Only deals that are easy wins are likely to come to fruition, says Neil Sutton in the latest quarterly report from PwC

M&A activity among food and drink manufacturers has been subdued in recent months, in stark contrast to the frenzy of bids in the retail sector. But behind the scenes there are still plenty of negotiations going on. The question is: will they amount to anything?

In the short term, the answer appears to be no. Food companies remain very focused on what they will and will not consider acquiring at the moment, and anything that is not an obvious fit or an easy win is highly unlikely to be taken forward. Disposals, however, are still at the forefront of corporate minds as they focus on core activities.

Unilever is continuing to shed brands as part of its “Path to Growth” strategy, while Procter & Gamble has said it is “exploring strategic alternatives” for its Sunny Delight and Punica beverage brands.

Northern Foods said in May that it continued to review its portfolio of businesses, precipitating much speculation about the future of its confectionery, distribution and flour milling divisions. Private equity owners of food businesses are also testing the water. The 3i-led consortium of venture capitalists that own Prize Foods is rumoured to be contemplating a sale, as are EQT, the Swedish private equity group that acquired Findus in 2000.

Private equity interest in the sector remains high on the buy side too, as shown by Montagu’s recent purchase of Marlow Foods. Food businesses that are solid and cash-generative remain attractive targets for PE houses in the current economic climate and we are seeing more and more interest from this quarter, particularly from houses not traditionally associated with the sector.

A main concern for all venture capitalists is how to realise their investments further down the track.

However, the recent disposals of The Sandwich Factory and Lyons Seafoods to trade purchasers show that it can be done. Cranswick’s purchase of the Sandwich Factory allows it to build on last year’s acquisition of North Wales Foods, while SIF, the new owner of Lyons, is an Icelandic seafood group that was keen to build on its existing presence in the UK.

Looking forward, owners of food businesses are becoming much more aware of the need to “groom” companies for sale to maximise value, and this means that the timetable for disposals is being extended. PwC is working on a number of deals where the decision to sell has been taken, but the actual process will not begin until 2004.

The uncertainty surrounding the future shape of the food retail sector is also holding some transactions back. Depending on who emerges on top, some suppliers may be looking forward to increasing sales to newly enlarged retailers, while others may be facing a much bleaker future.

Either way, potential purchasers will have much more clarity on their prospects and will be able to value target companies with more certainty.

As the picture clears, we may see this pent-up demand for M&A released and what PwC refers to as the Elvis scenario - “a little less conversation, a little more action”.

n Neil Sutton is head of consumer products at PricewaterhouseCoopers Corporate Finance.
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