Manufacturers are outbidding the private equity houses, says PricewaterhouseCoopers Corporate Finance partner Neil Sutton

The success rate of private equity houses in completing UK food sector deals appears to be on the wane. In the past 18 months there have been very few, although there have been some significant exits. However, this isn’t through a lack of interest on the part of the private equity houses - they have been active bidders. It’s just that the trade buyers are becoming more bullish.
Private equity houses have failed to win a number of auctions, including most publicly those of Noon and HP, where the trade buyers simply offered more money. A key part of this willingness to pay more has been the increasing realisation on the part of many food manufacturers of their own vulnerability. In order to survive against the ever-powerful customer and perhaps even to demonstrate future earnings growth, they need the strength and cost reduction potentials that consolidation can bring.
The inability to realise synergies without a suitable consolidation candidate within its portfolio means that standalone private equity deals have been struggling to compete with the amounts that a trade buyer is prepared to pay. In the two auctions mentioned, Kerry paid a full 16 times historic EBIT multiple for Noon, while Heinz paid a multiple of 2.7 times HP Foods’ worldwide sales. In Europe, private equity houses with existing food investments, such as Gilde and PAI, remain competitive.
Another factor that has persuaded trade buyers to increase their valuations has been the return of a feelgood factor. There is a real confidence within the industry following successful floats such as RHM and Premier.
At the same time, there is no lack of potential acquisition candidates and it seems likely that the major food groups will continue to rationalise their portfolios, seeking to sell so-called ‘orphan’ brands.
Indeed, within the past few weeks a number of multinationals have announced portfolio reviews that will lead to divestments: Cadbury Schweppes has announced the sale of its European soft drinks business (including brands such as Orangina, Schweppes, Oasis and La Casera); Heinz has announced that it is in discussions with its investment bankers regarding the potential divestiture of non-core businesses including its seafood, vegetable and frozen businesses in Europe (brands such as John West, Petit Navire and HAK); and Unilever has announced that it intends to conduct a study into strategic options for its European frozen foods business, which includes brands such as Iglo, Findus and Birds Eye.
There have already been a number of transactions in the frozen arena over the past few months and it looks like the sector to watch closely over the coming months.
One reason that private equity houses may be nervous about over-bidding is downward pressure on margins due to the combination of price deflation and cost inflation. Food manufacturers are being increasingly squeezed as supermarkets take advantage of cheaper EU imports and input costs spiral. Consumers are feeling the pinch too.
If private equity purchasers are going to become more successful in bidding, they need to start trying to create a trade-based angle. We have seen some evidence that private equity houses are trying to secure a synergy angle in advance - effectively buying an option on merger potential.
With confidence in the market and strategic thinking by both buyers and sellers, increased M&A activity over the next six months looks extremely likely.

Merger & acquisition activity
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DateBuyerTargetDescriptionDeal value
Sept 05Nestlé SAProteika SASFrench food producer Nestlé Entreprises SA, a unit of Swiss sector company Nestlé SA, has acquired Proteika SAS, a French maker of food products for people with special dietary requirements N/A
Sept 05FPI LtdSeafood Co LtdCanadian-based seafood harvesting, processing and marketing firm FPI Ltd has acquired UK
importer and distributor of chilled and frozen foods The Seafood Company Ltd£18m
Aug 05Domstein ASAIglo Haugesund ASNorwegian seafood manufacturer Domstein ASA has agreed to acquire local sector company
Iglo Haugesund AS N/A
Aug 05Gilde Participaties BVBakker Bart FoodDutch private equity company Gilde Participaties has acquired a majority stake in brewery chain Bakker Bart Food Group NV from Italian holding group Barilla Holding Spa£21m
Aug 05Royal Greenland A/SPomorski Przemysl Fish processing company Royal Greenland A/S, through its Polish subsidiary Royal Greenland Seafood, Miesny Agros Koszalinhas acquired Polish meat producer Pomorski Przemysl Miesny Agros Koszalin SA (PPM Agros)N/A
Aug 05Kerry Group plcNoon Group LtdIrish-based processor Kerry Group plc has acquired UK producer of chilled and frozen Asian dishesNoon Group Ltd from UK private equity firm Bridgepoint Capital Ltd£124m
Aug 05Dr August Oetker Unilever plc & NV Global food and household product group Unilever has agreed to sell its frozen pizza business Nahrungsmittel KG(Frozen pizza business)to German food company Dr OetkerN/A
Aug 05Rieber & Son ASAUniq plc UK manufacturer of food dairy products Uniq plc has sold its Scandinavian salads business to (Nordic salads business) Norwegian manufacturer of food products Rieber & Son ASA £10m
July 05 International Specialty Creative Food International Specialty Products Europe, UK subsidiary of International Specialty Products Inc, has Products Inc - ISP Systems Ltd acquired UK food stabiliser systems manufacturer Creative Food Systems Ltd N/A
July 05 Ardo NV Findus SA Belgian frozen food manufacturer Ardo NV has acquired Spanish sector company Findus SA from international food group Findus N/A
July 05 Existing management Benedicta SA A management buyout team, backed by AXA Private Equity, has acquired French bottled sauce producer (MBO) Benedicta SA from private equity players Barclays Private Equity France and ABN Amro Capital France £41m
Source: Dealogic