramatic in the food and drink market compared with other industries. The fall in the number of US mergers worth over US$100m has been particularly steep, although the number of smaller acquisitions made has also decreased.

The global food industry is unlikely to witness the level of acquisition activity seen during the 1999-2000 period for some time, mainly for the following reasons:

  • Many of the companies that have made major acquisitions have been integrating their new businesses over the last year, which has required a considerable amount of time and resources.
  • Despite the fact that many of the companies featured in this report are relatively cash-rich, some have incurred debts as a result of acquisitions, which are now in the process of being reduced.
  • The current economic downturn affecting most of the world’s developed markets has led to lower investor expectations, along with a more cautious attitude by management.

Future outlook

However, merger and acquisition activity is forecast to increase again in the future, especially if the economic situation improves. The trend towards consolidation will create increasingly powerful multinational companies with a portfolio of strong brands. Acquisitions are forecast to take place in growing markets, such as functional foods, or in parts of the world where the number of local producers is high, and the share of multinational companies is comparatively low.

This article was taken from The Acquisition Report – Trends & Directions – a report produced by Leatherhead Food International in December 2002. Available at a price of £695, more information about the report can be viewed here.