The final days of 2017 saw a flurry of transactions in the international food sector, bringing to an end an active year of deal-making. This year looks set to be another busy one for food-company strategists. Dean Best looks at what could lie ahead.
When it came to food-industry M&A, 2017 ended with a bang – and a series of factors suggest there could be a wave of further activity this year.
On 15 December, Unilever announced it had accepted an EUR6.8bn (US$8.14bn) offer for its spreads arm from private-equity firm KKR.
Then, the week before Christmas took everyone by surprise. In the space of a few hours on 18 December, two eye-catching deals in the US were announced, with Hershey moving for US salty snacks maker Amplify Snack Brands and Campbell Soup Co. buying Snyder’s-Lance, the country’s number-two savoury snacks business. US peer Conagra Brands joined the fray three days later with the acquisition of frozen firm Sandwich Bros. of Wisconsin.
In Europe, two smaller – though still notable – transactions came on 22 December, for many the final working day before the festive break. Finland’s Raisio offloaded its confectionery assets to Ireland’s Valeo Foods, while Poland’s Colian Holding swooped for Irish chocolate maker Lily O’Brien’s.
“It’s kind of make hay while the sun shines”
The reasons for any deal can vary but a number of underlying factors are seen fuelling growing interest in doing deals – and the year ahead is expected to be another in which the industry’s landscape is shaped by M&A.
“When liquidity is so good and debt is so cheap, this is a real sweet spot for M&A,” Simon Peacock, a director at Catalyst Corporate Finance, the UK-based adviser set to merge with Spanish asset management and investment banking firm Alantra, says.
He argues conditions for M&A compare favourably with the buoyant market before the 2008 financial crisis. “For my point of view, this is the better market than we had in 2007 for M&A because we’re not underpinned with risky debt. They’re essentially funds of big, big investment assets, rather than retail banks doing things that they shouldn’t have been doing.”
Peacock, who joined Catalyst in 2006 after seven years at United Biscuits, believes there are other economic and geopolitical factors at play that could make 2018 a particularly bumper year for deal-making before a possible slowing in activity as the industry enters 2019. One, the US raised interest rates three times in 2017; Peacock expects other countries/blocs to follow suit. And, two, he suggests corporates may want to get their deal-making done before the UK leaves the EU, scheduled, at present, to be by the end of March 2019.
“I think around the world, interest rates are going to be rising. The States went first. You’re going to see start to see some kind of economic correction. Nobody has a clue about when that is going to be. And of course, we’ve got an even bigger issue with Brexit. 2019 holds the biggest unknown that we’ve ever had in Europe for a long time,” Peacock tells just-food. “It’s kind of make hay while the sun shines. I think everybody in our industry expects it to be a slowdown come the back end of ’18, early ’19. If you are in our industry, you’re advising your clients this is still the best seller’s market I’ve seen.”
Big Food becoming aggressive
Focusing on the food industry itself, it is a sector going through a period of flux, with growing consumer interest in the link between diet and health combining with the rise of the digital sphere to change the eating habits that had fuelled sales growth for decades.
The members of so-called Big Food (a term coined to describe the largest, conventional, packaged food makers in the US but one that also applies to their peers in Europe and other ‘western’ markets) have seen their sales come under pressure as more consumers shun long-standing brands perceived to be overly processed and turn instead towards foods perceived to be natural or healthier – products and brands that have been launched by smaller upstarts that, amid the rise of the Internet, social media and the smartphone, have seen the barriers to entry come crashing down and have been able to market themselves effectively.
These specific factors have been behind much of the M&A in the food sector in the last 24 to 36 months and their impact is only intensifying. The moves made by Hershey and Campbell, as well as the series of smaller bolt-on deals announced by Nestle and Unilever in 2017, suggest Big Food is becoming more aggressive in its efforts to use M&A to stimulate their top lines – and the smart money is on that continuing this year, especially against the financial and geopolitical backdrop described by Catalyst’s Peacock.
