It’s not just the big banks battling for mandates in an active market for M&A in the US food industry. Smaller players are in the running, too. Mike Burgmaier, the MD and co-founder of Whipstitch Capital, talks to Dean Best about the factors driving deals in US food, what acquirers want and how his growing firm can offer sellers.

With growth in many established, US packaged-food categories hard to come by, manufacturers are looking to M&A to inject some life into their top lines.

And while there are still some big deals to be done – Conagra Brands’ US$10.9bn acquisition of Pinnacle Foods last summer a notable example – the activity appears to be at the lower end of the market.

With consumer demands and habits rapidly-evolving – as well as the barriers to entry of marketing crashing down amid changes in technology – there are numerous examples of smaller players eating the lunch of larger brands. And it’s those upstarts that can be attractive targets for bigger companies searching for growth.

The big banks are still doing business. The likes of Goldman Sachs, JP Morgan and Morgan Stanley were active in 2018 and continue to be so. But the current M&A landscape can offer significant opportunities for smaller advisory firms – and one example is Framingham, Massachusetts-based Whipstitch Capital.

“We have all the same relationships that the larger investment banks have but we understand the market dynamics, the competitive dynamics, so much better,” Whipstitch MD and co-founder Mike Burgmaier insists.

Burgmaier and fellow co-founder Nick McCoy set up Whipstitch in 2015 after working together at US investment bank Silverwood Partners. Whipstitch’s focus was – and still is – on working with companies doing business in the healthier parts of the consumer packaged goods sector.

“We saw a void in the market for an investment bank to focus specifically on the better-for-you consumer space,” Burgmaier says. “Nick and I felt like we wanted to set up our own business and be solely focused on better-for-you consumer, be the best at that and go as deep as possible.”

Whipstitch’s business is “about 90% sell-side”, Burgmaier says, and deals on which the company has worked include PepsiCo’s purchase of US probiotic and kombucha drinks producer KeVita, Keurig Dr Pepper’s move for bottled water brand Core Hydration and, in food, jerky brand attracting investment from Monogram Capital Partners, General Mills investing in GoodBelly Probiotics and German confectioner Katjes Group buying a 5% stake in Californian start-up Foodstirs Modern Baking.

Burgmaier argues Whipstitch’s ability to “go deep” into that “better-for-you” part of the US food-and-beverage market has enabled the firm – which is set to employ its 11th full-time member – to win business ahead of some larger peers, giving an example of being hired over JP Morgan on a deal for an unnamed drinks company. “We’ve beaten out some major banks recently on some really great mandates,” he says.

The ongoing fragmentation of the US packaged food sector as new entrants launch onto the market is contributing to a dynamic M&A landscape in the country. Could that lead to more opportunities for more M&A advisory firms to be set up, presenting another competitive flank for Whipstitch Capital?

“I don’t know. I think the more likely scenario is that – and we’ve been seeing this a little bit – is the bigger banks start to come down and try to do the earlier deals,” Burgmaier says, offering two ways in which appointing banks larger than Whipstitch could present problems to food company management teams looking to sell their business.

“The minimum fees that some of these large investment banks have are incredibly high. They have to support and feed a large organisation,” Burgmaier argues. “I obviously don’t want to disparage people but I have heard when the big banks come down you don’t get the person who runs the consumer sector working on a transaction that might be a US$200m enterprise value deal – or even $100m – they’re going to throw the junior team on it. That person may not really know what they’re doing and what they’re looking at.”

Burgmaier says he has seen some different types of firm enter Whipstitch’s field but insists not all entrants can offer the right kind of service to a company looking to buy or sell. “We have seen some smaller broker-dealers, or some – I don’t know – quasi-investment banks, advisors, that have entered the market and they have smaller teams or outsourced teams maybe,” he says. “I honestly have a hard time recommending them to a lot of companies that we ended up passing on.”

Whipstitch closed 15 deals in 2018 and is “probably headed to the same number” this year, Burgmaier says, adding: “This is going to be our best year by far. We were probably at the same number of deals last year but the quality and the size keep going up.”

