Mergers alliance Global Report food and drink 2009


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Mergers alliance Global Report food and drink 2009

  1. 1. Global Food & DrinkSector Review 2009
  2. 2. Sector Review 2009Contents Report 2 Introduction 3 Report Highlights 4 Deal Focus by Country Americas Brazil 6 Canada 8 Mexico 10 USA 12 Asia, Africa and Middle East China 14 India 16 South Africa 18 Turkey 20 Europe France 22 Germany 24 Italy 26 The Netherlands 28 Poland 30 Russia 32 Spain 34 United Kingdom 36 Contacts 38 Transactions 40
  3. 3. Sector Review 2009 Report About the report This sector review was coordinated by the We also surveyed owners and senior executives Catalyst Corporate Finance research team on within food and drink (F&D) sector organisations behalf of Mergers Alliance. To compile our findings and Private Equity investors worldwide. we conducted interviews with our sector experts in each member firm within Mergers Alliance. Deal Focus Within each country’s Deal Focus we review Additionally, we provide an overview of the F&D merger and acquisition (M&A) activity over a four sector as a whole, highlighting the market year period, focusing on key deals and trends structure as well as commenting on the key within the F&D sector. We also include a table of trends and the factors influencing M&A. We end recent transactions where the target company is by providing predictions for M&A in the sector located in the country under review. over the course of the next 18 months. Disclaimer This publication contains general information and is not intended adviser. Whilst reasonable effort has been made to ensure the to be comprehensive nor to provide financial, investment, legal, accuracy of the information contained in this publication, this tax or other professional advice or services. This publication is cannot be guaranteed and neither Mergers Alliance nor any of its not a substitute for such professional advice or services, and it member firms or other related entity shall have any liability to any should not be acted on or relied upon or used as a basis for any person or entity which relies on the information contained in this investment or other decision or action that may affect you or publication, including incidental or consequential damages your business. Before taking any such decision you should arising from errors or omissions. Any such reliance is solely at2 consult a suitably qualified professional the user’s risk.
  4. 4. Sector Review 2009Introduction At the time of writing, the world is faced with significant economic uncertainty. It is clear that this year and next will bring many challenges for all of us operating within the food and drink (F&D) sector. However, as you will quickly We also see how acquisitions of mid-market1 see from the contributions businesses dominate F&D activity and howby our sector experts across the world, there Private Equity investors have slightly differentcontinue to be opportunities in all countries. In attitudes to investment in each country withinour own specialism of corporate mergers and our sector.acquisitions (M&A) there has been no respite inactivity over recent months, often driven by Regardless of how the current uncertaintyrapidly changing trends. unwinds, we at Mergers Alliance are ideally placed to help you. Whether you seek growthYou will find in our report a great deal of through acquisition, wish to restructure or realizemarket-leading insight into the key issues facing value in your business, our international advisorsthe sector in 2009 and beyond. The growth of are in a unique position to help you. Our memberthe discounter model, portfolio realignment and firms have a prominent position advising ownersdeleveraging amongst the F&D majors, the and managers in boardrooms across the worldcontinued globalisation of brands and our views and are renowned for delivering award winning,on the future of family-ownership in the sector partner-led advisory service with seamlessall figure prominently in this report. international co-operation.Our work also highlights the role played by We hope you enjoy reading our report andthe many ‘national champions’ that exist within welcome any thoughts or additions you mightthe sector. At a time when many fear greater like to contribute.protectionism from the world’s leading nations,we explore how Governments are stimulatingcross-border trade and co-operation.Simon PeacockHead, Mergers Alliance Food & Drink Sector Team+44 207 881 1Transaction values between US$25m and US$350m 3
