Kraft Foods’ move to buy Cadbury in January failed to spark a burst of M&A activity in the food industry, as economic conditions continued to dampen attitude to risk. As the year progressed, however, and confidence returned, the pace of acquisitions picked up. But as Dean Best reports, the nature and rationale behind the deals has altered significantly.

Cast your mind back 12 months. Major economies were still in recession, consumer confidence was on the floor and, due to the financial crisis of late 2008 and early 2009, lending had dried up. At the back end of 2009, the only major (potential) takeover in town was Kraft Foods’ pursuit of Cadbury.

Three weeks into 2010, Kraft finally won over the Cadbury board with a higher offer and, as they say, the rest is history. However, some industry watchers expected the GBP11.5bn sale of Cadbury to spark a wave of consolidation in parts of the food sector, particularly in confectionery.

In reality, such predictions proved way off the mark. Kraft’s interest in the Dairy Milk maker had its own logic. In fact, the only knock-on effect it had in terms of M&A was Kraft’s decision two weeks earlier to sell its US pizza business to Nestle – ostensibly to raise funds for its bid for Cadbury and to take one of its possible rivals out of the race for the UK confectioner.

The early months of 2010 saw few major pieces of M&A in the food industry. The downturn and weak consumer confidence meant food manufacturers were focusing more on cost and providing value for shoppers than expansion through acquisition. Lending conditions were also hardly conducive to a fertile M&A environment. Private-equity firms, which had spent much of the Noughties securing deals at ever higher multiples with ever-more amounts of debt, were forced to keep their powder dry. And, in effect, the major deals dried up.

That said, as the year turned to spring, some green shoots emerged. US snack maker Diamond Foods added a strong brand to its portfolio with the acquisition of upmarket crisp maker Kettle Foods from private-equity firm Lion Capital. Finland’s Raisio, the company behind the Benecol brand, pounced for Glisten, a UK snack and confectionery maker focused on the healthier parts of both categories. Privately-owned dairy giant Lactalis gained scale in Spain with the purchase of Ebro Puleva’s dairy business.

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By May, there seemed to be signs that private-equity firms were regaining their appetite for deals. US food group Michael Foods was sold to a private-equity unit of Goldman Sachs, while Norwegian food group Rieber & Søn sold seafood business King Oscar to a private-equity buyer. In July, the private-equity backed Birds Eye Iglo snapped up Unilever’s Findus Italy unit for a cool EUR805m, beating off interest from Lion Capital, which owns the Findus brand in the UK and Scandinavia. Later in the year, a private-equity consortium led by KKR bought Del Monte Foods for US$5.3bn, the largest leveraged buy-out in the US this year.

Of course, not every pursuit of a business ends in success. By late spring and early summer, one of the year’s longest-running M&A sagas was already coming to the boil in North America, with US convenience-store chain Casey’s General Stores standing firm against interest from Canadian rival Couche-Tard. It was September before the story reached its denouement with Couche-Tard throwing in the towel after an increasingly hostile six-month takeover battle.

In the retail sector, 2010 saw the odd major M&A deal. In May, Wal-Mart Stores’ UK arm Asda agreed a deal to buy the local business of Danish discounter Netto. In July, private-equity struck again, with Lion Capital buying French frozen-food retailer Picard in a secondary buy-out from BC Partners.

In September, Wal-Mart itself made a move, launching an offer for South Africa’s Massmart Holdings, although, by November, the world’s largest retailer had, after talks with Massmart’s shareholders scaled back its bid, tabling US$2.3bn for 51% of the business.

The globalisation of food retail continued in 2010, albeit at a much slower pace than in previous years. Aside from Wal-Mart’s move into Africa, the key major deal was Casino’s move to buy the Thai business of French rival Carrefour. The sale marked the latest stage in Carrefour’s revamp of its international operations, which has seen restructuring in western Europe but, ultimately, not the desired disposal of its stores in Malaysia and Singapore. In recent weeks, there has been renewed speculation that Carrefour could at last enter the Indian market through a tie-up with local conglomerate Future Group although, at the time of writing, this remains unconfirmed.

One rumour that has often done the rounds over the last few years is Wal-Mart’s ‘imminent’ entry into Russia. However, after the company’s announcement last week that it plans to close its office in Moscow, any appearance of the US retail giant behind the former Iron Curtain appears as far off as ever.

As 2010 progressed, the level of M&A speculation appeared to grow, perhaps as business confidence improved and financing became easier to come by. While some private-equity firms were returning to the market as ready buyers, keen to spend the funds built up and then not used during the depths of the downturn, others were keen to use the improved conditions to realise a return on investments.

The future of UK biscuit and snack maker United Biscuits grabbed the headlines this autumn, with private-equity owners PAI Partners and Blackstone apparently ready to sell. PAI has also been at the centre of speculation surrounding global yoghurt brand Yoplait. The private-equity firm has owned a 50% stake in the business since 2002 and is now ready to sell its shares. The likes of Nestle, General Mills and PepsiCo have been named as potential buyers, while Lactalis has already had a bid for the whole business turned down. The early months of 2011 could see the climax of both deals.

PepsiCo provided one of the major deals to be announced in the last quarter of the year. The cola and crisps giant moved to buy Wimm-Bill-Dann in a deal that valued Russia’s largest dairy company at $5.4bn. The proposed acquisition marks PepsiCo’s first significant foray into dairy and will be a key part of the US group’s ambition to generate $30bn in sales from “nutrition” products, up from $10bn now. Analysts estimate that, to reach that target, PepsiCo is likely to have to make more acquisitions in the years ahead.

The dairy sector saw yet more consolidation, with mergers or planned mergers in France and Austria and, in the final weeks of the year, the announcement of another deal in Germany. Arla Foods, the dairy giant behind Lurpak butter and Castello cheese, plans to merge with Germany’s Hansa-Milch in yet another sign of the consolidation of dairy industries across Europe as suppliers seek to build scale in the face of growing retail power. What’s more, as the prospect of a deregulated European dairy sector (and probable falling milk prices) nears with the end of EU dairy quotas in 2015, expect to see more deals in the industry.

Further consolidation is also likely to be seen in certain UK food categories in 2011. In November, own-label convenience food suppliers Greencore and Northern Foods announced plans to merge, a deal that analysts believe has been driven by the need for greater clout when dealing with the UK multiples.

Mark Lynch, of M&A advisors Oghma Partners, has been covering the UK food and drink sector since 1985 and he believes the proposed merger between Greencore and Northern suggests that “industrial logic rather than financial logic” is now driving change in the industry.

“It’s a return to the sort of deals that I saw at the beginning of my career that were sort of equity-driven deals,” Lynch says. “It’s a share deal, it’s a merger, it’s a nil-premium merger, it’s driven absolutely by economic sense and logic. These two companies coming together to take cost out of the industry, which is what the trade is demanding of them. It wouldn’t have happened three or four years ago; that deal would have been competing against private equity who would have had the benefit of easier financing, the ability to leverage and the tax advantage you get from leverage – all this would have put them in poole position. This is a return to industrial logic rather than financial logic drives industry change, which I think is a positive thing.”