VFC received a £7.5m investment in the quarter

UK food and drink dealmaking has held steady so far in 2022, despite the soaring inflation and mounting headwinds facing the sector.

Grant Thornton’s new quarterly M&A analysis found the 35 completed transactions in the quarter broadly matched total deal volumes in the previous three quarters, belying fears that supply chain disruption and mounting costs could freeze dealmaking.

Total activity was well down on the 63 deals of 2021’s first quarter, when the market benefited from the thawing of a Covid freeze in activity.

Nevertheless, the “respectable” level of activity suggested there could be a natural floor to the level of dealmaking in the sector, according to GT head of food and beverage Trefor Griffith.

“There is continued private equity investment into the sector, which means there is always likely to be a certain amount of deals happening despite wider conditions,” he said.

Private equity investment was responsible for more than 45% of Q1 deals, up from 27% in the previous quarter. PE cash went towards early-stage, high-growth companies where there was less competition from large trade buyers.

In particular, high-growth segments like plant-based continued to see deals, including Veg Capital’s £7.5m investment into vegan fried chicken brand VFC and LDC’s investment into Shaken Udder.

By contrast, Griffith said trade buyers “remain very cautious” because “they are dealing with many of the same challenges as their potential targets”

Trade buyer caution partly explains disclosed deal values being a relatively low £489.5m, down from £1.4bn in the fourth quarter of last year due to a lack of mega-deals being done.

On a sector basis bakery was the most active category, taking 17% of deals driven by acquisitions in the premium end of the market, followed by meat and plant-based both with 11%.

Macro economic conditions are likely to constrain a recovery in dealmaking in the foreseeable future, but Griffith expects activity to continue despite conditions worsening since the end of the first quarter as the war in Ukraine and its impacts have escalated.

“You are going to have reasons why businesses are being sold,” he explained, noting that private owners may not want to continue in the face of tough conditions or defensive deals happening to consolidate and secure supply chains.

“It is arguably a sensible time for those sitting on cash to buy assets now as buyers are going to have less competition and pricing will be weaker than in a hot market,” Griffith said.