  5. 5. Sector Review 2009 Report Highlights We at Mergers Alliance believe the main factors to shape M&A in the food and drink sector over the next few years will be: National Champions Globalisation of brands Our work shows that ‘national champions’ exist within Global brands continue going from strength to strength. the food and drink sector in most countries, and tend They have the financial muscle to dominate their to operate in segments where a strong country-specific categories and are generally the first to enter and comparative advantage exists. Examples include beef consolidate new emerging markets. For example, processor JBS in Brazil and tea manufacturer Tata Tea Coca-Cola has not only acquired bottling capacity to in India. Dominant in their domestic, usually consolidated secure control of the carbonated drink market in many markets, many are now executing acquisition strategies countries, it is also acquiring regional and national juice overseas to drive growth. We estimate that there are brands to dominate the entire soft drinks market, often in the region of fifty of these businesses operating paying very high multiples and occasionally attracting the globally today. wrath of local competition authorities. The Netherlands Anticipated liberalisation of the EU dairy market drove the Friesland / Campina dairy Canada merger, creating a national champion George Weston, a family controlled quoted company, disposed of non-core dairy and bakery businesses to focus UK on their retail chain Loblaw Private Equity investors in the UK continue to back innovative, niche brands, using creative financing structures France USA Companies such as Danone and Pernod Coca-Cola and Pepsico are acquisitive Ricard have disposed of non-core assets in BRIC countries and have moved their to deleverage portfolios toward healthier products Spain Anglo Dutch giant Unilever has disposed of olive oil brand Bertolli to SOS Cuetara of Spain Brazil Brazilian meat and poultry processors lead the world and have acquired businesses globally4
  6. 6. Portfolio realignment & deleveraging Ownership structureAfter a period of unreserved acquisitive expansion fuelled The prevalence of family owned businesses in theby cheap debt, many businesses are now actively food and drink industry is higher than in almost anydeleveraging their balance sheets. Adjusting their other sector. The trend is particularly strong in continentalstrategies to focus on core brands, many are undertaking European countries such as Italy and Germany. Forwide reaching disposal programmes to realign their example German Mittelstand companies encompassportfolios. Prominent examples of this trend include businesses of all sizes and sub-sectors, with manyleading French companies Pernod Ricard and Danone. considered highly attractive M&A targets for domestic and overseas acquirors as well as Private Equity investors.Discounters Variation in maturity of food and drinkThe impact of the global economic downturn on Private Equity marketsconsumer spending has benefited the highly-competitivediscounter supermarket model, with consumers trading Private Equity investors have invested in all major globaldown to cheaper products. This competitive environment food and drink markets, although certain markets arehas resulted in some discounters, notably in Germany, considerably more mature than others. In the UK andpursuing vertical integration by acquiring their own The Netherlands, years of Private Equity activity haveproduction capabilities in certain categories. resulted in a highly developed market where it is common to see tertiary buyouts, with Private Equity houses happy to acquire businesses at different stages in their lifecycle. Russia Russian F&D companies will look to acquire in the CIS countries to access growth in those sectors which are heavily consolidated at home China New acquisition financing regulation will open up opportunities for domestic management buyouts funded by Private EquityGermanyGerman Mittlestand companies willcontinue to be attractive mid-market M&Atargets to domestic and overseas tradeacquirers as well as Private Equity India Tata Tea has acquired both international and regional brands to achieve the number 2 position in the global tea market 5