There is an expectation prices for good assets will remain elevated. “Some of the multiples we’re seeing are very full and there’s quite a lot of activity,” Trefor Griffith, a partner at professional services giant Grant Thornton, says. “What you have from an M&A perspective is larger corporates looking at their current portfolio of products and shelf locations and saying: ‘Where do we need that to be now and in 20 years time?’ That’s driving a lot of activity basically.”
Private-equity has firepower
To the appetite from the trade should be added the financial firepower of private equity. Global private-equity funds rose a record US$453bn from their investors in 2017, according to Preqin, a UK-based tracker of the industry. “Globally you’ve got a massive over-supply of private-equity to be invested,” Griffith says. “There’s too much money chasing too few deals and that makes it favourable to the shareholders of good companies. Anything that comes up which is good is getting additional value because of the competitive nature of the processes being run.”
Peacock agrees, though he cautions against any fears multiples will become too hot. “There’s a lot of money going around. I don’t think it’s pushing the price up into silly numbers. I think everybody remembers ’07 and avoiding overpaying. That’s one of the big lessons. But for a good asset, it’s competitive.”
KKR’s purchase of Unilever’s spreads business could lead some to conclude private-equity has become once again a formidable competitor for assets, especially in food and beverages, relatively defensive (and flabby) sectors traditionally coveted by buy-out houses. M&A strategists within food companies will need to keep a weather eye on competition from financial players but the size of Unilever’s spreads arm precluded any trade suitors, while there is an argument industry makes a better buyer in times of geopolitical uncertainty.
“When there’s periods of disruption, I think that’s when large trade buyers tend to do better than private-equity buyers,” Peacock argues. “They understand their own business and they can take difficult decisions. There aren’t that many private-equity houses in food that make tough decisions about the assets that they’re in.”
Eyes on the UK
With Brexit on the horizon, an obvious focus of that geopolitical uncertainty is the UK, already a competitive market for international food companies. “Many companies that I talk to in Europe are asking me about Brexit and I don’t have the answer – no-one has the answer because it changes every day – but the thought process is ‘whatever happens, do we need to have assets in the UK?’,” Cyrille Filott, global strategist for consumer foods at The Netherlands-based financial services group Rabobank, says. “That is a live theme. Companies are really looking to keep access to a very important market.”
Grant Thornton’s Griffith says the Brexit vote has contributed to growing interest in UK assets in the last year. “You’ve got European buyers saying they need something in the UK now,” he reflects, although he notes the uncertainty thrown up by the country’s decision to leave the EU has “derailed” some possible deals. “We have some deals not happen that probably would’ve happened otherwise but, generally, the drivers continue to be favourable.”
The fall in sterling since the UK’s vote in June 2016 to leave the EU has made the cost of shipping to the country more expensive, prompting some food manufacturers to ponder whether they should set up production there, with M&A a possible lever to pull.
However, Catalyst’s Peacock contends cost will be less of factor than proximity to the UK consumer. “We’re not the best in terms of productivity. Why do you need to do it in the UK? When you need to have a very high service level, and a very flexible model, and a model that responds very quickly to the customers because the customers are what everyone really desires in the UK,” he says. “The strongest reason to buy in the UK have never been about having a UK-based workforce. It’s been about being able to service the customers and the retailers, and the consumers in the UK, from a UK base because that’s easier to do.”
New hands at the helm
A number of members of the Big Food cohort are entering 2018 with CEOs relatively new to the job. 2017 saw a clutch of the world’s largest food companies change their chief executive, from Nestle at the start of the year through General Mills in June and on to Kellogg and Mondelez International in the autumn.
The appointment of outsider Mark Schneider to the top job at Nestle has already sparked an upturn in M&A activity at the Swiss food giant. There has also been speculation Unilever could be preparing the ground for the departure of long-time CEO Paul Polman.
