Food & BeverageIndustry SnapshotGrant Thornton Corporate Finance Spring 20122011 in reviewGrant Thornton Corporate Finance LLC Overview Contact information(GTCF) is pleased to present the spring Food and beverage companies have generally2012 issue of its semiannual Food & benefited from an improved economy, although Brian BasilBeverage Industry Snapshot. This edition many are still cautious in the face of ongoing Director T 248.233.6930contains commentary on key factors that changes within the industry. Last year, the industry E email@example.com the food and beverage industry saw record high commodity costs, spikes in retailin 2011 and an overview of M&A trends, grocery prices and three publicly traded companies Erik Egerer Managerincluding a summary of industry stock announce their intentions to break into two or more T 248.213.4227market performance. Also featured in organizations. Continuing trends such as changes E firstname.lastname@example.org publication is an outlook for 2012 in consumer preferences and evolving marketinghighlighting anticipated developments techniques remain at the forefront of discussions aswithin the industry. they too alter the industry landscape. With offices in more than 100 On the M&A front, transaction volume increasedcountries, the partners and employees but value and deal multiples declined because ofof Grant Thornton International Ltd the disproportionate number of relatively smallmember and correspondent firms serve transactions last year, compared with more mega-hundreds of food and beverage industry deals in the previous year. Private equity fundsclients ranging from global conglomerates were acquisitive, along with strategic buyers, whichto middle-market companies in all continued to snap up high-quality companies.sectors of the industry. GTCF teams continued >have advised on more than 50 food andbeverage industry M&A transactionsover the past three years.
From a stock market perspective, the GTCF Food and Pure playBeverage Index has generally beaten the broader market over Another macroeconomic trend has highly diversifiedthe past couple of years, with retailers exceeding the other conglomerates breaking up into two or more smaller, pure playcategories (i.e., food processors, distributors and beverage companies. Within the food and beverage industry alone, threecompanies). Moreover, higher-end retailers (e.g., Whole Foods, major companies (Sara Lee, Ralcorp and Kraft) announced inThe Fresh Market) and lower-end retailers (e.g., Wal-Mart, 2011 their plans to break apart over the next year. 2011 wasFamily Dollar) performed better than traditional retailers (e.g., also the year in which Fortune Brands completed its transitionKroger, Safeway), as indicated by same-store revenues and into two separate companies: Beam (NYSE: BEAM), whichstock market data. produces and sells branded distilled spirits, and Fortune Brands Home & Security (NYSE: FBHS), which engagesIndustry trends in the manufacture and sale of home and security products.Commodity and retail prices rise Other companies that announced corporate breakups include2011 was a volatile year for commodity prices. Wheat and corn Tyco International, ConocoPhillips, McGraw-Hill and ITTcosts rose drastically in the early months of the year as extreme Corporation. This trend continues; investors believe theweather conditions, including droughts and floods, cut into parts are worth more than the whole, and companies seek tosupplies and put upward pressure on prices. Increased demand increase valuations. Moreover, having a leaner business allowsfrom emerging markets (mostly China) exacerbated this management to focus on core operations. This is a reversal ofsituation. Prices later moderated as a result of improved supply many years of diversification and might be a harbinger of aand weaker consumer demand but remained relatively high. shift in the focus of M&A activity to more closely track core Additionally, crude oil prices rose during the first four competencies.months of 2011 as a result of widespread political unrest in the continued >Middle East. Oil prices decreased after their April peak, but toa much lesser extent than wheat and corn. The cost of crudeoil is expected to remain volatile in 2012 because of economicand geopolitical uncertainty, and overall commodity prices arelikely to remain at elevated levels for the foreseeable future asChina and other emerging markets drive increased demand. Commodity price pressures affected retail prices aswell. Consumers are now paying more for meats, fruits andvegetables, along with most dairy and coffee products. Thefood and beverage Consumer Price Index (CPI) rose almost3.4% in 2011, compared with only 1.9% and 0.8% in 2009 and2010, respectively.Commodity price chart Wheat Corn Crude OilFive-year relative value One-year relative value350% 130%300% 120%250% 110%200%150% 100%100% 90% 50% 0% 80% Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11Source: International Monetary Fund2 Food & Beverage Industry Snapshot – Spring 2012