  7. 7. Deal Focus Capital City: Brasília Area: 8,511,965 sq km Population: 198,739,269 Time zone: GMT -3 Brazil “Brazil is the world’s potential to produce 816,000 birds per day and generate up to 70% of its Brazilian revenues from exports. Brazil is largest exporter of poultry currently the worlds leading chicken exporter and third largest chicken producer behind the US and China. and beef. JBS has Away from meat and poultry, Latin Americas largest transformed itself into the Coca-Cola bottler, FEMSA, acquired Refrigerantes Minas world’s largest beef processor (Remil) for US$364m. FEMSA, which is part of Mexican company KOF, said that the purchase of the bottler through overseas acquisitions. and brewer would give it a 30% share in Coca-Cola bottling in Brazil. It now has operations across Private Equity (PE) has not played a large role in the South America, the US, Brazilian F&D sector. A notable recent investment was GP Europe and Australia with Investments’ acquisition of the dairy business Lacticinios Morrinhos (LeitBom) in 2008 (US$180m), paying 4.9x Brazil now representing less historic EBITDA. Gávea Investmentos acquired and subsequently exited Ipanema Coffees and LAEP, a PE than 20% of revenues.” fund focused exclusively on the dairy industry, acquired the assets of Parmalat Brazil out of bankruptcy. Derek Gallo, BroadSpan Capital M&A activity in the F&D sector M&A dominated by meat, poultry Average Deal Value US$m and dairy deals 30 160 Brazilian M&A activity has grown impressively fuelled by a 25 140 120 Deal Volume strong national currency and high food commodity prices. 20 100 Deal values in 2008 of US$4.9bn represented an increase 15 80 of 56% compared to 2007. 60 10 40 One of the most acquisitive groups was the pork, 5 20 poultry and beef processor Marfrig Frigorificos e 0 0 Comercio Alimentos, which has made 14 acquisitions 2005 2006 2007 2008 in South America, the US and Europe since 2007. In 2008 it acquired a group of businesses based in Brazil Total Deal Volume Source: Mergermarket, and Europe (combined revenues of US$2bn) from US Capital IQ Average Deal Value US$m based OSI Group. The US$496m transaction supported Marfrig’s strategy to gain direct access to international markets and diversify its protein mix. A high protein economy Marfrig was not the only Brazil-based acquiror overseas. JBS acquired Australian Tasman (US$150m) and US Brazil is advantageously positioned to be a global SmithField Beef Group (US$580m) and only recently supplier of meat and poultry. It has a large land mass, announced that it had decided to end its pursuit of a favourable climate, access to low cost inputs (corn National Beef Packing Company, the fourth largest and soy) and a relatively low cost of labour. Innovation producer in the US. In 2007 it paid US$1.4bn to in agri-technology has continued to drive yield acquire Swift Foods Co, the third-largest US beef improvements. The recent sharp decline in global and pork processor. demand for poultry, beef and pork has been somewhat mitigated by access to new markets. China There was also important inbound M&A. Tyson Foods has for example recently approved Brazilian poultry, continued its international expansion with the acquisition which will feed through to exports in 2009 and has also of three Brazilian poultry companies including Macedo indicated it will approve Brazilian pork imports. The Agroindustrial. Tyson, the worlds second largest meat devaluation of the Real is also likely800 help exports. 20 to and poultry processor, said that the deal offered the verage Deal Value ($m) 18 7006 16 14 600 lumeDeal Volume 12 500 20 10 800 400 Value ($m) 18 8 700 300 16 6 600 200 14 4 12 500 100 2
  8. 8. Brazil is a fragmented market Recent F&D Transactions Date Target Stake Description Acquiror Deal ValueDespite F&D being the second most active M&A sector (US$m)since 2005, the industry remains highly fragmented. Nov-08 OSI Group 100% Meat processing Marfrig 496The largest players retain relatively small market shares, Businessesmainly due to the scale of the country and presence of Oct-08 Macedo; Avicola; 100% Poultry Tyson Foods (US) 95 Frangobras processingmany regional players. Perdigão, one of Latin America’s Jun-08 Refrigerantes 100% Bottling services Coca-Cola 364largest food companies commands only a 17% home- Minas Gerais FEMSA (Mexico)market share in poultry and 7% in milk. Recent rumours May-08 Alimentos 100% Pastas and Adria Alimentos 348 Bomgosto baked products do Brasilof a possible tie up with Sadia may change this position. Apr-08 Montelac 100% Dairy products Industria de 74 Alimentos Alimentos NilzaOwnership of production is still largely in private hands Apr-08 Laticinios 100% Dairy products GP Investments 182and there are a limited number of publicly traded food Morrinhos Apr-08 Cotoches 100% Dairy products Perdigao 40companies. Many family owned regional companiesoperate under opaque corporate governance structures Feb-08 Moinhos 100% Poultry Marfrig 53making them difficult acquisition targets, particularly for