In an uncertain business environment, with executives watching closely how the incoming President Trump could affect areas from regulations to trade, how the UK’s Brexit talks could unfold and how major European economies will vote in a series of elections in 2017, where are the opportunities for M&A in the international food sector this year? Dean Best reports.
While there are indications sentiment in the food industry for M&A in 2017 is a touch more muted than in 2016, industry watchers believe there are sectors that could see a flurry of activity this year.
Eyes on organic
The organic sector, growing rapidly in the US and in a number of major markets in continental Europe, has been touted as an industry that may see a burst of deal-making in 2017.
“Organic is one that we have singled out as an area of potential M&A activity,” Cyrille Filott, a global consumer foods strategist at the Netherlands-based Rabobank, says. “You’ve seen, of course, Danone [and] WhiteWave. You see some smaller deals here in Europe with, for example, Wessanen buying in Spain. Probably there is more to be done given that organic is one of the few categories that is actually growing and growing quite nicely.”
In the US, sales of organic food rose 11% in 2015, the most recent data for which figures are available. In Europe, the most significant markets for organic products are in western and northern Europe, with Germany, France and the UK the three largest markets, with each growing solidly. In 2015, sales of organic food and drink grew 11% in Germany, by 15% in France and by 5% in the UK. However, per capita consumption in these three markets lag behind levels seen in countries including Switzerland, Denmark and Sweden, indicating a runway for growth.
“I can imagine that food companies are looking for that type of growth; you can develop internally but an acquisition potentially may also make sense,” Filott says.
Of course, the growth the organic sector is enjoying in a number of western markets is only part of the story. Competition among suitors for high-growth assets is likely to be fierce. Moreover, the supply of organic food is struggling to match demand in a number of countries, which while keeping margins and prices high, will push up the value of assets further.
Not all M&A watchers see the growth of the organic sector as a reason why interest from suitors could rise. Jonathan Buxton, head of the consumer group at London-based M&A advisers Cavendish Corporate Finance, suggests another dynamic.
“If you’ve got a relative downturn and a flattening in consumer demand, with organic always trading with a premium, are you really going to see people making those healthy eating choices when they’ve got less cash? I’d say we might well see some consolidation but that’s actually probably going to be driven by a potential slowing in demand,” Buxton says.
Healthy snacking to continue to be fertile ground
When it comes to M&A in the food industry, healthy snacking has been a hotbed of activity in recent years.
2016 saw deals include US chips-to-pretzel giant Snyder’s-Lance swooping for UK calorie-focused popcorn maker Metcalfe’s Skinny, the sale of Stream Foods, the owner UK children’s snacking brand Fruit Bowl, to South Africa’s Pioneer Food Group and another US group, Amplify Snack Brands, snap up better-for-you snacks firm Boundless Nutrition.
The opening weeks of 2017 have already seen Kellogg invest in US firm Kuli Kuli, a company making bars and powders from plant food moringa and Pure Growth Organic, a US firm making organic snacks aimed at children, attract investment from the acquisitive Sunrise Strategic Partners, the fund set up by Steve Hughes, the former CEO of Boulder Brands.
“Snacking, because of all the changes in consumer preferences, interest in convenience on-the-go, will continue [to see M&A],” Filott says.
While the area is set to be a fertile category for deals, some believe that, in the UK at least, there will be a reduction in activity this year.
“I suspect healthy snacking has probably had its round,” Buxton says. “There’s going to be more things coming through but at the moment they’re fairly small businesses. If they scale up and become more mainstream, then you’ll see some of them getting the attention of the bigger players, such as Propercorn, which Piper invested in.”
Could indulgence be a private-equity play?
M&A strategists at most of the larger food multinationals, when drawing up their targets, have health at or near the top of their trends to hit.
That consumer interest in the links between diet and health is rising, not just in developed markets but emerging economies, too, is undeniable.
However, for the majority of consumers, there remains a time and a place to indulge. With trade suitors looking elsewhere, could this be an area in which private-equity could come to the fore?
Last year, we saw French investment firm Eurazeo move to buy a clutch of Mondelez International’s European confectionery brands, including Carambar and Krema. Eurazeo believes it can grow a set of brands that may have been deemed non-core by the Cadbury and Oreo maker. “We are particularly enthusiastic about this unique opportunity to invigorate and develop a portfolio of legendary brands, which are deeply rooted in our history, by significantly investing in innovation and marketing support,” Eurazeo deputy CEO Virginie Morgon said.
Meanwhile, the resurrected Hostess Brands, the US snack maker and owner of the Twinkies brand, was sold to US investment firm Gores Group for US$725m.
The appeal of brands that take consumers back to a time before they worried about sugar content or clean labels can be witnessed in the performance of Hostess, which saw a near-16% increase in sales during the first nine months of 2016. This was supported by “white space” distribution gains and an increase in marketing investment.
However, there is more than one way for a private-equity buyer to make a return and, looking ahead, Filott sees the confectionery is ripe for a private-equity firm to come in and act as a consolidator. “The big challenge for the bigger confectionery companies is looking for growth, so a private equity may come in and do a – I’m not sure whether I should call it the 3G Capital-type of rationalisation – but something like that, as in an increased cost focus and streamlining of the asset. I think that that’s something that may make sense, in a no-growth environment because in general confectionery isn’t growing that much.”
Could foodservice come into play?
With, broadly speaking, foodservice growing at a healthier clip than grocery retail, there is no question many packaged food manufacturers are weighing up how to expand in that channel.
The more oft-trodden path is for retail-focused food manufacturers to acquire suppliers with greater exposure to foodservice but in 2016 Thai Union Group announced a notable deal, making a $575m “strategic investment” in Red Lobster, a US-based seafood restaurant operator, to help build what the seafood processing giant called its “direct-to-consumer” channel.
How could those considerations play out in the M&A sphere in 2017?
Buxton points to two recent deals in the UK foodservice sector – both carried out by the owner of 2 Sisters Food Group, one of the country’s largest food manufacturers.
In October, food tycoon Ranjit Boparan snapped up American-style restaurant chain Ed’s Easy Diner out of administration, adding to his growing presence in the country’s foodservice sector.
London-based Ed’s Easy Diner was bought in a pre-pack administration deal through one of Mr. Boparan’s restaurant chains, Giraffe Concepts, itself only acquired by the businessman from Tesco last summer.
“I think very much and there’s a relentless trend towards more and more eating out or eating in the home and ordering out. I think that’s going to be a big driver,” Buxton says. “That’s the sort of three-way split where you’re supplying the supermarkets, you’re supplying foodservice and you’re supplying direct to the end-customer via your own restaurant. That’s a very efficient way of really covering all the bases. If you’re a food business and you’ve got the skills to operate these things then it can make a lot of sense. Then they’re taking all of the margin all the way through from production all the way through to the consumer.”
At Rabobank, Filott believes there could be more deals done by retail-focused consumer packaged companies to boost their presence in foodservice but suggests it fits a broader narrative that he calls “reconnecting to the consumer”. He points to Unilever‘s $1bn acquisition of Dollar Shave Club – a US company that delivers personal grooming products direct to consumers – last year as a pointer to this trend, even if in a different channel.
“One of the big stories in ’17 and then beyond is how Big Food can reconnect with the consumer. Is foodservice a solution to that? Potentially, could be. That’s at least more directly connecting with the consumer,” he says. “Unilever and Dollar Shave Club is a non-food example but it is a great one and everybody is looking at it as in what’s going on here, why are they doing that and what are the ramifications. It’s about reconnecting to the consumer and whether that’s through a certain e-commerce or internet platform or through foodservice, those could be ways to get there.”