Last year surprised commentators with the relatively subdued levels of M&A in the food sector. While 2013 did include the largest ever food industry deal by value – the move to take Heinz private – the number of transactions completed came in somewhat below the expectations of M&A advisers. 2014, we are told, is likely to be a different story as deals work their way through the sector’s pipelines and valuations continue their upward march. Katy Askew reports.
According to Ernst and Young M&A advisor Andrew Cosgrove, 2013 was a surprisingly quiet year in terms of food sector M&A levels. “We know from our own client work and the EY Capital Confidence Barometer that there is increasing appetite for deals,” Cosgrove tells just-food.
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In 2014, he expects M&A activity to pick up as the potential of the positive industry sentiment is realised.
Oghma Partners’ Mark Lynch concurs that this year is likely to be a busy one on the M&A front. “Looking into 2014 we expect deal multiples to remain robust and see an active first-quarter given a number of deals currently in the pipeline,” he observes.
Indeed, already this year we have seen the highly acquisitive US natural and organic food group Hain Celestial take control of family-owned Tilda’s rice brand, while earlier this week Premier Foods quelled long-running speculation over the future of its bread business when it revealed plans to establish the unit as a stand-alone joint venture with private equity firm Gores Group.
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Ironically, an increased appetite for deal-making in 2014 could be driven by ongoing weak consumer sentiment and challenging trading conditions, which are dampening the potential for organic growth.
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By GlobalDataOn the one hand, weak organic growth prospects are prompting food companies to look to M&A to expand into adjustment categories and markets, unlocking new growth opportunities. On the other, difficult trading conditions are forcing a number of food multinationals to rationaise and optimise their portfolios, divesting non-core assets.
Both Nestle and Unilever can be counted in latter group. Last year, Unielver has shed a swathe of non-core assets, including Skippy and Wishbone, in its bid to focus on “fewer, better brands” and the conglomerate intends to follow this path as it turns its attention to revitalising the food side of its business. Meanwhile, as profitability has come under pressure at Nestle, management has insisted that it must focus its attention on battles it can win. Last year, the world’s largest food group sold off its Jenny Craig weight management business and it would seem that further disposals could be on the cards – with analysts repeatedly pointing to the underperforming Lean Cuisine frozen ready meals business in the US.
“[2013 saw] the trading of brands amongst the large corporates as they all try to realign their portfolios to what they perceive are key investment markets to come… and there are obviously more to come as corporates try to realign portfolios,” Grant Thornton research analyst Tracey Jarvis says.
Key to food multinationals as they look to develop their brand stable will be expansion into high growth categories or markets.
Zin Bekkali, CEO of frontier market specialist Silk Invest predicts a growing appetite for businesses in as yet under-developed regions. “2013 turned out to be a great year for the frontier markets. Our markets have built a strong base for what we see as another year of “continued strength”, which is also our central theme for 2014,” Bekkali says.
According to the assessment of Silk Invest, emerging markets are entering a “new growth phase” and in 2014 will account for around 51% of global GDP. According to the IMF, the BRIC markets are expected to see GDP growth to pick up over the next year – climbing to around 4.5% and dwarfing the US’s expected GDP growth of 2.6%.
However, emerging markets are also leaving behind a “relativity easy” period of growth, the investment firm suggests in its market outlook for the coming year. “Investors still need to adjust to this reality.”
Moving forward, a significant challenge to many an M&A deal in emerging markets will be the increasingly high valuations placed on assets in these high-growth areas. Bekkali predicts that this will result in a jump in deal making in “frontier markets” including Africa and the Middle East.
The BRIC markets will remain a popular investment destination – but the nature of this investment is likely to evolve in response to higher valuations.
Increasingly, firms in the BRIC markets are likely to opt for the establishment of joint ventures. Another significant and growing trend is the tendency for capital to flow from emerging to developed markets – as evidenced by last year’s Shuanghui International (now WH Group) acquisition of Smithfield and Bright Foods move to buy Weetabix. Currently, a key area that is attracting overseas investment from Chinese firms is the dairy sector, as companies look to establish safe milk supplies to feed China’s booming demand.
It isn’t just valuations in emerging markets that are set to rise this year, Glenboden advisor Stefan Kirk suggests. “We can think in terms of ten-year cycles that have occurred each decade since the 80s. Around the middle of the decade valuations pick up, reaching a crescendo in the latter part of the decade before a marked downturn,” he tells just-food.
In the mid-2000s, Kirk says the cycle reached its peek with Danone’s 2007 acquisition of Numico – a deal that at the time was viewed by analysts as expensive almost to the point of breaking the bank. “I see no reason why this cycle shouldn’t occur for a fourth decade in a row. It’s arguable now been kicked-off, notably by Suntory’s acquisition of Jim Beam again for an EBITDA multiple reported to be around x20,” Kirk continues.
A significant factor in the rise in valuations is the cyclical nature of the banking system. Kirk explains: “Risk -weighted capital adequacy ratios are of critical importance in bank regulation. In an economic downturn, when banks are having to recoup losses, they weight their allocation into safe assets like government securities. Later when the upturn comes, banks are able to expand their credit activity to business. Ultimately that leads inter alia to higher valuations in M&A transactions.”
As valuations go up, a number of potential sellers are likely to be lured to the table, notably PE investors. “Looking into 2014 we may see further disposal of private equity owned assets as rising valuations and the passage of time persuade private equity funds to part with, in some cases, rather long held assets,” Oghma Partners predict in their most recent M&A update.
In terms of value and volume, then, it would seem that the industry is expecting 2014 to see a marked rise in M&A transactions.
