Ethical sourcing and pressures from industry consolidation will drive mergers and acquisitions in the food sector this year, a PricewaterhouseCoopers report has revealed.

European food companies are becoming more aware of an increasing consumer demand for ethically sourced products, such as organic or Fairtrade, and are looking for suitable M&A opportunities, along the lines of Cadbury Schweppes's acquisition last May of organic chocolate brand Green & Black's, said Neil Sutton, food sector leader of the corporate finance team at PricewaterhouseCoopers.

"Ethical supply chain management is becoming the focus for responsible food manufacturers and retailers. As consumer demand for ethically sourced products continues to rise, PWC expects M&A interest in this area to increase significantly.

"High profile adverse publicity can have a major impact on brand value," he said.

The report also found that the total value of disclosed mergers and acquisitions in the European food sector had increased by 44% to E10.5bn (£7.2bn) in the past year on 350 deals, compared with E7.3bn (£5bn) in 2004 on 315 deals. In the UK, the number of deals increased from 56 in 2004 to 59.

It added that 2006 had started well with the acquisition of Orangina SA by Blackstone Group and Lion Capital; the disposal of Heinz's European seafood business to Lehman Brothers Merchant Banking; the sale of Italian cheese maker Galbani by BC Partners to Lactalis; and Capvest's purchase of Swedish frozen food manufacturer Findus from EQT Partners, the Swedish investment vehicle that signed a deal to buy the majority of Compass's travel retail arm, SSP, last month (The Grocer, April 15, p5).

Major divestment programmes by Unilever, Cadbury Schweppes, Campbell Soup Company and Heinz all looked set to increase M&A momentum in the industry.

Sutton predicted: "M&A this year will be concentrated in some of the fragmented sub-sectors - freshly prepared fruit, salads and vegetables, poultry, and sugar and chocolate confectionery."