Dean Best speaks to four experienced M&A advisers about the factors they expect to affect deal-making in the packaged-food industry in 2021.

Shaun Browne, Houlihan Lokey

I’m seeing a period of M&A activity that is as busy as I can ever remember in any period of my professional career. I would put that to what I would describe as the concertina effect.

There are a whole series of deals put on hold in March that have been reactivated post the summer. You’re also seeing deals that were due to launch in April, May June, that didn’t launch because of lockdown – but were then soft-marketed over August, launched in early September and they’re coming to fruition now. You’re also seeing deals that were always due to launch straight after the summer break that have launched.

And – this is where it gets quite intriguing – you’re also seeing some deals due to launch next year that have been brought forward. Some businesses have performed, bluntly, much better than expected as a result of Covid-19 and therefore the owners are saying they want to sell now. There are also some entrepreneur-owned businesses – and indeed PE-owned businesses with certain different structures – where the owners are envisaging a significant hike in tax rates, capital-gains tax rates, next year to pay for all this [economic] carnage.

Looking at what’s out there at the moment, there’s a massive amount of stuff that is starting to reach fruition. In the UK and food, we’ve done the Winterbotham Darby deal, we’ve done the Fox’s deal, we’ve done Hovis. That’s just in the UK and just in the last four or five weeks. We’ve got other deals we hope to be in a position to announce between now and Christmas, and then some for the early part of next year as well.

Browne: “The vaccine is probably a double-edged sword from an M&A perspective”

How well do you really know your competitors?

Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.

Company Profile – free sample

Thank you!

Your download email will arrive shortly

Not ready to buy yet? Download a free sample

We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form

By GlobalData
Visit our Privacy Policy for more information about our services, how we may use, process and share your personal data, including information of your rights in respect of your personal data and how you can unsubscribe from future marketing communications. Our services are intended for corporate subscribers and you warrant that the email address submitted is your corporate email address.

Over the next three or four months there will continue to be a good amount of activity. Investors are no longer panicking about their existing portfolio. Banks and lenders are open for business again. The levels of activity you’re seeing at the moment, my guess, will continue for another two or three months at least.

Beyond that is a little harder, as ever, to read. The vaccine is probably a double-edged sword from an M&A perspective. It will encourage people to believe the world is heading back somewhere close to where it was before all of this and therefore some of the deals that have been completely impossible – and I’m talking about restaurant companies, foodservice, food-to-go, where the deal flow has dried up because valuations have been tanked – those in theory will come back, although they’ll be some caution initially.

Some habits that have developed over the last six months will stick. If you take a simple one, like working from home. I genuinely don’t think we will get back to how it was before. Working from home will be form a greater part of everybody’s daily lives than it did. That has implications for foodservice. That has implications for food-to-go. How much? I really don’t know.

Similarly, if you look at other businesses like direct-to-consumer. Some businesses have had an absolute boom this year. Mindful Chef, a great example, has just been sold to Nestlé. What will happen to those businesses when everything’s back to normal? The general consensus is you’ll probably hang on to some of the subscribers that you’ve picked up in lockdown. Are you going to hang on to all of them? Maybe – but it’s highly unlikely.

There are lots of question marks about what the long-term impact on food companies will be. Those issues take a while to flow through the system. If I was a foodservice business, let’s say, and I’d been thinking of selling myself at the beginning of this year and then my business fell off a cliff. Then, through next year with the vaccine, things are gradually getting back to normal and I then say ‘Great, well, now I’m going to sell’, how do you define what normal will look like? How quickly will foodservice come back? How quickly will catering come back? How quickly will events come back?

There’s still lots of uncertainty because of the long-term impacts of what the virus will bring. I don’t think it would be fair to say that the moment there’s a vaccine the deal activity will take off.

The themes that have been strong this year – look at all the pet deals that have happened, D2C and some of the healthier products – those will continue to be there. You might also see a bit of a move towards some of the traditional, shelf-stable categories that have been a bit unloved historically but which have had a resurgence of interest as a result of what’s happened this year.

Chilled could be also a bit more interesting now that you’ve seen PAI come and do this double dose of deals for Addo and Winterbotham Darby. I don’t think that they’ll necessarily stop there.

It’s been harder this year to sell businesses wherever they are to international buyers because of the difficulties of travel. I suspect when the data is finally analysed there will be more domestic activity in any country across Europe. Once Covid has gone away that situation should revert back to normal because international buyers will have been able to travel.

