CapVest bought Natra for £426m

Soaring inflation and economic instability has weighed on UK food and drink dealmaking, with the past quarter seeing the lowest number of deals completed since the depth of the Covid crisis.

While deal volumes have largely settled in the mid-30s since a post-Covid spike in the first quarter of 2021, Q2 2022 saw deal numbers drop to just 26 as the sector faced numerous economic challenges.

The latest Grant Thornton quarterly M&A report suggested slowing activity reflected “weakened confidence” in the sector amid rising input costs, squeezed consumers and recessionary concerns.

However, disclosed deal value rose to £1.4bn from just £490m in Q1, due to the completion of some larger ticket deals, including CapVest’s £426m acquisition of chocolate brand Natra and Unilever’s £790m purchase of a majority stake in Nutrafol.

GT head of food and beverage Trefor Griffith said there was anecdotal evidence valuations were also being affected by the current environment.

“There are concerns from North America and other global buyers around European assets because of the situation in Ukraine,” he said.

“There is also less competition in processes as there are fewer willing buyers, which therefore means it can be more difficult to achieve a high valuation.”

However, larger business – such as Unilever and PepsiCo – remain active in the market, with Griffith suggesting the current market suits trade and private equity buyers with available cash.

“It’s probably a more favourable market for well funded players to do acquisitions than when market is hot and they’re competing with fewer rivals for assets,” he explained.

“For those businesses focused on M&A as a clear strategy over the medium term, it is arguably more prudent to be opportunistic and get deals done.”

The second quarter saw just two food and drink businesses acquired from administrators. Wine brand Hun, which targets millennial drinkers, was saved by its supplier Origin Wine, while Morrisons acquired the McColl’s convenience store chain.

However the quarter contained 13 administrations and 38 members voluntary liquidations, with Grant Thornton expecting this to growth “in the face of rising cost pressures”.

“It doesn’t help that supermarkets are reportedly leaning on suppliers to absorb price increases,” the report stated. “This situation is not good news for smaller suppliers – of which there are many in the highly fragmented F&B industry – that don’t have the same bargaining power.”