The economic climate may be right for food and drink businesses to move into new high-growth markets or countries, reports James Ball
With bank lending at an all-time low, and private investors never so prudent, now's the time for the major fmcg players to keep their heads down and soldier quietly on. Or so the theory goes. It certainly doesn't seem the time to buy up rivals or move into new markets.
But, according to a new report from Catalyst Corporate Finance, this could be precisely what happens over the next 12 months. Given food and drink's relatively good position, the strong balance sheet of some of its major players and the depressed economy, now could be the time for major "transformational" deals in the sector - and trade buyers are in a position to take centre stage.
True, the number of UK mergers and acquisitions in the sector declined sharply in 2008, says the report, as seen exclusively by The Grocer. Over the year there were 77 completed deals, compared with 121 in 2007. But thanks to the purchase of Scottish & Newcastle by Heineken and Carlsberg for a hefty £7.8bn, the total value of completed food and drink M&A in the UK was up on 2007, at £11.8bn versus just £2.8bn the year before.
The drivers of these bigger deals, and M&A activity in the year ahead lies in portfolio realignment, says Simon Peacock, head of food and drink mergers at Catalyst. As consumer demand shifts in response to the economic climate, companies are having to reassess whether their portfolio is meeting that demand, he adds.
For some fmcg brands, this realignment has been achieved by selling non-core brands, as Unilever and Danone have in previous years. It can also be done through the acquisition of brands, or even by entering new markets.
"Shareholders are looking for growth, both in sales and in profits," says Peacock. "In a climate like this, that can mean transformational deals that move a company into new sectors or countries. ABF's purchase of Jordans was an example. Particularly in food and drink, there are still growth sectors. Moving into these is one way to look after the bottom line."
Private equity
While the opportunities for M&A are there, it doesn't look like deals will be quite so dominated by private equity in the months ahead. Private equity has been synonymous with food and drink M&A in recent years, as private equity companies were typically able to borrow five to six times their equity, making it far easier for them to price trade buyers out of the market. But over the past year that ratio has fallen to just one to two times equity. At the same time, asking prices have fallen by 40% to 50%, say industry commentators.
"Private equity often worked by buying up companies that weren't a good fit for trade buyers and dealing with the issues there," says Peacock. "Then a few years down the line, they'd look to sell the business on. That's still happening, but it's less common. As private equity grows more cautious, the trade is growing more aggressive. Now is the time for transformational deals, if the price is right.
"It's got to be attractive to put together a big-scale deal - an opportunity so good the banks can't ignore it. After all, if you were a bank, who else would you back over the big food plcs?"
Peacock says the most likely buyers are those who have sat out of the bullish M&A market of recent years and consequently have good reason to look at their portfolios and healthy reserves of cash. Despite cautiously forecasting bigger deals, he warns the big-ticket valuations and lending of the bull market aren't likely to return, and this will lead companies to be more creative.
ABF's acquisition of Jordan's was through a fairly innovative cashless merger, reducing the finance required.
The alternative to buying into high-growth sectors, says the Catalyst report, is buying into high-growth countries. As brands and businesses go global, cross-border M&A becomes more crucial to business tactics. This could lead to the unfamiliar experience of UK and European businesses being bought up by South American and South African giants that have outgrown their home markets. Similarly, UK businesses may seek to gain a foothold into countries less hit by recession by buying up local "champion brands".
OC&C strategy consultant Chris Outram agrees the market is ready for some once-in-a-lifetime deals, but cautions companies not to focus solely on price.
"There are two types of players right now," says Outram. "Stressed and not stressed. The latter are either in the right place at the right time or are those who saw changes coming and took early corrective action. Looking at those, it's clear they should be looking to M&A - they can pick up assets at a price they may never see again. But companies must be careful to take a view about the business model, their competitive advantage and how they could take a business forward before making that strategic decision," he adds. "The deal itself is just a tactical move."
Even "stressed" companies could benefit from looking at M&A, Outram suggests, as the right merger could generate strong cost synergies to help ailing businesses. The European dairy and alcoholic drinks sectors are ripe for consolidation. French dairy group Lactalis is said to be eyeing up acquisition opportunities, while several companies are understood to have run a slide rule over parts of Dairy Farmers of Britain's business. Meanwhile, drinks activity is rife globally as beleaguered spirits brands look to consolidate and newly-merged AB InBev, the world's largest brewer, looks to shape its portfolio.
And there are plenty more. Innocent sold a stake to Coca-Cola last month. But also on the block are Alpro, Moët and Krug, and several smaller suppliers are rumoured to be looking for "fire sale" buyers.
Turbulent market
The scene is set for more M&A, but in such a turbulent market it will be a strain on company resources.
"Management only has so much time," Outram says. "And they're pretty busy dealing with demand stress and trying to cut costs in the supply chain. Mergers can be very taxing on management, so only the desperate or those with serious financial and operational capacity will be willing to seriously consider M&A right now."
