just-food’s industry confidence survey for 2013 indicated an increased appetite for M&A this year after what some saw, globally, as a lacklustre year in the sector for deals. What lies ahead in the mergers and acquisitions arena over the next few months?

You expect there to be more M&A opportunites for your business this year than in 2012 – and you will be more willing to use deals to grow.

They were the two main messages on mergers and acquisitions from just-food’s confidence survey for 2013, which was discussed in an exclusive webinar last month.

Our survey of the international food industry showed nearly half of respondents believed there would be more chance to participate in M&A this year – up from just over 44% in 2012.

And, no doubt of particular interest to investment banks and M&A advisors, more respondents want to look to transactions to expand their business. In 2012, just under 36% said they would be more willing to use M&A to grow; that number jumped to just shy of 46% in this year’s survey.

In certain markets, there were signs M&A activity picked up in 2012. Analysts at Grant Thornton say deal volumes in the UK and Ireland’s food and drink sectors were up 17% in 2011.

How well do you really know your competitors?

Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.

Company Profile – free sample

Thank you!

Your download email will arrive shortly

Not ready to buy yet? Download a free sample

We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form

By GlobalData

Globally, the picture was more mixed. Ernst & Young, analysing Thomson Reuters data, says deal volumes worldwide fell by more than 28% last year on the level seen in 2011. There were a number of major transactions – Kellogg buying Pringles, Nestle snapping up Pfizer‘s infant nutrition business and ConAgra Foods acquiring US private-label peer Ralcorp Holdings were three stand-outs. However, companies were cautious, particularly about big-ticket deals.

Of course, in the early weeks of 2013, we have seen the largest-ever deal in the food industry announced – Berkshire Hathaway and 3G Capital’s agreement to buy Heinz for a whopping $28bn. But what broader trends for M&A should we expect to see in the food industy this year?

“For me the core message that emerges from the survey is largely positive. They demonstrate that confidence is growing around M&A and businesses are opening up to M&A as a viable means of expansion,” Charlotte Ashton, who works in Grant Thornton’s UK food and beverage corporate finance team, said in last month’s webinar.

Ashton pointed to other results in the survey to explain what she saw as the reasons why companies could turn to M&A this year. “Seventy-one per cent of respondents to the just-food survey expect the competitive environment to intensify. More than 50% expect promotional activity and commodity prices to increase. This is likely to lead to continued UK and Ireland market consolidation,” she said.

Food businesses, Ashton said, were “being squeezed at both ends of the spectrum”. She added: “Retailers are bearing the brunt of reduced consumer spending and suppliers are dealing with rising commodity costs and in some cases exchange rate exposure. A lot of the large corporates are increasingly moving to make global acquisitions to spread exposure to fluctuating exchange rates and commodity prices, as well as to rationalise distribution networks.”

The just-food confidence survey also showed half of respondents would only maintain their investment in NPD at the same level as 2012, which, Ashton argued, could also be a driver behind M&A activity. “There is often a trade-off between meeting short- and long-term objectives on growth in the face of increased competition. Corporates are looking to acquire new products and expertise rather than invest time and money in developing an unproven concept at the risk of failure,” she said.

Which type of entity will be behind M&A activity in 2013? During the downturn, private-equity firms have participated less, with financing more difficult to come by. The Heinz deal could be a sign private-equity firms will become more active; also this month we have seen private-equity group Rhône Capital agreeing a EUR1bn-plus deal to buy CSM’s bakery businesses in Europe and North America. In Australia, TPG Capital has bought poultry giant Inghams.

Ashton says private-equity activity in the UK and Irish food and beverage markets reached its highest level in 2012 since 2007. However, she was cautious about their prospects. “Restrictions on leverage ability caps the returns that can be achieved by private equity and limits their ability to compete with cash-rich corporates, who offer can take a long-term view,” she told attendees of the just-food webinar.

“They are losing out to trade on deals due to lack of synergistic benefits, which corporates can use to justify a higher valuation. We see private equity being left behind by trade in some of the auction processes.”

Since the webinar, just-food has seen the findings of Ernst & Young’s analysis of M&A in the food sector in 2012 and heard its forecasts for activity this year – and its views made interesting reading.

Presenting at the Consumer Analyst Group of Europe conference in London earlier this month, Francis Small, head of transaction advisory services at Ernst & Young, said deals had picked up in the fourth quarter of 2012, which he characterised as a “lacklustre year” for the food sector.

However, he said the early weeks of 2013 had suggested there was still a mood of caution in the industry. “It appears at the moment that the appetite for M&A activity continues to be relatively low. We’re approaching the end of Q1 but, other than the Heinz deal, we’re not expecting the Q1 numbers to show any sign of relief.”

Ernst & Young believes M&A can help companies deal with many of the challenges they are facing, including pressure on consumer spending in the West, volatility in commodity prices and, for groups exposed to more mature markets and categories, the need for a presence in faster-growing economies and sectors.

However, often, particularly when looking at emerging markets, caution in the boardroom is holding back businesses, even as financing becomes relatively less expensive, Small told the CAGE conference. CEOs want to do deals but their boards can be more reluctant, he said. “Quite probably the executive directors would make the business case for themselves but, when they take it to board level, they are having a more challenging conversation.”

And a final trend that adds to the debate on M&A in the food sector is the apparent stronger willingness among companies to sell. “You see a contrasting picture on appetite for disposals,” Small said. “The vast majority of people intend to accelerate divestment over the next two years. We certainly expect that over the next two years there will be significant divestment activity. It remains to be seen whether that stimualates an increase in acquisition activity.”

He added: “We’re faced with a dichotomy. The drivers for very significant change [in the industry] have never been higher but yet on the M&A side, the appetite for M&A continues to be relatively low. We would anticipate over the next 12 months or so we would start to see that gap start to close and we expect to see M&A activity rise. The question for organisations is, if that’s the pattern that’s coming, where is it that you want to be?”

just-food’s readers suggested their appetite for M&A has increased. Will that translate into deals? Watch our pages this year. 

Do you expect there to be more M&A opportunities for your business in 2013?
Answer Options Response Percent
Yes 49.6%
No 19%
Stay the same 31.4%
Will your business be more willing to use M&A to grow in 2013?
Answer Options Response Percent
Yes 45.8%
No 20.8%
Stay the same 33.3%
What will your R&D and innovation expenditure be in 2013?
Answer Options Response Percent
Higher than 2012 33.9%
Lower than 2012 13.6%
The same as 2012 52.5%