The victory of Blackstone Group and PAI Partners' over Premier Foods for United Biscuits last month is the latest in a growing list of wins for private equity players. In 2006 alone, seven of the 11 food and drink acquisitions have gone to private equity (see right). This compares with just three of the 18 deals above £20m in 2005, according to Luke Jensen, head of the consumer practice at OC&C Strategy Consultants. So what's giving private equity the edge?
Like the trade, it has been capitalising on a flurry of food and drink companies either putting themselves or a portfolio of their brands up for sale.
"As more assets become available it drives interest from private equity companies," says Jensen.
But the key is cash. "There is a big wall of money," says Phil Gries-Bach, director at Barclays Private Equity. "The food industry is being impacted by buyers who are keen to write cheques."
Keith Ellis, global head of food and drink at 3i, plays down talk of a fight. "There is no battle going on between trade buyers and PE, everything is taken on merit. At 3i we do a huge amount of analysis to see if a deal will create value."
However, there's no denying that private equity is pulling off more deals. This is clearly being driven partly by its ability to pay more.
"The UB deal came down to the valuation and Premier's idea of what the business was worth. They were not willing to go beyond that," confirms a source close to Premier of its decision to pull out of the auction.
Blackstone and PAI eventually coughed up £1.6bn.
But the main advantage private equity players have over their trade rivals is the way they can fund deals. Put simply, banks are willing to lend at increasingly competitive rates. Because money is cheaper, private equity firms are able to put down more debt, reducing their equity commitment. This allows them to pay a higher headline figure for a business yet still make the same returns.
Critical mass is key. Increasingly, their "aggressive" deal making is based on a buy-and-build strategy that involves acquiring a number of food companies and combining their operations. A high profile example is the CapVest-owned FoodVest business, which originally consisted of Young's Bluecrest but has since bought other assets including Findus.
This strategy enables them to reduce costs and enjoy the same sort of synergies normally only available to trade buyers. Indeed, in some ways they are becoming trade buyers themselves, says Neil Sutton, head of corporate finance at PWC. "Once a private equity company has bought one food company then is it not effectively a trade buyer?"
Another aspect private equity finds appealing about the sector is the scale of the deals on the table [See Box 1]. Many businesses coming up for sale are being spun out of the large food groups, which are choosing to concentrate on their core assets. This was the case with Unilever and the sale of its frozen foods division.
A large food company is likely to be supplying more than one big retailer, thereby reducing the asset's risk profile and making it a more attractive lending proposition to the banks. Better still, the assets being offloaded are more often than not branded.
"We're much more interested in brands as they are defensive - they can't be attacked by the major grocers whereas own label can," says Gries-Bach, explaining his preference for brands. "We want to be in branded as your destiny is in your own hands," adds Ellis. "All the recent deals have been branded. In the meantime the sale of own label businesses from Northern Foods has stalled."
Another advantage that many private equity players have is that they are not listed, giving them greater freedom to pull off deals.
Quoted companies have their shareholders to pacify. This provides added complications when bidding for businesses, according to Ellis.
Neither the City nor shareholders are likely to endorse paying too keen a price for slow-growth businesses such as Unilever's frozen foods division. This helps to explain why the only interested parties were private equity firms: Blackstone, CapVest, Lion Capital and Candover.
Nervousness about the supermarkets exerting too much power over food companies can make it difficult for the likes of Northern and Premier to get 'sign-off' on acquisitions, adds Ellis.
Trade buyers have still managed to complete some decent sized deals. Dairy Crest is currently in the process of acquiring Uniq's French spreads business, which owns St Hubert and Le Fleurier, for £200m.
Significantly they beat private equity players Bridgepoint and Duke Street Capital to the prize.
Other high profile deals include Premier's purchase of the UK and Ireland operations of the Campbell Soup Company in the summer and Heinz's acquisition of HP late last year.
And despite losing out in the UB auction, Premier remains confident that it will be able to complete further acquisitions. "It has always got its shopping list and acquisitions continue to form part of its growth strategy," says a spokeswoman.
Premier effectively operates in a similar way to a private equity company buying assets.
So although private equity players are winning on points at the moment, the fight is far from over: seven out of 11 this year is hardly conclusive.
That private equity firms are tending to pick up the more challenging deals could make life difficult for them in the future, warns Jensen. "Squeezing profits out of food businesses is not as easy as, say, growing store numbers in a retail business," he suggests.
Only time will tell if their aggressive entry into the market will generate the return on investment they are looking for - and whether the fight has in fact swung in their favour.n