The economic recovery has yet to translate into higher grocery sales – quite the opposite in fact – but it is having a positive impact on the M&A market.
Despite all the uncertainties surrounding the future of UK food retail, desire to invest in UK food and drink companies remains strong.
The number of deals has risen 5% in the first half of the year to 80, according to a new report from Grant Thornton. Bolstered by Japan’s Mizkan Group’s £1.3bn swoop on Unilever’s Ragu and Bertoli pasta sauce brands in May – the value of disclosed deals is also showing an upward trend.
The value of deals in the second quarter of this year rose by 109% compared with the first quarter of this year and by 16% compared with the second quarter last year.
Furthermore, company valuations are on the rise. Grant Thornton says that businesses that was previously valued at 6x EBITDA, might now be worth a 7x multiple.
The improvement is at odds with the trading environment. Overall grocery sales growth is at its lowest level in 10 years and branded suppliers in particular are struggling as trade shifts from the big four supermarkets to Aldi and Lidl, who are focused more on own-label.
The strength of the economy is important here. Buoyant equity markets are helping to drive valuations higher and the availability of debt on attractive terms is improving – making now a good time to invest financially.
Strategically too, now looks like a good time to think about making acquisitions and divestments. Growth is hard to come by, but that makes the case even stronger for companies to buy complementary businesses that are well-placed to grow and sell those that may struggle.
A good recent example of the former includes Purity’s acquisition of Firefly Tonics and Greencore’s sale of the Ministry of Cake business illustrates the latter point. Having exited its cake business and before that desserts – both categories suffering from over-capacity in the UK – the rest of the business is now well placed to grow well ahead of the broader UK grocery market. More than half of the UK business is in food-to-go – which has been consistently growing at close to double-digit levels, as the supermarkets open more and more convenience stores.