Healthy eating and private-label brandsThe rising demand for healthier, good-for-you foods continuesto guide consumer shopping trends. Organic and all-naturalfood products, as well as low-sodium and reduced-fat foods,are becoming more popular. Young consumers are increasinglyhealth-conscious, and baby boomers, many of whom are intheir mid-60s, are also focused on nutritious diets. Consumersare willing to pay more for these food products, even in afragile economy. At the same time, however, sales of less expensiveprivate-label foods are surging. Private-label products haveimproved dramatically in terms of quality over the past severalyears and are driving a shift in consumer perception. Onceconsidered the cheap alternative, private-label products haveincreased in quality, and demand for them is growing. Evenas unemployment rates declined and the economy improved(albeit at a very measured rate) last year, private-label sales M&A activityincreased. We expect this trend to continue as price-conscious 2011 had the greatest number of announced food and beverageconsumers perceive less of a difference between private labels transactions since 2007. The number of announced dealsand major brands. increased by almost 13%, from 289 in 2010 to 326 in 2011. Factors driving M&A include (1) strategic buyers takingSocial media advantage of improved stock prices, (2) record amounts ofAdvertising through various social media outlets, including cash on strategic buyers’ balance sheets, (3) private equityFacebook and Twitter, has redefined the market in terms of groups deploying significant stockpiles of cash, and (4) bankshow companies brand themselves. Using social media enables aggressively pushing new loans.businesses to participate in a relatively cost-effective manner, Even though deal activity was stronger last year than theallowing smaller middle-market organizations to compete year prior, aggregate deal value appeared to decline in 2011.more successfully with larger corporations. The food and However, 2010 saw three transactions of more than $10 billion,beverage industry is also being affected by the increased while 2011 did not have any transactions over $3 billion. A lackpopularity of daily deal companies such as Groupon and of blockbuster deals with disclosed transaction values resultedLivingSocial, along with online and mobile coupons. It will be in a drop in aggregate deal value last year.interesting to see how marketing techniques within the food continued >and beverage industry change as social media and digital dealsites continue to penetrate the market. Food and beverage industry U.S. target transactionsSustainability # Announced transactions Deal value ($Billions)As the general population becomes more environmentally # Announced transactions Deal value ($Billions)conscious, food sustainability has transformed into a major 400 $120area of focus. In order to reduce their carbon footprint, many 350consumers have expressed a preference for local foods with $100fewer food miles, meaning that they would rather purchase 300food that has been transported over a shorter distance from the $80producer. In response, retailers and restaurants have started to 250offer more locally sourced meats and seafood and more locally 200 $60grown produce. Consumers have also become advocates of environmentally 150 $40safe packaging products. Companies are using more biodegradable 100and recyclable materials while minimizing the use of plastic and $20other non-eco-friendly products. This trend is likely to continue 50as green initiatives become more and more widespread. 0 $0 2005 2006 2007 2008 2009 2010 2011 Sources: GTCF research; certain financial information provided by S&P Capital IQ3 Food & Beverage Industry Snapshot – Spring 2012
