The 2008 mergers and acquisitions season has officially kicked off. This week, babyfood company Organix Brands became the first major signing when it was snapped by Swiss food company Hero.
It joins innovative, premium companies such as Abel & Cole, Farmhouse Fare, Clipper Tea, Green & Black's and Maximuscle that have been bought by heavyweight trade or private equity teams over the past couple of years.
Judging by the noise surrounding Dorset Cereals at the moment, the luxury muesli brand could well be next in line. And there are plenty of other players catching the eye of the talent scouts.
Innocent, Eat Natural, Gü and the Feel Good Drinks Company are just some of the brands that we think are on the radar of deep-pocketed companies this year. Companies rumoured to already be up for sale include So Good and Tyrrells.
It's their phenomenal rate of growth that makes them so attractive. Innocent dominates the smoothie category, with UK sales alone of £130m; Dorset Cereals and Eat Natural are the two fastest-growing cereal companies in the UK; Yeo Valley continues to lead in organic; and premium desserts brand Gü has become a £24m brand in under four years.
Set against the backdrop of marginal growth across the fmcg sector as a whole, it's not surprising that these companies are creating such a buzz.
"The food industry on the whole is not in growth, people are not eating a lot more, therefore the impressive companies are those that have a brand with that elusive quality of growth," says Shaun Browne, MD of corporate finance boutique McQueen.
With the credit crunch and the rising cost of borrowing, it's more important than ever that acquisitions have good growth prospects, agrees Neil Sutton, head of corporate finance at PriceWaterhouseCoopers.
"In a downturn people used to say let's put money into food, but that is too basic an analysis. Companies are now looking at the subcategories that are growing at the expense of others. It is a lot easier to repay a debt when the company you buy is growing at 20%."
The reason these companies are growing at such a rate, says Browne, is their clever positioning. "Corporate buyers are looking for brands that are premium, healthy, convenient, have provenance, and are environmentally friendly."
Many of these traits are instantly identifiable in our chosen brands. All have premium and many have healthy credentials. Yet what really makes them stand out is their innovation and slick marketing.
"The big food multinationals are becoming more interested in small, high-growth, premium food businesses as a kind of outsourced NPD," says John Spayne at independent investment bank Spayne Lindsay & Co. "It is often not easy for a big multinational to develop innovative new products and brands and to cultivate the ethical virtues and 'cool factor' of young growing businesses."
For smaller companies, this is less of a problem. Dorset Cereals, with its estimated £50m price tag, will bring real innovation to a major cereals company if, as expected, it is bought by one, says Sutton. "Dorset Cereals is an excellent brand with high levels of innovation and growth and is an obvious brand for people to buy."
Companies such as the Feel Good Drinks Company, The Fabulous Bakin' Boys and Gü also possess the much sought after cool factor, adds an industry expert. Although Feel Good Drinks isn't up for sale, he predicts it will be within two years because of the young, fun image it has created.
"Feel Good is probably the most attractive drinks company behind Innocent because it has much of the same quirky approach," he says. "The Fabulous Bakin' Boys' laid-back type of attitude is refreshing in a staid category such as cakes and biscuits."
Even Innocent, which could hardly be described as small any more, has managed to retain its cool image. "Innocent still feels like a small company run by its founders," says Harry Cragoe, the founder of PJ's Smoothies. "Its product is very similar to own label but can charge a premium, which makes it so special. It acts like a small company, has real character and continues to evolve and differentiate itself."
Another business that has made canny use of its marketing to reinforce its premium positioning is Cains, which plays very effectively on its Liverpool heritage. "Cains doesn't tick the health box, and investors will look hard at this, but it is a very strong brand that has cultivated a great image for itself, with real provenance," says the expert.
Some brands stand out for their clever diversification. Dorset Cereals extended into cereal bars, for instance, while Gü has moved out of its chocolate heartland with Frü fruit puddings, and Tyrrells is mooting a move into vodka.
""A company that can build a suite of products is essential. We want to see that a brand has the ability to break out of its category as well as generate good margins.," says Simon Blakey, director at Avenmore Developments, which invests in start-up businesses including new drinks company Sip.
It is a good time to buy. Plans to raise the lower level of capital gains tax from 10% to 18% in April this year, doubling the rate of tax entrepreneurs have to pay on selling their businesses, will encourage companies to sell fast. "This has no doubt focused the minds of some entrepreneurs," says Spayne.
The question is: who'll be doing the buying? Over the past couple of years, the division of spoils between trade and private equity buyers has been pretty equal. But the balance of power is shifting in favour of trade buyers, believes Sutton. "The trade has come back. Private equity has done a good job for companies such as Maximuscle and Burton's Foods. But what it pays depends on what it can borrow, which has been affected by the credit crunch. There are a bunch of auctions going on at the moment that are largely trade-focused."
And there will no doubt be more as the transfer market heats up. But which of the players on our list will be next to put in a transfer request? n