The PE firm aims to create the UK’s best value-added chilled food company

Of the flurry of food and drink deals struck since the first national lockdown eased in July, PAI Partners’ ambitious double swoop for Addo and Winterbotham Darby might be the most interesting.

Pulling off a simultaneous acquisition of two market-leading businesses would be a rare coup in normal times, but to do so in the midst of the pandemic, with all its restrictions, is even more impressive.

But what now? What is the vision for Addo and Winterbotham Darby (WD)? PAI hopes that by bringing the two businesses together, both management teams will benefit from sharing best practices, NPD and supply chain initiatives.

Addo CEO Deborah Bolton and WD chief Steven Higginson will remain in place, with Paul Monk, currently executive chairman of both businesses, staying on to oversee the newly created platform.

The French PE house spotted significant benefits of combining the two, says a City source.

Savoury pastry maker Addo has more experience in manufacturing, operations and supply chain, while WD, which supplies continental meats, antipasti and olives, is stronger at NPD, consumer insight and bringing products to market.

“Putting them together gives you the best of breed,” another dealmaker adds.

PAI’s strategy with previous deals provides insight into what may follow. The firm isn’t afraid to invest in its assets or make further bolt-on deals to accelerate growth. It has done both with R&R Ice Cream, which ultimately led to a joint venture with Nestlé to create Froneri, and with soft drinks bottler Refresco.

Money to play with

With a combined turnover of £500m, Addo and WD aren’t the biggest of deals for PAI, which had €5.1bn (£4.6bn) to play with in its latest investment fund.

“It is obvious PAI want to use the deal as a springboard for further consolidation within the space,” a City source says. “There are a large number of opportunities contiguous to the assets they bought and, if you stretch a bit further, in other areas of UK chilled.”

Another dealmaker expects the PAI platform to be “very active in mopping up stuff in the UK” as the sector requires consolidation.

Potential targets include Cranswick-owned Continental Foods, Oscar Mayer, non-core assets within Kerry and Bakkavor, and a long list of smaller players across chilled categories.

And with so many opportunities, PAI will have the luxury of picking and choosing what to go after – though that also presents its own troubles given the number of varied categories in chilled.

“The next acquisition will be more interesting and telling than the original double deal,” a City source says. “There is such a smorgasbord of opportunity ahead. Do they go down the protein route? Vegan? Prepared fresh produce? Or gamble on food-to-go?”

The competition authorities shouldn’t trouble PAI just yet, with the two platform businesses competing in separate areas. But with Addo and WD being market leaders any bolt-on could trigger scrutiny from the CMA.

“There is some overlap in their bakery product range, but the CMA is unlikely to get too excited unless it starts seeing Winterbotham’s tortillas as competing with Addo’s quiches,” says Andrew Taylor, partner at Aldwych Partners.

“Up until now, though, the CMA has looked at competition using very narrow product categories.”

However, before getting carried away with what comes next, PAI need to focus on the deals completing.

Dealmakers expect a steadier approach initially, focusing on bedding in the platform deals, with one eye on exit in five years’ time and the high possibility of an IPO as the end goal.

“You don’t want to become 2 Sisters chilled division, which just got too big and cumbersome and ended up as a race to the bottom,” says another City source. “For an IPO you need a growth story and if all you have done is buy a load of businesses that are flat in turnover it doesn’t give an exciting narrative.

“You have to make sure the base business is running well, is humming and well-integrated. When you look at businesses going on acquisition rampages like Premier Foods did, they almost always end in tears.”

Possible parallels for the future strategy can be found in mixed protein group Eight Fifty Food, created by CapVest in 2019 when it put Young’s together with pork producer Karro. Now with revenues of £1.7bn, 8,000 employees and 21 sites in the UK, Ireland and Europe, the group is PE-owned, fast-moving, pragmatic and diversified after several bolt-on deals, with an IPO on the cards for 2021, a City source says.

There may also be parallels in the good timing of the ventures. Eight Fifty benefited from soaring demand for pork in China after African swine fever wiped out pig stocks in the country.

Similarly, “PAI have picked a good time to get into chilled and can benefit from structural weakness at Greencore and Bakkavor in the pandemic.”

Yet another dealmaker says: “There has been extreme volatility in 2020, and more to come. PAI are well placed to navigate a way through and take advantage of it.”