Mike Burgmaier, Whipstitch Capital

We’ve had the best year in the firm’s history, which, when you look back, is a pleasant surprise. It looked like it was going to be a big year and then, in March, everything just came to pretty much a screeching halt. So many companies had to focus inwardly, as you’d expect.

During this time, too, there were not as many new companies that were starting out. You’ve got fewer brands out there in total – but those that have survived have done, in the most part, incredibly well, especially if they’re in categories that are in strong demand

Since August, September, there have been many companies entering the market to sell, and a lot of processes that have begun. It’s almost like the problem is there are so many companies pondering entering the market to sell. They’re almost maybe too many opportunities out there.

Burgmaier: “Better-for-you frozen is really going to be a strong area over 2021”

The key for companies is to show that any recent increase in sales represents a long-term gain for them, not just a one-time bump of revenue from stockpiling. We try to see the growth of the brands relevant to their categories and making sure they are outgrowing the growth in the category.

We’re definitely expecting a good number of M&A transactions in the food and beverage market over 2021. There are a lot of strong companies out there and a lot of the emerging brands, the better-for-you brands, have really done well. Their P&Ls have never looked stronger. When the pandemic began, a lot of companies looked inward, underwent some strong, rational, cost-cutting measures, not knowing what was going to happen – and then executed extremely well and have come through the other end bigger, better and more profitable.

The shift that’s been going on for a long time in terms of the younger, more diverse consumers trending towards healthy, better-for-you brands, our data suggests that’s accelerated during the pandemic. Certainly there’s been a lot of comfort food and sales of alcohol are up as well but, when you look overall at the larger shift, it still is moving in a large way towards the healthier, better-for-you brands.

I think better-for-you frozen is really going to be a strong area over 2021. There are a few brands that have achieved strong growth and that are outgrowing the categories. The overall category lift in frozen has sustained itself and there are certain categories of frozen where better-for-you brands have really created leadership and are starting to become dominant.

We’ve been looking at the growth on meal kits, which was a long-heralded opportunity that went through some tough times because the business models were not sustainable as built a few years back. They’ve had a little bit of a renaissance. You’ve got some real winners in the meal-kit space. Consumers are learning how to cook through meal kits in some ways and supplementing it on their own.

2020 was our best year in terms of firm revenue and growth and [number of] deals is right there with it. I think next year has even got much more potential on both metrics, firm-wide revenue and number of transactions. We have already started such a large number of deals in process at the moment. It’s unclear if they’ll close the end of the year or early next year but there’s a lot of activity going on right now.

Jeroen van den Heuvel, Oppenheimer & Co.

It was after the summer holidays – so it was really end of August, early September – that all of a sudden the M&A market came back and has been, in my segment, very, very active since it’s in September. I think the second half of 2020 is going to be very good.

You’ve seen Ferrero buying Fox’s and PAI buying Winterbotham Darby, Addo and Angulas Aguinaga. A lot of the sell sides actually come from PE firms. Many of these were actually planned for the first half of 2020, but they had to be put on hold because of Covid. As the performances of most of these companies – and what is being sold today are only companies happily exposed to food retail – are above budget, the owners say ‘Let’s see where the market is at in terms of demand and price.’ To everybody’s surprise, demand has been excellent and pricing has not really been affected.

van den Heuvel: “The second half of next year will be a little bit subdued. It will be the mirror image of 2020”

Who are buying these assets? It’s trade buyers with strong balance sheets but also private-equity funds that have recently raised a new fund and they have to put the money to to work. What we also see is private-equity funds that are less exposed in their portfolio to food and bev want to make acquisitions in the sector because they see it as a defensive industry and they expect there’s going to be more rocky weather coming next year.

Covid has helped with valuations. We had this very long bull market in 2019 where a lot of deals were not done because buyers were only willing to pay up for proven, stellar, high-quality assets. Covid has been such an agent of change that actually that pricing gap has decreased. On the one hand, companies with a heavy exposure to food retail are all running at like 10-15%-plus, sometimes 20%, on the budget. That justifies a valuation level because it means the asset can go through a crisis in an even better shape. More money is also now flowing into the sector because it’s a defensive sector and that also drives up the ability to pay.

