M&A levels remained relatively subdued in 2013. Growing private-equity interest and something of a shift in capital flows to mature markets have been significant trends shaping the M&A landscape. While gaining routes-to-market in emerging economies has remained key for strategic buyers. Katy Askew examines some of the stand-out deals of the past 12 months.
While some large-scale deals were completed in 2013, early indicators would suggest M&A activity in the food sector has remained relatively modest.
True, the economic outlook in developed markets has brightened somewhat. However, growth in emerging markets cooled this year and many Western economies have yet to return to pre-downturn growth levels. Consumers remain guarded. It would seem the mixed economic picture and cautious mood has rubbed off on would-be investors in the sector.
In its latest M&A update, advisory firm Oghma Partners revealed a “relatively quiet” second trimester that saw a 14% drop in food and drink M&A in Europe. This came on the back of flat volumes in the first four months, from January to April.
“Activity within the food and beverage sector was particularly slow,” Oghma partner Mark Lynch wrote. However, he added: “The remainder of 2013 looks to be significantly more active”.
There have been some bright spots. 2013 was the year private equity regained its appetite for the food sector. The year started off with a bang when the largest-ever takeover in the food industry was announced in February. Warren Buffett’s Berkshire Hathaway fund and private-equity firm 3G Capital revealed plans to take condiments giant Heinz private in a deal that valued the ketchup-to-beans manufacturer at US$28bn.
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As Ernst and Young’s Andrew Cosgrove says: “The big theme has been the return of PE to the sector with 3G/Berkshire Hathaway’s buyout of Heinz the stand-out deal… PE had been relatively quiet the last few years as consumer was regarded as being one of the poorer performing sectors when it came to exit potential. This looks to have changed.”
Private-equity investors have been out in force over the past 12 months, with deals including PAI Partners’ acquisition of R&R Ice Cream; CapVest Equity Partners and Lantmännen’s move to team up and create a regional poultry powerhouse in the Nordics; turnaround specialist Rutland Partners’ investment in Bernard Matthews; and Tyrrells swapping one PE owner for another when Investcorp purchased the upmarket UK crisp maker from Langholm Capital.
For Stefan Kirk, an M&A advisor at Glenboden, there were two “stand-out deals” in 2013 – the sale of Tyrrells and, las month, the sale of UK biscuit firm Burton’s Biscuit Co. to the Ontario Teachers’ Pension Plan.
The transactions, Kirk suggests, demonstrate the profile of possible buyers of food business are changing.
Kirk says the Tyrrells sale demonstrates the ascendancy of private-equity investors over trade buyers, particularly because the crisp firm would have been a tempting prize for a strategic buyer. “Tyrrells ticked the boxes for a trade buyer, like Intersnack for example. It delivers premiumisation of portfolio, internationalisation potential, cost synergies. In the event, the company was acquired by a petrodollar portfolio manager – Bahrain-based Investcorp,” he says.
Kirk also found OTPP a surprising buyer for Burton’s. “With Burton’s, you’d expect a mature company that delivers reasonable margins to be the subject of a secondary buy-out by an independent private equity firm specialised in consumer goods, like Lion Capital. In the event, the bid’s won by the PE arm of Ontario Teachers’ pension fund.”
The Canadian pension fund is no stranger to investing in the food industry, which is often viewed as a safe bet for steady returns. It holds shares in Nestle and Unilever with a value of C$198.8m and C$148.5m respectively. It also has interests in smaller food companies, such as US snack maker Shearer’s Foods.
The group’s acquisition of Burton’s does point to a shift in investor profile. Alongside the usual suspects of trade buyers and private-equity firms, there is a feeling that Middle Eastern wealth funds and pension funds are increasingly becoming alternative source of capital, lured by the guaranteed cash flow offered by FMCG companies.
Much trade activity has focused on the swapping of brands as the corporate food giants work to manage their portfolios with a focus on fewer, larger brands.
Prompted by challenging trading conditions and a slow-growth environment, food companies want to concentrate their resources behind the brands that they feel offer the opportunity for big wins. In this context, non-core brands are viewed as a distraction rather than an opportunity.