Cruzeiro do Sul processing Jan-08 DaGranja 94% Slaughterhouse Marfrig 58foreign acquirors. Agroindustrial for pigs Jan-08 Avicola Industrial 100% Poultry Sadia 31The Government is supporting the sector through its Buriti Alegre processingfunding, providing US$35bn of credit through theAgriculture and Livestock Plan. The Government’sdevelopment bank (BNDES) has also played a roleas an investor in the sector and part funded Marfrig’sacquisition of OSI. Predictions M&A activity will slow down, as companies remain cautious, postpone unnecessary investments,Trends in M&A preserve cash and brace themselves for uncertainty aheadThe economy is forecast to contract rapidly in 2009 afteryears of strong growth. Many companies have suffered Whilst sellers do not believe timing to be opportunefrom commodity price declines, weakening cash for valuations we expect to see moderate M&Ageneration. Businesses have subsequently scaled back activity in consolidating sectors; juices, pastas,their M&A ambitions, especially beyond their borders, as dairy and beefin the case of JBS. We have also witnessed a wave ofdistressed M&A and bankruptcies, particularly in the We expect continued diversification of the proteinethanol sector. mix (e.g. beef players looking at dairy and poultry) as well as expansion in terms of geography.There is uncertainty with regards to the ongoing treatment Players such as JBS will continue to look forof tax breaks which allow companies to deduct 34% of targets overseasthe premium paid in acquisitions. The tax deductions arecurrently one of the great attractions for acquisitions inBrazil and speculation that they might be rescinded inthe near future could mean a rush of deals in 2009. 7
  9. 9. Deal Focus Capital City: Ottawa Area: 9,984,670 sq km Population: 33,487,208 Time zone: GMT -5 Canada “Many large Canadian The proceeds from these disposals are expected to be invested in the struggling Loblaw supermarket chain in F&D companies will be which George Weston has a 61% stake. George Weston is rumoured to be considering taking Loblaw private forced to dispose of non- to facilitate a quicker turnaround programme. The core and non-performing turnaround is required to fend off the threat posed by US discounter Wal-Mart, who has been aggressively assets to maintain their expanding its hypermarket chain throughout Canada since 2006. competitiveness in the new, challenging global business Landmark Private Equity deal in 2008 environment.” Private Equity (PE) does not play a prominent role in the Blair Roblin, Solaris Capital Advisors Canadian F&D market having completed only a handful of transactions over the last four years. In September however, US PE firm Centre Partners Transactions across a variety of completed the US$660m public to private acquisition of sub-sectors Connor Bros, North America’s biggest manufacturer and distributor of seafood products. The business operates Despite transaction volumes falling in 2008, M&A deals globally and has a stable of four seafood brands; were completed across a broad range of F&D sub-sectors Brunswick, Beach Cliff, Bumble Bee and Clover Leaf. including bread, meat and dairy. Centre Partners has had a strategic relationship with The year began with Canada Bread Company’s US$66m Connor Bros since 2003 when they merged portfolio acquisition of Aliments Martel Inc, a privately held company, Bumble Bee into Connor Bros. One of the Quebec-based manufacturer and distributor of drivers for the 2008 acquisition was the positioning of sandwiches. The acquisition is the second in the Connor Bros’ canned fish product portfolio which is sandwich market for Canada Bread. In 2006 the expected to benefit from the uncertain economic Company acquired Toronto-based Royal Touch Foods environment as consumers seek value products. as part of a strategy to diversify into high growth, value-added food segments. In June, XL Foods acquired fellow beef processor M&A activity in the F&D sector Lakeside Farm Industries for US$97m. Lakeside, a subsidiary of Tyson foods, was divested because it did not fit with Tyson’s long-term international strategy which 50 375 Average Deal Value US$m is focused primarily in Asia, Mexico and South America. 40 300 In October, Saputo one of the leading consolidators in the Deal Volume Canadian dairy market acquired Neilson Dairy, the dairy 30 225 division of Weston Foods for US$372m. The milk industry in Canada is highly regulated particularly in Quebec 20 150 where the retail price of milk is set by the authorities. The deal was attractive to Saputo given the market 10 75 leading position it was acquiring in the Ontario fluid 0 0 milk and cream market. 2005 2006 2007 2008 Then in January 2009, George Weston made a second Total Deal Volume large disposal announcing it was selling its US bakery division to Grupo Bimbo of Mexico for US$2.4bn. Source: Capital IQ Average Deal Value US$m8
