If M&A activity continues at anything near the frenetic rate of last year, we could be in for a busy year. In 2005, buyers helped themselves to the most acquisitions since 2002.
PricewaterhouseCoopers research found that this appetite for deal-making drove €12bn (£8.2bn) of food transactions across Europe, up from €7bn (£4.8bn) in 2004. This is up 71%, while overall M&A growth is 30%. While the number of deals grew from 315 to 353, an even greater proportion of growth came from the rise in size of acquisitions. The average deal size rose 50% to hit €84m (£56m), reflecting the trend towards consolidation and intense competition between private equity and trade buyers.
Venture capital’s star waned in the 18 months leading up to the third quarter of 2005, when it was faced with an onslaught of bullish trade buyers. However, in the final three months of the year private equity played a part in a high proportion of deals.
Venture capitalists should remain in a strong buying position this year thanks to bumper fundraising rounds and the strong debt finance market. McKinsey has estimated the European private equity overhang to be €40bn (£27bn), implying leveraged buying funds of €120bn (£82bn) looking for good homes. Moreover, in the general market as well as in food, many venture capital funds are making disposals to realise returns for their investors, which will fuel the sell side.
There was evidence of this last year through the sales of Cauldron, Noon, Braes and other companies. One key issue on these disposals was the sensitivity of dealing with the sale of own label businesses, in particular handling any conversations with retailers in advance of completion.
This is not to say M&A won’t also be heavily driven by corporates in the year ahead. It will. Last year there was significant trade interest in auctions such as HP from Danone, and also the flotation of RHM.
In the year ahead, trade buyers are likely to be looking to consolidate a disparate industry. From their current fragmented position, manufacturers are forced to compete among themselves for business with a small number of major retail groups, putting pressure on margins. Pressure to be efficient leads to M&A activity.
In addition, there is extra pressure on food manufacturers who find it difficult to pass on cost burdens such as the increasing fuel and energy prices.
Strategic corporate decisions will also drive changes in 2006, as multinational food companies focus on global categories and offload non-core or non-global businesses. A recent example is Cadbury Schweppes’ announcement of the sale of its European beverages division to Blackstone and Lion Capital for €1.85bn (£1.27bn).
Further activity should occur in the chilled and frozen sectors. In the last quarter alone five companies in the chilled sector, including Hitchen Foods and Cauldron Foods, changed hands. Further landscape-changing deals can be expected.
Meanwhile, the sector can offer hot up and coming companies. Growth in the wellness area has been phenomenal in recent years. The UK's ageing population has taken to a plethora of products, from flavoured waters to probiotic drinks and margarines that claim to lower cholesterol.
Food giant Nestle has recognised the important role private equity can play in this fast-growing area, launching its own fund to invest in new companies developing new foods and processing techniques targeting the health and nutrition market. The company has put serious resource into the project too, committing €500m (£343m) to the fund and appointing the former group CFO Wolfgang Reichenberger to run it.