The UK food and beverage sector has enjoyed a veritable M&A binge over the summer months as sellers and buyers' expectations align more than they have done for the past two years.
Looking at activity for the tertiary (the first four months of the year), changes were already afoot. Volumes were broadly flat with 20 deals compared with 22 in the same period a year ago, according to UK-based corporate adviser Oghma Partners. But the value of the transactions tell a different story, with deal value even after stripping out the c£13bn mega Kraft/Cadbury deal, which dominated the first half of 2010 more than doubling to £745m.
M&A deals in the food and beverage sector in 2009 were in the order of £1.25bn and given the activity in recent months, Oghma estimates the figure for the first seven-and-a-half months of this year has surpassed this already, reaching £2.5bn, excluding Cadbury.
The second-tertial figures next month will reveal the actual picture, but with fears of a double-dip recession and commodity prices set to remain high for some time, the environment hardly looks rosy. So what are the reasons behind the recent pick-up? And can it signal the start of a "golden period" as some in the City suggest?
While the trading environment is not ideal, Oghma's founding partner Mark Lynch suggests many sellers are better positioned to dip their toe in the water and make strategic moves.
"Two years ago, companies felt they were standing on the edge of a precipice and couldn't quite see the bottom," he says. "Now they know where they are in terms of the environment and that allows them to move ahead with a bit more confidence in their businesses, aided in many cases by rebuilt balance sheets. In addition, they've done as much as they can on the cost front and they're thinking what next?"
Premier Foods signalled a willingness to have such a dialogue recently, stating it is "open-minded" about disposing of assets to pay down its gargantuan £1.365bn debt.
It stopped short of pinpointing the assets that would face the chop, but industry sources say rival Northern Foods' disposal of Dalepak Frozen Foods suggests non-core operations would go first. Dalepak, which suffered a "marginal loss" of £23m in the year to 3 April, was thrust into the hands of Irish Food Processors Group, which already supplies a range of the company's frozen food products, for £6.4m.
It is these sort of transactions that we are likely to see more of, says one dealmaker, as trade buyers with similar operations look to pick up unloved assets with the hope of getting a higher return. "If you're somebody else that's got an operation or can deliver more synergies into it, then it becomes a stronger proposition than something that is a fledgling part of a business," he says.
Trade buyers and sellers aside, another key driver for increased activity in the sector is the pent-up demand from private equity houses, under increasing pressure both to realise value on existing investments through a sale (such as United Biscuits) and to deploy raised funds. A lot of five-year funds closed in late 2007 but the M&A slowdown of 2008-2009 saw new investments fall through the floor and the clock is now ticking for many financial buyers to get money out the door.
Let's not over-egg private equity's role, says Lynch, returning to Oghma's first-tertial figures, which highlight that financial buyer activity only accounted for 20% of transactions by volume for the first four months of this year.
"There is the perception that financial buyers are the be-all-and-end-all, but 80% of the deals came from trade buyers, and 30% of those were overseas."
The continuing level of activity of overseas buyers appears to be the dominant trend in the deal world, as domestic trade buyers remain stifled by a desire to stay focused and a lack of financial capacity.
"They're thinking, why make an acquisition when I can just pick up the business either by targeting that business through my own customer base or by recruiting key people from the old business," says Livingstone Partners partner Patrick Groarke, adding: "I hadn't seen that culture in the food industry until 12 months ago."
Though the UK's allure has undoubtedly been brightened by weaker sterling, experts suggest the scale of the market and the direct access to the end consumer are the real attractions for overseas companies. One only needs to look at French dairy giant Groupe Lactalis' swoop on the Rachel's Organic business from Dean Foods and Thai Union Frozen Products' acquisition of John West in July for a testament to the trend.
What is evident from these and other high-profile deals this year, such as Kraft/Cadbury, Noble Foods/Gü and more niche transactions such as the acquisition of organic babyfood supplier Plum Baby by Darwin Private Equity, is this demand for branded business.
"Private equity firms like branded businesses," says Rollits' partner Julian Wild. "Partly because they often offer more growth and better prospects on exit but also because private equity are wary of the major retailers' control of own label."
So with larger branded business viewed as the holy grail, are we set to see a tug of war between private equity players with cash to spend and overseas buyers hungry to bolster existing operations and diversify into new ones?
"There is more likely to be a bit more competitive tension," says Livingstone Partners analyst Harsha Wickremasinghe, "because there are some international operators who have very strong branded operations in their respective markets and would be able to leverage their knowledge and utilise it effectively here."
Who wins out and at what price will be put to the test with pending deals such as Blackstone/PAI's sale of United Biscuits. But as private equity/overseas players battle it out for coveted brands, food manufacturers will be under no illusion about the challenges that lie ahead. Therefore the decision on when a dipped toe becomes a full plunge is firmly in their court.
"There are huge changes coming in at a macro-economic level, which will affect demand and put people off running into a sales process too quickly," says Wickremasinghe.
Nevertheless the green shoots of business confidence are returning, says PwC head of corporate finance Neil Sutton, who notes a greater equilibrium in perceived values of businesses between buyers and sellers.
"A number of equity houses are showing significantly greater order books and there is more confidence being shown by corporate purchasers. This bodes well for a much improved outlook, if not a golden period for activity in the sector."