  10. 10. Strong family influence Recent F&D transactions Date Target Stake Description Acquiror Deal ValueThe F&D industry in Canada is relatively fragmented and (US$m)diverse. However, there are a number of family-controlled Oct-08 Neilson Dairy 100% Dairy Saputo 372F&D conglomerates who have a significant influence inthe market. A number of these conglomerates such as Sep-08 Connor Bros 100% Seafood Centre Partners 660 (USA)George Weston (retail), Maple Leaf Foods (food Aug-08 B&C Food 100% Food wholesaler Premium Brands 6processing) and Saputo (dairy and bakery) are intent Distributors Income Fundon growing their businesses whilst retaining their Jul-08 Cereal Foods 100% Flour milling Dover Industries 12 Canadaindependence. Jul-08 World Vintners 100% Wine producer Andrew Peller 9As an export-led economy, Canada has been hit by Jun-08 Lakeside Farm 100% Meat processing XL Foods 97falling global demand due to the worldwide economic Industries Mar-08 Timothys 100% Coffee and Tea Sun Capital n/dslowdown. During 2009/10 we expect a material impact coffees Partnerson the Canadian F&D export market which is worth Feb-08 Billy Bee 100% Honey McCormick & Co 75approximately US$18bn, particularly given the USA Honey Products Jan-08 Aliments 100% Sandwiches Canada Bread 66accounts for 70% of F&D exports. Other major export Martel Inc Companymarkets for Canadian products include Japan, May-07 My Organic 100% Baby foods Clearly Canadian 2China and Mexico. BabyIncreasingly discerning consumersThe Canadian consumer’s demands and expectations of Predictionstheir food products are forcing the industry to adapt to Many large F&D companies will be forced toprovide greater product variety, increased convenience dispose of non-core and non-performing assets toand healthier food options. Retail food sales of staple maintain their competitiveness in a new, challengingproduct lines have been sluggish during 2008. Growth global business environmenthas been exhibited in the products priced in thepremium price bracket and those catering for the Companies which address the premium end of thehealthy eating trend. market and the healthy eating niche are likely to prosper as older consumers with greater spending power become more quality and health awareStrategic M&A used to access Higher input costs in 2009/10 are likely to lead togrowth markets food processors consolidating in order to drive through production and cost based synergiesThe Canadian F&D market is highly developed withdomestic and international companies competing formarket share. The high competition levels in staplesegments of the market are driving many businesses touse strategic M&A to provide access to faster growingniches. For example, in 2007 Clearly Canadian,historically a beverage company continued itsdiversification strategy through the small bolt-onacquisition of My Organic Baby, a health food producerwith products aimed at the baby market. ClearlyCanadian was attracted by the highly specialised, nichegrowth market in which My Organic Baby operates.Consumer spending on baby products has showndouble digit growth over the last five years. 9
  11. 11. Deal Focus Capital City: Mexico City Area: 1,972,550 sq km Population: 111,211,789 Time zone: GMT -5 Mexico “In highly consolidated Grupo Industrial Azucarero de Occidente, a sugar mills operator for US$93m. markets, such as soft In the consolidated soft drinks sector, Coca-Cola FEMSA, drinks and juices, the second-largest bottler of Coca-Cola trademark beverages in the world and part owned by US Coca-Cola acquisition multiples can Company, acquired Jugos del Valle for US$450m. Jugos be extremely high – 22x EBITDA is Mexico’s second largest juice producer. in the case of Coca-Cola’s Private Equity (PE) activity whilst progressing slowly, remains relatively underdeveloped. Strategic acquirors still acquisition of Jugos del Valle. account for over 90% of all deals even in the mid-market and therefore Mexico remains a market for corporates. This acquisition was Coke’s only Active PE firms however include Carlyle Mexico, Advent viable option to enter the Mexican and Nexxus Capital, business Ybarra. jointly with Grupo Pando in fish who recently invested juice market – hence the multiple!” M&A activity in the F&D sector Luis Garcia, Sinergia Capital 20 800 Average Deal Value US$m 18 700 M&A driven by corporate buyers 16 600 14 Deal Volume 12 500 2008 ended with the announcement of Grupo Bimbo’s 10 400 acquisition of the US fresh bakery business of Weston 8 300 Foods for US$2.5bn from Toronto-based George Weston. 