Based on publicly disclosed data from the food and beverage Food and beverage median EV/EBITDA multiplesindustry, median transaction valuation multiples decreased by8%, from 9.0x in 2010 to 8.3x in 2011. Interestingly, public EV/EBITDAmarket data tells a different story as average multiple values 12.0xincreased 0.4x EBITDA last year. This discrepancy is primarilybecause smaller deals dominated the transaction market last 10.0xyear. There is a positive correlation between company size andmultiple values because larger businesses have more capital 8.0xavailable from more sources. An expanding economy and the desire to grow led to a 6.0xnumber of significant M&A transactions in 2011. As shownbelow, J.M. Smucker was extremely acquisitive in the coffee 4.0xsegment last year. In May 2011, the company acquiredRowland Coffee Roasters, maker of the leading Hispanic 2.0xcoffee brands Café Bustelo and Café Pilon, for more than $350million. Later in the year, J.M. Smucker announced plans to 0.0xpurchase the majority of the North American foodservice 2005 2006 2007 2008 2009 2010 2011coffee and beverage business of Sara Lee. This acquisition Sources: GTCF research; certain financial information provided by S&P Capital IQwould bolster J.M. Smucker’s position in the coffee market. In addition to acquisitions, the market also saw largediversified food and beverage companies announce plans to The second entity, which is currently being referred to asbreak apart into two different entities. Below are a few examples: CoffeeCo, will consist of the international beverage and bakery businesses, as well as the North American beverage business.Sara Lee Corporation (NYSE: SLE) Its leading brands will include Pickwick, Maison du Café andIn January 2011, Sara Lee announced its plans to split into Bimbo. In order to create a pure-play coffee and tea company,two publicly traded entities — a meat-focused Sara Lee and Sara Lee recently acquired both The Coffee Company and Teaa yet-to-be-named beverage entity. The new Sara Lee will Forté and sold a majority of its North American foodserviceinclude the North American retail and foodservice businesses coffee and beverage business.(excluding the North American beverage business), keeping Analysts report that the breakup of Sara Lee, which shouldbrands such as Jimmy Dean, Ball Park, and Hillshire Farm. be completed in early 2012, offers great potential for long-term shareholder value. It will provide more opportunities for the new Sara Lee business and has the potential to increase the valuation of the higher-margin CoffeeCo. continued >Notable food and beverage transactions Announced Enterprise value EV/ date Target Buyer (in $M) EBITDA 01/03/12 Tea Forté, Inc. Sara Lee Corp. N/A N/A 12/12/11 The Coffee Company Sara Lee Corp. N/A N/A 12/05/11 National Beef Packing Co. LLC Leucadia National Corp. $1,483 4.57x 10/28/11 Alberto-Culver Company, Culver Specialty Brands B&G Foods Inc. $325 N/A 10/27/11 Great Plains Coca-Cola Bottling Company Coca-Cola Refreshments USA, Inc. $360 N/A 10/24/11 Sara Lee Corp.* The J. M. Smucker Company $400 N/A 08/08/11 Sara Lee Refrigerated Dough, LLC Ralcorp Frozen Bakery Products, Inc. $545 N/A 06/28/11 BJ’s Wholesale Club Inc. CVC Capital Partners and Leonard Green & Partners $2,627 6.82x 06/17/11 Clement Pappas & Co., Inc. Lassonde Industries Inc. $497 8.28x 05/16/11 Rowland Coffee Roasters, Inc. The J. M. Smucker Company $363 N/A 04/05/11 The Wimble Company Diamond Foods, Inc. $2,518 N/A*Majority North American Foodservice Coffee and Beverage BusinessSources: GTCF research; certain financial information provided by S&P Capital IQ4 Food & Beverage Industry Snapshot – Spring 2012
Ralcorp Holdings Inc. (NYSE: RAH)In July 2011, Ralcorp announced plans to spin off Post Foods,maker of Raisin Bran and Honey Bunches of Oats, into aseparate publicly traded company. The spinoff comes only fouryears after Post Foods was acquired from Kraft Foods. UnderRalcorp’s ownership, sales of Post Foods’ products sufferedbecause the cereal maker no longer had the support of Kraft’sextensive sales force. This transaction is expected to concludein early 2012, when Ralcorp will receive approximately $900million and retain a 20% interest in Post Foods. Going forward, Ralcorp will continue to trade on the NewYork Stock Exchange (NYSE) under the symbol RAH. PostFoods will also trade on the same exchange after the deal isclosed, but under the ticker symbol POST. Ralcorp also plans to grow