He says the “vast majority” of the deals on which Whipstitch is hired involve branded CPG companies. “We’ve got a very sizable marquee personal care deal we’re working on right now. We actually have an ingredients business that’s kind of half private-label, half branded that we’re selling,” Burgmaier reveals. “We do touch all the areas but I would say at least three quarters of our deals have been high-growth, fast-growth, branded CPG products.”

Unsurprisingly perhaps for a firm focusing on working with companies offering better-for-you products, Burgmaier says the macro trend of health and wellness will continue to underpin deal-making in US food but few would argue with that sentiment.

“I think you’re going to see a fairly healthy mix of relatively smaller deals and larger deals – and when I say smaller, deals that could be $75-200m enterprise value deals,” Burgmaier explains, offering a range of product categories where he believes there could be an increase in M&A activity.

“Functional beverages – certainly ones that are low calorie [or] related to gut health that have some type of unique process in their production, some IP. Definitely kombucha within that. I think high-alcohol kombucha is going to be an incredibly large market that is just starting right now. It has an almost unlimited potential.

“There’s been incredible improvements in alternative sweeteners and the ability for a lot of companies to use alternative sweeteners to sugar in the formulation. Brands that can jump on that effectively, potentially combine it with some functionality like plant-based protein or probiotics, have a great opportunity. Better-for-you frozen is a good space as well. Certainly, everybody’s talking about plant based protein because of the Beyond Meat IPO. I think there’s probably a lot to that. And I think grass-fed meat will continue to grow incredibly.”

However, businesses and brands touting better-for-you or more sustainable products launch onto the market in the US at a dizzying rate – and not every new entrant can succeed. That presents both opportunities for a firm like Whipstitch should more company founders decide to sell-up but could also present a challenge for Burgmaier and his team in choosing the right mandates to chase. They, after all, want deals to close.

“It is about 300 times more difficult to get a $5m deal done for a company that’s got a lot of hair on it. The selling that you have to do to convince someone to buy that business versus something like a KeVita that has a three-year 100% CAGR, an incredible margin [and] its velocity is ever increasing – that’s much easier,” Burgmaier says.

“In some ways I think there’s a perpetual shake-out that’s always happening in terms of brands and products – brands that are growing extremely well and then those that can plateau or stagnate. We see the same thing in the better-for-you space. There are times when some companies have run their course. It doesn’t mean it’s over but maybe current management and current ownership have done what they can with it.”

However, for all that, there remains, Burgmaier says, an appetite among the larger food and drinks manufacturers in the US to invest in up-and-coming players.

“A lot of the strategics can’t keep writing the $700m to $2bn cheques. There’s only so much of that you can do. The risk profile in terms of whether it’s success or happens or not with those transactions is a big bogey,” he says. “We see a lot of activity from a lot of strategics making investments – and silent investments – in a lot of better-for-you food and beverage companies. Some with a second bite attached post the acquisition and some without a defined path to acquisition. I think with a lot of these strategics the hope is is that they’ll learn, they’ll build relationships with the companies in which they’ve invested and then, having that seat at the table early, they could make a pre-emptive bid to acquire without a process. I do think we’re going to see a lot of deals happen earlier and earlier.”

Nevertheless, it is, in many ways, a testing time for a larger food manufacturer trying to weigh up which of the number of fledgling businesses on the market could be worth a punt. 

“We’ve talked with a lot of strategics and the phrase that they’re using is that – to use a baseball analogy – ‘We want to buy something when it’s in the second inning’,” Burgmaier says. “[Brands that] have got good, proven growth in velocity and sell-through in the natural channel, in the conventional channel, maybe some club. A brand that’s proven itself in those early days to be strong, to be potentially transferable and extendable.

“We are seeing more and more, from the large strategics, that companies in the better-for-you space need to be profitable or how have a very, very clear and believable near-term path to profitability, which more than anything points to a strong underlying gross margin and well-deserved sell-through that it wasn’t over-promoted to death or extremely pushed. I do think strategics are getting a little smarter in terms of the underlying fundamentals of the companies in which they acquire.”