Despite improving economic conditions in the UK and Ireland, the woes of the big four grocers are helping drive a robust M&A market in food and drink – but not in the most desired way, at least for one side of the deal.
The companies being bought won’t thank Tesco, Morrisons, Sainsbury’s and Asda, as much of the rise in deals has come about thanks to a jump in distress levels, according to Grant Thornton’s latest quarterly M&A report.
Findings showing the number of companies going into administration or liquidation increased a whopping 178%, compared with the last half of 2014, won’t come as a surprise. It backs up a study by recovery firm Begbies Traynor last month which found the escalation of the supermarket price war has affected food suppliers, independent grocers and farmers and sent the number of UK food suppliers experiencing “significant” financial distress rocketing by more than 50% to 1,622.
According to analysis by GT, 131 companies went into administration or liquidation in the first six months of 2015, compared with just 47 in the second half of 2014. In response there has been an upturn in the number of bust businesses being snapped up – with four such deals in both the first and second quarters of 2015, representing a 50% increase on Q3 and Q4 of 2014.
“The brutal price war is affecting the entire food industry, down to the smallest food manufacturers through to farmers and independent grocers,” says Trefor Griffith, head of food and beverage at GT and author of the report.
The large majority of companies being rescued have been small operators in the bakery and confectionery sectors and niche companies with heritage brands. Finsbury Food snapped up Johnstone’s Just Desserts to give it access to the foodservice market and coffee shops; House of Vantage acquired chilled home bakery product manufacturer Bakeaway; and Creative Confectionery acquired the business and assets of Cumbria-based JE Wilson & Sons, one of the original makers of Kendal mint cake.
While not a company in distress, Thorntons was not exactly in rude health with profit warning following profit warning as the supermarkets, which its new strategy relies on heavily, significantly reduced their volume of stock as well as delayed placing orders and making payments. Italian confectionery giant Ferrero completed one of the most noteworthy deals in the second quarter with the £112m takeover of the ailing British chocolate brand.
“The difficulties faced by Thorntons, which led to its acquisition by Ferrero, are a further clear illustration of the impact on food and beverage manufacturers of the intense competitive pressures in the UK supermarket sector,” Griffith adds.
“The Thorntons example goes to the heart of the question of how best to reach the end consumer in a structurally shifting food and beverage retail market. The established large multiple retailers are fighting a price war against a backdrop of increasing market penetration by the discounters and trends towards convenience and online purchasing.”
Overall in the food and beverage space, deal volumes in the second quarter increased to 47, up from 44 in the first three months, pushing the first half total from 82 a year ago to 91, GT’s report shows. Disclosed values also jumped sharply (by 26% on the same period last year) to £3.38bn, driven by the €2.6bn sale of Iglo Group to investment vehicle Nomad Foods and the $1.5bn Moy Park transaction by Brazilian meat packer JBS.
Activity in the lower middle market was also healthy as larger companies filled in gaps in their portfolios, Griffith says.
“Successful businesses in the sector have typically followed several route-to-market strategies,” the dealmaker adds. “They have made an early entry into relationships with the discounters, developed the food service channel and expanded into export markets. The flipside is that companies that remain largely dependent on the Big Four will continue to face strong pressure on their businesses as those supermarket retailers continue to rationalise the number of SKUs they carry.
“Both sides of this trend will help drive deal activity as growing businesses expand into new channels and the strong acquire the weak.”
There was also a growing appetite from overseas to invest in UK and Irish companies, with 14 deals with international acquirers in Q2. Half emanated from Europe, four from the US and the remainder coming from Brazil, Japan and the British Virgin Islands. It puts the half-year figures at 21 transactions, which compares with 21 for the whole of 2014.
Click here to read a story featured in this week’s issue of The Grocer magazine looking at the likelihood of a Brake IPO in light of private sales continuing to win out in the dual-track approach.