6 Mainly funded through debt, the deal was estimated to 200 4 have been completed on a multiple of 9x EBITDA. Grupo 2 100 Bimbo, one of Mexico’s largest producers of baked- 0 0 goods, is a seasoned acquiror and this acquisition follows 2005 2006 2007 2008 a number of international deals over the last few years. The deal reduces Bimbos dependence on the domestic Total Deal Volume Source: Mergermarket, market and is somewhat typical of acquisition strategies Capital IQ Average Deal Value US$m adopted by the larger Mexican groups. The other big deal of 2008 was the acquisition of Grupo Gigante for US$1.7bn by Soriana, Mexico’s second Mexico is a consolidated market largest retailer behind Wal-Mart de Mexico (Walmex). Monterrey based Soriana acquired 206 supermarkets in The F&D industry in Mexico is consolidated across most order to expand out from its traditional base in Northern sectors with major players dominating their categories. La Mexico. The acquisition provides it with 47 stores in the Costeña in fruit and vegetables, Grupo Bimbo in breads, Mexico City region, an area which has been difficult biscuits and baked goods and Sigma Alimentos in meat to expand due to competition and a lack of available products. Grupo Industrial Lala is believed to have a 54% real estate. share of the milk product market, further strengthened by the recent acquisition of the Mexican assets of the Italian Traditionally US and Spanish companies are the group Parmalat. principal foreign buyers of Mexican F&D businesses. In 2008 however, other European domiciled companies acquired local firms. Campari acquired two tequila businesses including Cabo Wabo for US$80m. 20 800 erage Deal Value ($m) Value ($m) UK based ED & F Man Group acquired 49% of 18 16 700 600 14 Deal VolumeDeal Volume 12 500 20 10 800 400 Average Deal10 18 8 16 6 14 700 300 600 200 4 12 500 100 2 10 0 400 0 8 2005 2006 2007 2008 300 6 200 4
  12. 12. A developing economy Recent F&D transactionsThe Mexican market shares many of the trends and Date Target Stake Description Acquiror Deal Valuecharacteristics of other developing nations. It tends to be (US$m) Dec-08 Bakery division 100% Baked goods Grupo Bimbo 2,500focused on good value, discounted brands and products (Weston Foods)are purchased based on price rather than other buying Nov-08 Destiladora San 100% Tequila Davide Campari 28points. Only a very small percentage of the population, for Nicolas (Italy) Oct-08 Longmont 100% Meat processing Sigma Alimentos n/dexample, shops for groceries based on nutritional contentalthough this is likely to change as the country wrestles Sept-08 Carta Blanca de 41% Brewer Fomento 60with its growing obesity problem – currently ranked Ciudad Juarez Economico Mar-08 Malta Cleyton 70% Pet food Evialis (France) n/dsecond globally for incidence rates. Mar-08 Qualtia 49.9% Meats and Xignux n/dThe corner store plays a major part in grocery retail Alimentos cheesewith an estimated 45% of Mexico’s F&D sold through Feb-08 Yavaros 100% Canned fruits Grupo Pando n/d Industrial and vegetablesindependent local shops. The major retailers such as Jan-08 Cabo Wabo 100% Tequila Davide Campari 80Wal-Mart, Soriana and Chedraui, whilst continuing to Tequila (Italy)open new supermarkets, are developing ‘corner store’ Jan-08 Grupo Gigante 100% 206 Organizacion 1,350 supermarkets Sorianaformats for major metropolitan areas. Unlike the Jan-08 Azucarero de 49% Sugar mills ED&F Man Group 93independent corner stores, the retail multiples are able to Occidente operator (UK)capitalise on the growing market for own label products,which are inherently attractive to the average costconscious Mexican shopper.The majority of F&D consumed in Mexico is produced Predictionslocally with foreign multinational brands operating plantsin the country. Local products tend to dominate the fresh With the current economic situation, we expectproduce and alcohol markets while international firms will an increase in the forced sale of companies whoseoften supply processed products. Importers have seen a products are focused on the middle incomedrastic change in their position with the Peso losing population. These companies are likely to facec.35% of its value against the US dollar and it is likely increasing pressure due to down trading by theirthat local producers will be in a position to once again typical clientele to cheaper productsenter those markets. We