With bank lending at an all-time low, and private investors never so prudent, now's the time for the major fmcg players to keep their heads down and soldier quietly on. Or so the theory goes. It certainly doesn't seem the time to buy up rivals or move into new markets.
But, according to a new report from Catalyst Corporate Finance, this could be precisely what happens over the next 12 months. Given food and drink's relatively good position, the strong balance sheet of some of its major players and the depressed economy, now could be the time for major "transformational" deals in the sector - and trade buyers are in a position to take centre stage.
True, the number of UK mergers and acquisitions in the sector declined sharply in 2008, says the report, as seen exclusively by The Grocer. Over the year there were 77 completed deals, compared with 121 in 2007. But thanks to the purchase of Scottish & Newcastle by Heineken and Carlsberg for a hefty £7.8bn, the total value of completed food and drink M&A in the UK was up on 2007, at £11.8bn versus just £2.8bn the year before.
The drivers of these bigger deals, and M&A activity in the year ahead lies in portfolio realignment, says Simon Peacock, head of food and drink mergers at Catalyst. As consumer demand shifts in response to the economic climate, companies are having to reassess whether their portfolio is meeting that demand, he adds.
For some fmcg brands, this realignment has been achieved by selling non-core brands, as Unilever and Danone have in previous years. It can also be done through the acquisition of brands, or even by entering new markets.
"Shareholders are looking for growth, both in sales and in profits," says Peacock. "In a climate like this, that can mean transformational deals that move a company into new sectors or countries. ABF's purchase of Jordans was an example. Particularly in food and drink, there are still growth sectors. Moving into these is one way to look after the bottom line."
Private equity
While the opportunities for M&A are there, it doesn't look like deals will be quite so dominated by private equity in the months ahead. Private equity has been synonymous with food and drink M&A in recent years, as private equity companies were typically able to borrow five to six times their equity, making it far easier for them to price trade buyers out of the market. But over the past year that ratio has fallen to just one to two times equity. At the same time, asking prices have fallen by 40% to 50%, say industry commentators.
"Private equity often worked by buying up companies that weren't a good fit for trade buyers and dealing with the issues there," says Peacock. "Then a few years down the line, they'd look to sell the business on. That's still happening, but it's less common. As private equity grows more cautious, the trade is growing more aggressive. Now is the time for transformational deals, if the price is right.
"It's got to be attractive to put together a big-scale deal - an opportunity so good the banks can't ignore it. After all, if you were a bank, who else would you back over the big food plcs?"
Peacock says the most likely buyers are those who have sat out of the bullish M&A market of recent years and consequently have good reason to look at their portfolios and healthy reserves of cash. Despite cautiously forecasting bigger deals, he warns the big-ticket valuations and lending of the bull market aren't likely to return, and this will lead companies to be more creative.
ABF's acquisition of Jordan's was through a fairly innovative cashless merger, reducing the finance required.
The alternative to buying into high-growth sectors, says the Catalyst report, is buying into high-growth countries. As brands and businesses go global, cross-border M&A becomes more crucial to business tactics. This could lead to the unfamiliar experience of UK and European businesses being bought up by South American and South African giants that have outgrown their home markets. Similarly, UK businesses may seek to gain a foothold into countries less hit by recession by buying up local "champion brands".
OC&C strategy consultant Chris Outram agrees the market is ready for some once-in-a-lifetime deals, but cautions companies not to focus solely on price.
"There are two types of players right now," says Outram. "Stressed and not stressed. The latter are either in the right place at the right time or are those who saw changes coming and took early corrective action. Looking at those, it's clear they should be looking to M&A - they can pick up assets at a price they may never see again. But companies must be careful to take a view about the business model, their competitive advantage and how they could take a business forward before making that strategic decision," he adds. "The deal itself is just a tactical move."
Even "stressed" companies could benefit from looking at M&A, Outram suggests, as the right merger could generate strong cost synergies to help ailing businesses. The European dairy and alcoholic drinks sectors are ripe for consolidation. French dairy group Lactalis is said to be eyeing up acquisition opportunities, while several companies are understood to have run a slide rule over parts of Dairy Farmers of Britain's business. Meanwhile, drinks activity is rife globally as beleaguered spirits brands look to consolidate and newly-merged AB InBev, the world's largest brewer, looks to shape its portfolio.
And there are plenty more. Innocent sold a stake to Coca-Cola last month. But also on the block are Alpro, Moët and Krug, and several smaller suppliers are rumoured to be looking for "fire sale" buyers.
Turbulent market
The scene is set for more M&A, but in such a turbulent market it will be a strain on company resources.
"Management only has so much time," Outram says. "And they're pretty busy dealing with demand stress and trying to cut costs in the supply chain. Mergers can be very taxing on management, so only the desperate or those with serious financial and operational capacity will be willing to seriously consider M&A right now."
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