Dealmaking activity in the food and drinks industry looks set to return to lows not seen since the 2008 financial crash as rampant inflation led to a collapse in M&A over the summer.
Volumes in the four months to the end of August dropped by 29% year on year to 22 deals, according to latest report by corporate finance firm Oghma Partners.
Transaction values sank more than 90% to just £270m, compared with £3.9bn in same period of 2021, as there continued to be an absence of mega deals in keeping with the first four months of 2022 when values also declined by 85% year on year to £300m.
About 60% of deals had an estimated value of £20m or less.
Oghma said the decline was similar to falls experienced in 2020 when the onset of the Covid crisis put a stop to almost all dealmaking.
However, it remained doubtful that the strong recovery in the final four months of 2020 as activity picked up following the end of the first lockdown would be matched this year.
“Undoubtedly, equilibrium will return in due course, which will lead to a reinvigorated M&A market, but it may take some time and we would expect that the current year will end at a level near, or below, that following the 2008 financial crisis,” partner Mark Lynch added.
Activity from financial buyers dropped off significantly in the second tertiary, only accounting for 9.1% of total deal volume for the period, with the figure in the year to date standing at 16%.
Lynch warned it could be a sign of things to come as rising interest rates across the world limited private equity’s ability to raise debt to fund acquisitions.
He said the decline in deal activity so far in 2022 stemmed from business uncertainty as food and drink brands battle soaring input cost inflation and focus on pushing through sharp price rises.
“Profitability is under pressure and the outlook uncertain, putting off buyers and sellers alike,” Lynch added.
The availability of debt also held back M&A in 2022, he said. “It appears liquidity is getting tighter with banks less willing to lend and the cost of debt is rising as governments seek to both fight inflation and fund expansionary fiscal budgets.”
Finally, Lynch highlighted a changing appetite for risk raising further hurdles for dealmakers and also lowering valuations.
In the four months from May to August, 54.5% of deals were done by UK corporate buyer, while overseas buyers accounted for 36.4%.
Notable deals included Solina’s acquisition of Zafron Foods and Lotus Bakeries takeover of Peter’s Yard as both companies continued to solidify positions in the UK market.
Despite a significant decline in PE deals, one of the largest completed in the period involved Endless acquiring edible oils supplier KTC Edibles.
The most active category in the period was grocery/confectionery, which saw Premier Foods buy The Spice Tailor, marking the group’s first acquisition since 2016.
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