do not expect M&A in 2009 to reach the levels of a couple of years ago due to the consolidatedTequila remains a fragmented sector nature of the market, although there is an opportunity to acquire in sub-sectors which areThere has been substantial consolidation across both the much less consolidated. We would expect mid-soft and alcoholic drinks industry over the past five years. market acquisitions by foreign firms as they takeCoca-Cola and PepsiCo have acquired most regional cola advantage of a depreciating Pesoplayers and all major fruit juice producers. The beer Given their recent track record we would alsosector is also relatively consolidated, although the tequila expect to see some outbound M&A from firms suchproduction market is more fragmented and many firms as Gruma, Grupa Bimbo, Lala and Sigma Alimentoscontinue to look to secure rights to distribute imported to name a fewalcoholic drinks.Due to the levels of consolidation in the food sector,larger companies do not feel compelled to makeacquisitions to gain market share. They are able toexert sufficient competition to force rivals to disappear ontheir own accord. Acquisitions are typically used to enternew product niches or in acquiring local assets fromoverseas sellers. 11
  13. 13. Deal Focus Capital City: Washington,D.C. Area: 9,826,630 sq km Population: 307,212,123 Time zone: GMT -5 to -10 USA “We expect to see Transaction activity in 2008 was not limited to domestic mega deals, overseas trade acquirors were also active sustained M&A activity acquiring more than thirty US based F&D businesses. Notable transactions included the acquisition of in the US F&D sector Smithfield Beef Group for US$580m by Brazilian during 2009 as the larger meat processing company JBS in April. players continue to realign their Major US F&D groups led outbound M&A transactions. Coca-Cola and PepsiCo have been acquisitive in the product and brand portfolios to emerging economies, especially the BRIC nations as they seek out high-growth markets. meet the evolving needs of the US consumer.” M&A activity in the F&D sector Bob Billow, Billow Butler & Company 250 1,500 Average Deal Value US$m Largest F&D deals in history 200 completed in 2008 1,000 Deal Volume 150 In November, InBev, the Belgium based brewer acquired Anheuser-Busch Companies Inc (AB) the US based 100 500 beer group in a US$61bn transaction. The combined 50 group now owns some of the most popular global beer brands including Beck’s, Budweiser, Stella Artois, 0 0 Hoegaarden and Staropramen. 2005 2006 2007 2008 InBev acquired AB primarily for its 48.5% share of the Total Deal Volume American beer market. The transaction was also highly attractive to AB which has struggled in recent years to Source: Capital IQ Average Deal Value US$m achieve revenue growth principally because its core market is growing at just 1.3% per annum. By leveraging InBev’s extensive distribution network in emerging Competitive market requires markets, AB can improve the marketing of its brands in a number of fast-growing beer markets such as Eastern differentiation Europe and South America. The additional ‘sweetener’ The US F&D industry is mature, highly competitive to the deal was the expected merger synergy gain of and relies heavily on advertising, branding and product approximately US$1.5bn over the next two years. innovation to attract and then retain customers. The Earlier in the year, Mars, the world’s largest chocolate market is reported to be growing at 3.3% per annum and maker, acquired Wrigley for US$23bn to create the is forecast to be worth US$605bn by 2011. Like many world’s largest confectionery group with a global market Western F&D markets, the US is heavily weighted share of 14%, overtaking Cadbury Schweppes’ 10% towards meat products which is the largest segment share. The deal brought together companies controlled by of the market accounting for more than 27% of sales. two American dynasties, the Virginia based Mars family Businesses operating in the F&D industry range from and the Wrigleys of Chicago. The strategic rationale for large diversified companies such as 800 PepsiCo, Sara Lee the deal was driven by Mars’ need to diversify its 20 Average Deal Value ($m) Value ($m) and Tyson 18Foods to segment specialists such as Kellogg 700 confectionery business and to enhance its potential for 16 14 600 (cereals and snacks) and Land O’Lakes (dairy). Niche Deal VolumeDeal Volume 12 500 growth in the non-chocolate confectionary segment. 20 10 800 400 Average Deal players tend to be privately owned and offer specialised 18 8 700 300 Significant operational synergies are expected to be 16 6 600 200 local and regional products. Private 100 14 4 Equity (PE) investors extracted from a rationalisation of the combined global 12 2 500 are also relatively active players in the sector having 10 0 0400 sales force. 8 6 2005 2006 2007 2008 300 completed 130 deals (15% of total deal volume) in the 4 200 2 100 last 4 years0 across nearly all F&D sub-sectors.12 0 2005 2006 2007 2008
