No sooner had we entered 2013 than the food and beverage industry was stealing the business news headlines. On 7 January, Experian revealed that the UK saw a three-year high in ‘megadeals’ in 2012, with food and drink one of the most active sectors.
The next day, AG Barr and Britvic shareholders agreed to merger proposals that will create one of Europe’s largest soft drinks firms, with a market capitalisation of more than £1.5bn.
Although the OFT delayed its decision on the merger this week, I strongly believe this wave of consolidation will continue this year and beyond. Why? Because the key factors driving this activity show no sign of weakening.
Chief among them is record high feed and commodity prices. This, and the volatility that comes with it, makes it extremely hard for independent food producers, in particular, to operate profitably and plan ahead. This will lead to acquisitions by larger companies with greater economies of scale and access to capital.
Even some of the larger multinationals are finding life tough, as they struggle with high input costs, low margins and too much debt. We will continue to see them demerge or sell parts of their business to deleverage and de-risk their core operations.
Another key driver will be the demand for strong brands and market reach. I expect to see further investment from the Far East in strong Western brands, and from established Western multinationals in emerging markets to increase their market penetration. Bright Food and Mizkan led the way in 2012.
Where we are moving to is fewer independent companies with more consolidation internationally, and bigger players in the market looking to consolidate operations to fewer but bigger sites.
It is going to be a very dynamic sector. This will give rise to Competition Commission issues that need to be considered as part of any merger plan. It will also create opportunities for other players to pick up divisions that the competition authorities require to be sold as a condition for their approval of the merger.
Let the games commence!
Craig Hodgson is a partner and head of the food & beverage practice at Mills & Reeve