The rise of the emerging markets of the East has led some M&A watchers to believe companies in markets like India and China could be more regular buyers of businesses in the West.
Groups in those markets, so the argument goes, may want to attain the distribution, technological and manufacturing expertise built up by Western firms and transfer that to their domestic businesses.
The news last week that UK convenience food group and supplier to the multiples Adelie Food Holdings has been sold to Indian leisure company India Hospitality Corp (IHC) added to that debate.
The UK convenience food producer, which supplies products including salads, quiches and sandwiches to UK multiples including Asda, has been bought from private-equity firm Duke Street Capital.
The acquisition is understood to be IHC’s first major investment in UK. The Indian leisure company, which is 58% owned by US investment firms Hayground Cove Management Capital and Navis Capital, services the air catering, restaurant and hotel industries.
The move into convenience will be a first for the group. Its reasons for purchasing Adelie are, the CEO Ravi Deol told just food, as part of a planned further expansion across the European food market.
Deol, said the company was “open to evaluate opportunities across UK/Europe with strategic importance”.
The CEO, however, also pointed to benefits such as drawing competencies – product and people, credibility and upstream learning,” with Adelie providing “access to the best in class upstream capability which can be competitively deployed in other markets, specifically India.”
An analyst that wished to remain anonymous, however, questioned how beneficial the deal will be to IHC and whether, in the Indian market, its consumers are ready for the convenience to-go offering.
“I have a very big question on how well developed the Indian convenience food sector is for something like the technology that Adelie uses,” the analyst told just-food. “From my limited knowledge of how the Indian convenience sector works, it is a very complex logistical distribution model with people ordering personalised food to their desks and Adelie doesn’t do that. I don’t imagine they can supply any deeper insight into how that model works, because I guess that is essentially the model they are going to be up against.”
The analyst suggested that, if it is knowledge of the convenience model IHC is looking for, the company could have paid a consultancy for the information.
“I’m not quite sure how good the deal actually is. Obviously, the reasons that they’ve stated for purchasing Adelie is to use those core skills of convenience food in the Indian market. None of the assets they’ve got in the UK are transferable really.”
IHC joins a growing number of companies in the developing countries that are investing in the West to take advantage of their model for domestic benefits.
Analysts have said companies in the West have built up a lot of expertise in distribution, technology and manufacturing and groups in China and India may want to attain that knowledge for their own businesses back home – and could do that through acquisition. This kind of deal would support that thesis.
However, Trefor Griffith, corporate finance director at UK-based financial services firm Grant Thornton, believes the deal will benefit both firms in the long term.
“There will be a cross fertilisation of ideas and products,” he told just-food. “Using India as an example, the requirement for Indian food in this country is very high, so being able to bring additional products into Adelie’s range should be beneficial really.
“While IHC will look to leverage Adelie’s skills in other markets, they’re not going to take them away from the UK. It should be incremental, additional, from Adelie’s point of view, the opportunity to grow overseas but still in the UK.”
For Adelie, Griffith believe IHC will bring its global footprint to the table.
“IHC will plug Adelie’s expertise into those growing markets, as well as the mature markets such as the US, to get the benefit of those. There are opportunities for UK manufacturers to grow in the UK because the population is increasing and certain demographics are changing … but the population is growing at a slower rate than that of emerging economies, so if you can access those you can grow the business more quickly and this will allow Adelie to do that.”
Whether we can expect companies in the emerging markets of the East to become more regular buyers of firms in the West is a question that has caused debate in M&A advisory circles and in the industry over the last decade and it has intensified during the downturn, with markets like India and China growing at rates that countries in the West can only dream of.
“We’ve seen it already to some extent with the likes of Tetley and Tata and I think we will continue to see it where there is a real strategic reason,” Griffith told just-food. “But it will be selective.”
He uses supermarkets as an example. “In terms of India it will be interesting to see what happens to supermarkets. They have been refused entry into India fairly recently but that may change, and if that happens they are going to require that whole supply chain management piece which is currently not at the level of sophistication that it is the UK, so therefore they’re going to need people to help them.
“Supermarkets into India will be a huge driver of consolidation if those changes were to happen, and if it doesn’t then you will probably see more of this type of deal where they can leverage the product and skills into different areas,” he told just-food.
As for IHC and Adelie for now, Griffith is confident the acquisition is a win-win deal.
“It should be really good for both IHC and Adelie, and ultimately for the consumer both in the UK and in the overseas markets they will go into.. it will be interesting to see how many other similar deals are done over the next few years.”