A perfect storm blew M&A in packaged food off its feet in 2022 and the same gloomy clouds are likely to hang over the industry for most, if not all, of the new year.

Risk-off sentiment has hit deal-making, with money scarce in the lending markets as monetary authorities set a course to raise borrowing costs to temper inflationary headwinds. While many food manufacturers and industry experts predict inflation will ease in 2023 – and central banks may change strategy – they expect rates will remain high by historical standards. Then add recession risk to the global equation.

As the one-year anniversary approaches to mark Vladimir Putin’s invasion of Ukraine and the impact on commodity supplies and energy prices, Just Food speaks to food industry M&A watchers about what might lie ahead.

Jeroen van den Heuvel – Oppenheimer & Co.

There was a sharp decline in the number of deals in Q3 and a major slowdown in overall deal activity. We’ve seen that decline continue in Q4.

It’s been a difficult year. People have been working on transactions but they didn’t close. 2023 will be a very difficult year, especially in the first half. You will still have high inflation, you will likely still have the war in Ukraine, high energy prices and higher interest rates. On top of that, you’re going to have a recession in the UK and Europe.

You have a massive disconnect between buyers and sellers in terms of valuations. When these things happen, there’s always a time lag between buyers and sellers to adjust. The sellers are still in 2021. In their minds, they want to sell their business for 2021 multiples but the buyers are looking at the circumstances of today. I hope the disconnect in the first half is going to be much smaller and that will make it a little bit better in the second half.

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You have US$1.2tln dry powder available with private equity globally. On the other hand, you still have a lot of corporates with strong balance sheets and they are eager to make strategic acquisitions. In this environment, there’s not a lot of money available for growth companies.

Food categories that are in the early stages of development are likely to face consolidation pressure because there is less venture capital available in the current markets. We’ve seen consolidation in food delivery and parts of online retailing such as herbs and spices.

The sellers are still in 2021. The buyers are looking at the circumstances of today.

And also you’ve had [consolidation] in more mature parts of the food and beverage market which have been hit hard by the combination of higher input prices and higher energy prices. Bakery is an example because they’ve been hit by price increases in flour, butter, palm oil and sugar, and they need electricity to operate the production equipment and gas to heat ovens.

Also, if you look at the strength of the dollar compared to the pound or the euro, it means that for a US strategic buyer in food and beverage,it’s bargain-hunting now. We do see more interest from US companies to buy in Europe.

Another example is public-to-private transactions, where we also see those increasing in food. What you will also see next year, is family offices or private equity taking minority interests in family-owned companies to strengthen the capital base. There will also be more structured deals, where for instance, you buy a minority, and you have an option in 12 or 24 months to go for a majority. You see more earnout constructions, too, to deal with the uncertainty of profitability levels much more than we’ve seen in the last couple of years.

Another thing we’ve seen in the market is more vendor loans – the seller gives a loan to the buyer to help finance a transaction.

Nicolas McCoy – Whipstitch Capital

There’s a reluctance for people to go to the market because there’s a bit of a dour outlook. There is some legitimate margin compression with companies because inflation has gone up. That does put a small brake pedal on M&A with big buyers as they ultimately want to buy companies that are going to be profitable.

There’s a lot of companies at the end of private-equity fund life. And the private-equity fund doesn’t have any more cash and the company is burning a couple of million dollars a year and they have to find a solution. Somebody usually comes along and buys it for one-time revenue or something. But that market has gone out the window.

Right now, there’s not a great market for the have-nots, as we call them. The companies that are not near profitability and they’re running into a ceiling of brand headroom. They don’t have cash, and there’s just a tonne of them out there. Some of them are really good brands that took a tonne of money – $20, $30, $40, $50 million over the last few years – and they’ve only been able to get to $45m or $50m in revenue and they’re pretty fully distributed.

The only way to make them larger is to go into a different category or something – that’s perceived as very risky so there’s not really a great home for it. They’re too small for the big people to buy, they’re not profitable enough either for private equity, nor do they have enough growth prospects. These things just aren’t selling and so that’s polluting the market a little bit.

There’s a greater perception of risk right now among the direct-to-consumer-only companies, particularly things around meals, food delivery and things that have a regionality in nature. The things that have really pulled the stock market down are, generally speaking, tech companies that sell into or around e-commerce.

By the end of 2023, you’re going to start to see more M&A activity

I think [the US economy] is going to slowly get a little bit better. I think they’re going to stop raising rates pretty soon. You’re already seeing the stock market going up a little bit as a leading indicator.