An event like corona, because it’s an agent of change, means people look different at business models, at portfolio, at consumer behaviour. We will all be working more from home in the future, for instance, so what’s the impact of that on a company? You have a lot of things that are changing so there’s more decisiveness in a sense to act on a new strategy.

The trends we discussed in June are still very much there and I would even say in a more strengthened fashion. Plant-based is still extremely hot. Meat alternatives is still an extremely hot area. Healthy food, healthy snacking, sort of CSR-related food initiatives, both with corporates and with PE firms, and I think that’s driving corporates even more to look at their portfolio and actively make decisions to sell parts of the portfolio that do not fit in that category – and acquire firms that are active in the category.

Like this year, next year you will see a big difference between the first half and the second half. I’m very bullish on the first half and I’m bearish on the second half. In the first half, we’ll see an enormous amount of activity because there are still a lot of companies that were supposed to exit in 2020. You see the first wave of those transactions happening as we speak. Then there’s also a huge amount of companies that were supposed to exit this year and they have chosen basically to wait for full 2020 results to be audited and then come to market, in, let’s say, as of February next year.

You also have companies looking at all the successful transactions and valuations of the second half of this year, who will say ‘We should go before the summer.’ There will be the positive effects from the fact there is a vaccine, a psychological effect. People are going to get injected with the vaccine in multiple countries. There will be quite a positive wave in the economy, everybody expecting things to go back to normal, so confidence will go up. That’s a good exit environment. Everybody will want to profit from that positive environment.

But everybody also knows, because of the vaccine, government support will basically stop in maybe in the second quarter of next year. A lot of companies will actually be in a very weak position and be driven into receivership, so you will probably get a huge backlash in the second half from corona – and that’s why I’m pretty bearish on that part of the year. In the second half of next year, there will be a lot of restructuring M&A from foodservice-exposed companies but I think it will be a little bit of a subdued environment. It will be the mirror image of 2020.

Andreas Kulcsar, DC Advisory

Investors looking at various ideas for investments in the food space are obviously monitoring companies’ performance very closely. After the initial stockpiling period, there were some businesses that were still trading very robustly in the months thereafter because their products were still in high demand. That gave investors looking at those opportunities quite a lot of confidence that those businesses are resilient and that changes in consumer patterns are here to stay for the longer term. People cook more at home, spend more time at home with a family, and probably will continue to do so as a result of the homeworking that is probably going to stay here for the time being. I think not many people think that they need to go back to the office five times a week.

Within the broader packaged food category, we could see activity probably towards ready meals, a further consolidation of the market. There is quite a bit of activity around supplements, with people wanting to be healthy throughout the pandemic and then supplement what they cook at home with nutritional supplements. Also, activity with household names, branded products that are well-established, well-known and have well-established sales channels, ideally omni sales channels. Those will be interesting targets for different types of investors.

We probably will see continued interest both from trade and PE but there is a vast amount of money going around, quite a few PEs have raised new funds, so that money needs to be deployed. Trade should be expecting competition from PE, especially the ones that have a relevant portfolio company and who are also able to much more quickly understand the market dynamics and carry out due diligence. They will be at an advantage compared to other private-equity firms that, quote unquote, just provide funding.

Kulcsar: “Brexit is a factor in corporate decision-making among clients I speak to”

Asian investors are looking to deploy resources, funds in Europe to get closer to well-known brands but also get access to sales channels to place their own products and services next to those here in Europe and the UK. There will be interest and there are some strategic investments as well that, unless you make a move towards those, you will miss a great opportunity to enter an interesting, growing market.

Brexit is a factor in corporate decision-making among clients I speak to. In some processes, we feel like potential investors are delaying the process a bit to push it into next year in order to have more visibility on changes in the cost structure of the target company. In other instances, it’s the opposite. Investors want to get a deal done because especially if it’s a fully-integrated, UK-based company, they feel it’s going to be very attractive to get a deal done with such an asset because it’s going to be in higher demand after Brexit.

There are quite a few companies trading very robustly at the moment that were probably not so much front-of-mind pre-pandemic because their products were maybe, quote unquote, a bit boring. However, because they’re household names, strong brands, and everybody knows them, it’s kind of a safe investment. They are really attractive assets at the moment – and also to build something around that is a bit more technologically advanced or interesting and on-trend, such as meat-alternative products or plant-based food. It is very likely that M&A activity will continue to remain high, because there’s just a lot of attractive assets but also a lot of private-equity owners with mature businesses in their portfolios.