Industry heavyweights Nestle and Unilever have both been engaged in a process of portfolio trimming – with Unilever selling its Wishbone dressings and Skippy peanut butter businesses in the US while Nestle cut loose its Jenny Craig weight management business.
“The trading of brands that has gone on amongst the large corporates as they all try to realign their portfolios to what they perceive are key investment markets to come… There are obviously more [disposals] to come as corporates try to realign portfolios,” Tracey Jarvis, research analyst for the food and beverage team at Grant Thornton, predicts.
But, where some see a drain on resources, others see an opportunity to expand into new areas and grow sales in mature markets.
Unilever’s sale of Skippy for $700m to Hormel Foods is an excellent example of this. For Hormel, Skippy helps balance its packaged food and protein portfolio. It also offers the group a strong brand – with a US market share of 17% and household penetration of 74% – in a sector that is growing ahead of overall US grocery sales. Hormel indicated that it plans to drive sales growth by focusing on innovation in the US. Skippy is also the number one international peanut butter brand, expanding Hormel’s global footprint and increasing international sales by an estimated 30%.
Strategic buyers this year have focused their acquisitive attention on bolt-on acquisitions that expand their presence in the faster-growth sectors of mature markets.
Growing consumer interest in free-from attracted attention. US spreads-to-coffee group JM Smucker acquired organic and gluten-free group Enray; while UK free-from firm Genius acquired the free-from bakery business of Finsbury Food Group.
Competition stepped up in the organic baby food market in the UK and US as Campbell Soup Co acquired organic baby food maker Plum Organics; Hain Celestial strengthened its hand in the premium infant food category with the acquisition of Ella’s Kitchen; and infant formula giant Danone expanded into high-growth organic baby food sector in the US.
Likewise, acquisitive US cereal firm Post Holdings has clearly been focused on expanding into higher-growth areas in the US through M&A. The firm completed a massive six small-scale acquisitions over the last 12 months, including Hearthside Food Solutions, the Golden Boy nut butter business and sports nutrition firm Dymatize. The group is broadening its portfolio to capitalise on the growth areas of “active nutrition” and private label and M&A has formed a key plank of this strategy.
Capital has also flowed from emerging market companies, who have continued to show an appetite for US and European food firms.
Sigma Alimentos, the food arm of Mexican conglomerate Alfa, launched a takeover bid for Spanish meat group Campofrio, hoping to take advantage of the ongoing economic weakness in southern Europe. The primary motivation for the Latin American regional giant’s offer was the market access that it would gain in Europe, catapulting the firm onto the global stage.
In one of the most high-profile takeovers of 2013, China’s Shuanghui International snapped up US pork producer Smithfield Foods in a deal valuing the company at $7.1bn, including debt. Shuanghui overcome concerns that the acquisition undervalues Smithfield – and indeed that it could pose a threat to US national security – to joined two of the world’s largest meat group’s to form a truly global juggernaut.
Shuanghui is the majority shareholder in Henan Shuanghui Investment & Development Co., the number one meat group in China, and Smithfield is the largest pork producer in the world. Through the deal, Shuanghui hopes to benefit from Smithfield’s expertise in supply chain management and access to US pigmeat. For its part, Smithfield emphasised the move would open the massive Chinese market to US hog farmers.
Shuanghui is not the only food firm that has looked to M&A to cash in on the opportunity presented by emerging markets – and China in particular. State-baked Chinese dairy giant Mengnui purchased domestic infant formula Yashili and is now benefiting from the Chinese government’s drive to strengthen and consolidate Chinese formula manufacturers as a “national champion” in the sector. US spice-maker McCormick bought up Wuhan Asia-Pacific Condiments Co., or WAPC, a Chinese bouillon producer in a move that doubled its US sales. And, yesterday (19 December), Hershey revealed a deal to acquire Shanghai Golden Monkey Food Joint Stock Co., in a move that would expand its distribution reach and provide local consumer insight.
While a healthy helping of caution and tight capital management would seem to have dampened the appetite of some trade buyers, it is clear that food companies are still willing to invest in M&A to expand into faster-growth areas of the food sector.