I do think that by the end of 2023, you’re going to start to see more M&A activity. Look back at Covid, look at March and April of 2020, the deal market just tanked. It just literally evaporated. But by the time we got to October, November, it was furious, making up for the lost ground. And I think that’s what’s happening now, too.

We still have a lot of companies that are growing their revenue line at very good rates and the customer base is still embracing the innovation.

[The environment] has impacted multiples on EBITDA-based deals. But the vast majority of deals are not selling off EBITDA in this sector. They’re selling off the future of the brand.

I think there’s definitely going to be more on our fundraising side in 2023 than the M&A side. But there’s a very big, blurred line there because you’ve got more and more of these private-equity firms doing cash-out, big-cheque deals. So I think we’re going see some of those, too.

Alex Masters, Tom Cunningham – Lincoln International

Tom Cunningham: We have been seeing a little bit more activity with corporates recently, pitching for potential disposals or even potential acquisitions. Private equity is a bit more tricky as there’s semi-reduced appetite from lenders to invest in consumer.

That’s not to say there’s no appetite. When trying to sell a business to private equity, it’s hard to rely on debt markets at the moment. Big private-equity consumer purchases next year will require a turn of the debt markets, which we don’t see at the moment.

Alex Masters: There are inflationary pressures, which means margins are flat or being squeezed. We think that private-equity food businesses may well be prepped for sale but they’ll probably be paused until sometime in Q2 or later, waiting for the debt markets to come back.

We see more corporate activity and less activity in private-equity-owned businesses. If you are a family-owned business and you want to realise one or two of your assets, you’ll probably choose a better time to do it than the first half of next year.

Most are expecting to wait until times get better before they push the button

Alex Masters

We see plenty of people prepping. Most of them are expecting to wait until times get better before they push the button.

Venture funds are certainly much more cautious. Anecdotally, people are saying that the multiples being paid by venture capital, even new funding rounds, are definitely coming down.

Growth companies are also facing headwinds. Their cost base is going up because commodities and energy costs are going up. But the retailers are less open to listing new products. It’s more challenging for growth companies, from a margin perspective, from a growth perspective, and the venture investors too are getting more cautious on pricing.

There’s a bit of a valuation gap now between where people thought they can sell and where they can probably sell. And the private owners and private equity are waiting, hoping that valuations come back. If it’s been six months, 12 months, and it’s obviously not coming back, they will be back in the market selling because they will have accepted the new norm.

There’s a lot of wait-and-see going on to see how things progress. If things get better, then there will be more M&A as 2023 progresses but, at the beginning, I think there will be less.

We think [plant-based alternatives] is a very exciting category. There will be more M&A. Long term, it’s going to grow. Short term in the UK, from the data I have seen in grocery, plant-based has pulled back in 2022.

Mikinao Ikarashi – Corporate Finance International, Japan (Frontier Management)

The Japanese [M&A] market wasn’t so attractive for European food players because food companies in Japan had trouble making profits due to the prolonged deflation in the past 30 years. The inflation Japanese corporates are now facing is a good sign for a better future. It’s a good opportunity.

The Japanese market is a little bit different to other ASEAN countries like China or south-east Asia and emerging markets. There isn’t a lot of opportunity to grow due to the decreasing demography. So the only way is to look at overseas markets, not only Europe, but also other regions like ASEAN, emerging countries, or the US would be another option.

There will be an opportunity for Japanese companies from the shrinking valuation gap between western countries and Japan.

We are now seeing a lot of activity from Japanese companies looking for investment opportunities in Europe. I see a bright future in terms of cross-border deals. Japanese private equity and venture-capital firms aren’t permitted to invest in foreign countries. We have some international Japanese corporations, so we’ll see some deals from them.

There will be an opportunity for Japanese companies from the shrinking valuation gap between western countries and Japan. It’s been said for a long time that US and European assets were too pricey for Japanese companies. That was a big hurdle. I see the declining valuation as positive for Japanese buyers and we will see a lot more opportunities.

Personally, I’m looking at the seafood industry because Japanese companies have an edge in that area. We consume a lot of fish. We have less consumption of meat, so plant-based meat, for example, would be very slow in Japan. Europe and the US will be interesting in terms of cross-border deals in fish.

Some Japanese companies are looking at fish markets in Europe and some European owners are expecting Japanese companies to buy their assets. There are some big fish players in Japan and now the [Covid] border is open we see much more activity in Europe of Japanese players.

Looking at the general food industry, well-known brands in Europe will also be targets for many Japanese players.

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