It is far from inconceivable the changes at top of many of the world’s largest food companies could act as another catalyst for M&A activity. Throw in the growing demands on the sector’s biggest players from investors in the wake of 3G Capital’s entrance into food and some sacred cows could even be up for grabs. Look at Unilever and spreads, one of the two industries at the heart of the origins of the business.
“There’s new management in place in some businesses who bring a different perspective and reduce further any sentimentality around sacred cows or historic brands. Ultimately, it’s all about current and future performance,” Grant Thornton’s Griffith says. “I don’t think, certainly for publicly-listed businesses, there’s any room in the current market for sentimentality. It’s got to be focused on future performance. If you’ve got a cash cow, which generates a lot of profit and because it’s a well-known brand that doesn’t require a lot of investment, then that sometimes funds the rest of the activity of the group but certainly you have to look for growth and therefore I don’t think there’s a lot of room for sentiment any more.”
With all that as the backdrop, what trends within the food industry could we see driving deals in 2018?
Snacking and on-the-go
Driven by demand for convenience, these are buoyants parts of the market and look set to continue to be be fertile ground for more deals this year.
Again, not new news, but Grant Thornton’s Griffith underlined how demand for healthier products is a relative concept, so opening the door to corporate interest in a range of foods. “Anything with more of a health and wellbeing connotation to it – even if it’s healthier than rather than out-and-out health – is of interest and on-trend.”
Campbell’s move for Snyder’s-Lance is an example of this trend. “Snyder’s-Lance was always a name that we had considered as a potential acquisition target – given it has that snacking orientation which is very on-trend, the better-for-you portfolio that encompasses about a third of their sales,” US-based Morningstar analyst Zain Akbari says.
Plant protein muscling in
A growing number of consumers are monitoring their meat consumption more closely, leading to rising interest in flexitarianism, vegetarianism and veganism – and in the companies manufacturing and marketing these products. The last 18 to 24 months has seen companies including Maple Leaf Foods, Tyson Foods and Nestle make investments in or buy outright businesses centred on plant-based proteins. “Plant-based has gone from the tofu crowd, which was really a niche market, to the mainstream and, when products go mainstream, big food companies tend to follow that,” Rabobank’s Filott says.
Filott puts forward an interesting observation, sparked by Nestle’s decision last year to manage its infant nutrition business regionally, rather than under the global Nestle Nutrition division it set up 11 years ago. “The discussions that we are having with companies is how do you set up for a world where globalisation may not be that important, where local sourcing is more important, local tastes are more important,” he says. “It could be M&A comes off the back of that as well – you may want to dispose of certain assets or you may want to buy certain assets; at least structure your company differently from what it currently is. It may not be an ’18 theme but perhaps a next-decade theme.”
Don’t forget consolidation
Amid the clamour for growth and the race to snap up buoyant brands, one must not forget the still-fragmented landscape of the food industry, combined with the stagnant nature of some of its sectors, means consolidation will continue to drive M&A. “Because the market is so competitive and in a number of areas there is over-capacity in the market, there is still going to be a lot of consolidation that is not so much high-multiple, brand-driven, consumer-preference driven,” Griffith says. “It’s saying ‘we’ve got over-capacity in pastry products or bread products or whatever’ and therefore that leads to consolidation because that’s the only way those companies can make money. You’re still going to see a lot of that.”
Getting closer to the consumer
In the last 12 to 18 months, the industry has seen investments or acquisitions by food manufacturers that have got them closer to the end-user. In 2016, seafood manufacturing giant 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. The same year, UK food tycoon Ranjit Boparan struck two deals in the country’s foodservice sector. In 2017, Nestle and Unilever were among the food manufacturing behemoths to announce investments in meal-kit suppliers.
However, M&A watchers believe it is, at present, hard to say definitively whether direct-to-consumer will become an important driver of deal activity in the sector. ” I’m not convinced that we would see large-scale M&A in that area,” Filott reflects. The investments made by Nestle and Unilever (in Freshly and Sun Basket respectively) were “to understand what’s going on in that market more than anything else”, he adds.