its private-label business. To furtherthis strategy, Ralcorp recently acquired Sara Lee’s North Americanrefrigerated dough business, which sells private-label food productsincluding biscuits, crescent rolls and pizzas to retailers. After thebreakup, Post Foods will focus on various growth strategies for itsbranded cereal line and should be able to compete more directlywith other cereal makers such as General Mills and Kellogg.Kraft Foods Inc. (NYSE: KFT) Public company informationDuring August 2011, only 18 months after its acquisition of Stock market performanceCadbury, Kraft Foods announced its intent to spin off its The GTCF Food and Beverage Index reflects data from foodhigh-margin, slow-growing North American grocery business and beverage industry participants that are broadly categorizedin order to focus on the fast-growing global snack business. as food processors, food distributors, food retailers and beverageThe more mature grocery business holds iconic brands such companies. Public market information indicates that the GTCFas Oscar Mayer, Kraft Macaroni & Cheese, and Jell-O. The Food and Beverage Index is up by almost 35% from Octoberglobal snack business currently includes brands such as 2007 stock market highs, while the S&P 500 has yet to reachNabisco and Cadbury and after the transaction will consist of those levels. The food and beverage industry is relatively stable,units in Europe and developing markets, along with the North and the index has outpaced the broader market since 2008.American snack and confectionery businesses. This transactionis likely to be completed before the end of 2012, at which timethe two businesses will trade as independent public companies.Grant Thornton Corporate Finance Food and Beverage Index GTCF Food and Beverage Index S&P 500160%150%140%130%120%110%100% 90% 80% 70% 60% 50% 40% Dec Mar June Sep Dec Mar June Sep Dec Mar June Sep Dec Mar June Sep Dec Mar June Sep Dec 2006 2007 2008 2009 2010 2011Sources: Public company filings; certain financial information provided by S&P Capital IQ5 Food & Beverage Industry Snapshot – Spring 2012
Food and beverage EBITDA multiples Average metrics Historical metrics % of 52-week Enterprise LTM LTM EV/ 12/31/10 Category EV/EBIT high value ($M) EBITDA % EBITDA EV/EBITDA Food distributors 82.2% $ 6,171 4.6% 11.2x 8.5x 8.9x Food retailers 90.7% 25,261 13.9% 14.6x 10.3x 9.5x Food processors 96.5% 47,922 16.1% 13.1x 10.8x 10.4x Beverage companies 93.3% 35,709 21.5% 14.8x 11.1x 10.9x Average 90.7% $28,766 14.0% 13.4x 10.2x 9.9xAs of 12/31/2011Sources: Public company filings; certain financial information provided by S&P Capital IQ As shown in the chart above, EBITDA multiples increased economy improved, consumers continued to shop at budgetfor food retailers, food processors and beverage companies last stores but were also inclined to purchase from higher-endyear, but decreased for food distributors. On average, however, retailers if a luxury item or important product was desired.public company multiples rose from 9.9x EBITDA in 2010 to This trend can be seen in both same-store sales (sales from10.2x in 2011. existing stores, excluding sales from new stores opened during the year) and public market data. In 2010, lower- and higher-Retailers end same-store sales grew by an average of 5.1% and 6.1%,An evolving consumer market has helped both higher- and respectively, while sales at traditional retailers rose by onlylower-end retailers gain significant momentum in the past few 0.8% (2011 data is not yet available). In addition, as depictedyears. During the economic downturn, consumers quickly below, retailers from both ends of the spectrum have outpacedbecame price-sensitive; the job market was bleak, the stock the S&P 500 and traditional stores over the past two years. Wemarket was down, and confidence was low. Along with expect this trend to continue over the medium term, until thepurchasing private-label brands, buyers also began to shop for U.S. economy recovers fully.everyday items at lower-end, less expensive retailers. As the continued >GTCF Food and Beverage Retailer Index Lower-end food retailers Traditional food retailers Higher-end food retailers S&P 500200%150%100% 50% 0% Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov 2008 2009 2010 2011Sources: Public company filings; certain financial information provided by S&P Capital IQ6 Food & Beverage Industry Snapshot – Spring 2012