As we progressed through 2010, the amount of M&A activity intensified around the world as business confidence improved, lending conditions became more favourable and the value of deals crept up.
In the UK food and drink sectors, according to M&A advisory firm Oghma Partners, the value of mergers and acquisitions in the four months to the end of August stood at GBP1.08bn (US$1.67bn), against around GBP330m in the corresponding period a year earlier.
The data showed that the number of deals in the first eight months of 2010 was lower than in the same period of 2009 but Oghma Partners said there had been a “marked increase” in the average size of transactions. Aside from Kraft Foods’ takeover of Cadbury, the M&A consultancy pointed to deals including the sale of Tate & Lyle’s European sugar assets and Thai Union Products’ acquisition of canned seafood business John West as signs of “renewed confidence in M&A markets”.
With a few days of 2010 to run, Oghma Partners’ Mark Lynch says the advisory firm has yet to collect all the data for the last four months of the year and the year as a whole. However, he suggests the “punchy deal” between Ireland’s Greencore and UK food group Northern Foods indicates this trend towards bigger deals has continued in the latter part of the year.
Looking ahead to 2011, Lynch believes the steady improvement in the conditions needed for a fertile M&A environment will continue. However, he explains that the balance of power may have shifted towards trade buyers and away from private-equity firms, who are having to finance deals using more cash and less debt as credit remains elusive.
“People want to sell and buy businesses. It’s the nature of business. The things that affect that are confidence, financing ability and value. From a low point, all of those things have improved. The logic is still there,” Lynch says, although, referring to the new environment for private-equity firms, he adds: “The buyer might be different.”
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With lending conditions less favourable than four or five years ago, private-equity firms may find themselves at a disadvantage to potential rival trade buyers but, in 2011, there is still likely to be a growing number of deals involving buy-out houses.
Private-equity owners of food and drink manufacturers who decided to not realise a return on their investments after the financial crash will face increasing pressure to sell. This, for instance, is likely to have been a driver in PAI Partners’ decision to sell its stake in Yoplait and apparently put United Biscuits on the block.
Elsewhere, the buy-out houses which opted not to acquire businesses during the downturn will be sitting on their investors’ cash – and investors are likely to be agitating for the funds to go out and spend.
Lynch says there could be more moves from private-equity firms during 2011 but insists buy-out houses will find the going tougher than they did before 2008.
“We could see them a bit more active but I don’t think we are going to return to the days that we saw pre-2008, when it was much easier to make the deals work financially because you could borrow more,” Lynch explains. “The fact that you have to put more cash in means their position relative to a corporate buyer has deteriorated. It would be quite astonishing to see the private-equity guys back to the level of activity relative to the corporate players that we saw pre-2008.”
The opening months of 2011 could see the conclusion to many of the purported deals still outstanding, including the sale of private-equity firm PAI Partners’ stake in yoghurt brand Yoplait, the disposal of Premier Foods plc’s meat-free business, which includes the Quorn brand, and the possible sale or break-up of US food group Sara Lee.
Another deal that could happen is the sale of United Biscuits by private-equity owners PAI Partners and Blackstone, although there remains much uncertainty around the future of the business, given the lack of buyers for the UK firm’s biscuit arm and the apparent end to negotiations with potential Chinese suitor Bright Food.
Bright Food’s apparent interest in United Biscuits prompted many column inches about the potential of growing investment from the East into Western consumer goods companies. And, with economies like China and India now motoring along again after being slowed but not halted by the downturn, 2011 could see a growing number of deals where they buyer has a distinctly Eastern flavour.
Lynch argues that the type of deal companies from the East will drive will likely gain them ownership not just of brands, but of access to European markets.
“We do see deals coming from Asia because there has been a transfer of wealth. The interesting thing would be if you have a basic processor looking to access markets higher up the value chain, you’re buying distribution, you’re buying the brand but you’re buying it to leverage your raw material, your commodity into a value-added market, rather than the straight-forward branded acquisition. I’m not saying they won’t happen but I think there’ll be less of those relative to the other type [of deal],” Lynch explains.
In all, then, the indications are that 2011 will be a more active environment for M&A in the food and drink sector, continuing the trend of the latter part of 2010, when more lucrative deals were signed across the industry.
As Lynch says: “The further away we get from the financial crisis, the better the environment for M&A.”