Meatless Farm Co was rescued from administration

Food and drink dealmaking continued to recover last quarter as receding economic fears, coupled with a string of distressed deals, boosted deal numbers.

The quarterly food and drink M&A report from Grant Thornton found UK industry deal volumes rose for the third consecutive quarter in the three months to the end of June, to 42.

That figure was up 13% on first quarter numbers and 61% year on year after deal activity was effectively frozen by soaring inflation and uncertainty following Russia’s invasion of Ukraine.

Deals for distressed assets continued to boost overall volumes, with six transactions (14%) involving an element of stress, including Black Sheep Brewery, Meatless Farm and Farmison.

However, Grant Thornton noted that the number of sector administrations fell back from 19 in the first quarter to 10 in the second quarter, while deal activity also picked up elsewhere.

“There are still distressed deals within the overall increase in deal volumes, but the amount of distress is reducing and so the number of positive deals is increasing,” said Nicola Sartori, lead of Grant Thornton’s M&A retail and consumer brands team.

The report found that private equity’s appetite for food and drink shows signs of returning, with PE responsible for 43% of transactions in the quarter – up 38% on the same quarter last year.

Half (nine) of private equity transactions were minority investments, as investors remain somewhat cautious on the consumer-facing sector. However, there was also activity from mainstream private equity houses via PE-backed consolidators like European Bakery Group or Stocks Spirits.

“You’re definitely seeing investment in the sector at that early VC stage, with buyers focused on innovation,” Sartori added.

“Early stage investors are typically not as nervous about the wider economic backdrop because they have a much stronger appetite for risk and are backing people who are looking to create something new to beat the market.”

However, she suggested the recent easing of UK inflation figures should feed into more confidence and greater activity among traditional and director private equity investors.

“The nervousness that was around a few months ago when inflation remained above market expectations is beginning to ease and so the narrative around private equity is improving and they seem more open to conversations on consumer assets again,” Sartori said.

Though the majority (67%) of Q2 deals were domestic, there was also an uptick in UK and Irish companies acquiring overseas assets, accounting for 21% of deals – the highest proportion since the fourth quarter of 2021.

On a category basis, spirits was at top spot with 22% of deals, boosted by Stock Spirits’ three deals in the period, with plant-based remaining in second with 10% of deals despite commentary around the slowdown in the category.

Sartori said the three sequential quarters of deal volume growth now represent a trend, and one that should persist through the rest of the year.

“As long as there are no other significant economic shocks, I think you’ll see that trend continue because conditions feel as though they are starting to become more resilient,” she said.