  14. 14. Consumers feeling the pinch Recent F&D transactions Date Target Stake Description Acquiror Deal ValueThe economic environment in the US has had a (US$m)significant impact on the industry since consumers Nov-08 Anheuser- 100% Brewer InBev (Belgium) 61,000have become highly price sensitive as budgets become Buschconstrained. Growth in private label sales increased Oct-08 Constellation 100% Alcoholic Eight Estates 234 Brands Inc beverages Fine Winesby 12% in the first half of 2008 according to Nielsen Jun-08 Nonnis Food 100% Bread and Vivartia 320Company as US consumers traded down from more Company crackers (Greece)expensive branded products. As a result of this trend, Apr-08 Wrigley 100% Confectionery Mars Inc 23,000branded food companies such as Kraft Foods have Apr-08 Smithfield 100% Meats JBS SA (Brazil) 580streamlined their brand portfolios by focusing on the Beef Groupmore lucrative brands such as Jell-O. Sep-08 Brownie 100% Pastries and Kellogg 41 IndyBake cookies Jun-08 Zephyr Egg Co 100% Eggs Cal-Maine Foods 27The trend for trading down is not only affecting productsstocked by supermarket chains. In response to declining Feb-08 Watts Brothers 100% frozen foods ConAgra Foods 233sales, Starbucks the premium coffee shop chain has Lamb Weston Feb-08 Mothers Cake 100% Pastries and Kellogg 12revamped its menu in order to incorporate less expensive & Cookie Co cookiesitems. In 2008 Starbucks also began to close stores for Jan-08 Rosenblum 100% Californian wine Diageo (UK) 105the first time in its history. Elsewhere in the restaurant Cellarssector, fast food chains such as McDonalds, KFC andWendy’s have been the major beneficiaries as consumersseek out ‘low-cost calories.’ PredictionsRobust transaction volumes Realignment of product portfolios by larger F&D groups will continue to result in non-core divesturesF&D M&A activity levels have been robust over the past and strategic bolt-on acquisitionsfour years due to many of the larger strategic playersrealigning their product portfolios to meet these changing Major US food groups will continue to acquireconsumer trends. Expectations that the US capital gains companies in emerging markets, especiallytax will increase has encouraged many private owners to BRIC nationscrystallize the value they have created in their businesses. Private Equity houses will increasingly targetIn the middle market, acquirors have reluctantly accepted businesses operating in niche segments of the F&Dhigher valuations of businesses that operate in the new market, and those businesses which cater to new,high-growth niches such as health and organic foods, but sustainable trendspremium foods and ethnic cuisine. Due to a limitednumber of quality target businesses, competition is highamong the strategic trade suitors which leads to hightransaction multiples. Greek food company Vivartia paida multiple of 10x historic EBITDA to acquire Nonni’s, amanufacturer of snack products. The premium multiplewas attributed to Nonni’s strong position in the USmarket, technical know-how, distribution network andcommercial potential as a platform from which Vivartiacan expand further into the US. 13
  15. 15. Deal Focus Capital City: Beijing Area: 9,596,960 sq km Population: 1,338,612,968 Time zone: GMT +8 China “The new financing Thirst for beer deals continues guidelines issued by the The beer industry in China is one of the first in the F&D CBRC in December are sector to start the process of consolidation. In May 2006, InBev China (a subsidiary of InBev) acquired 100% of expected to have a Fujian Sedrin Brewery to secure an eighth of the Chinese positive effect on domestic beer market, positioning InBev strongly in the densely populated areas of Central and Eastern China. The M&A and will encourage more transaction value of US$862m represented over 10x Sedrin’s net asset value. management buy-out (MBO) In December 2008, Carlsberg acquired a key stake in activity, which has long been Chongqing Beer Group, the fifth largest beer company stifled by the absence of in China and largest in Chongqing, a province with a population of 31 million. acquisition financing. This will In early 2009 we have seen a flurry of activity including inevitably generate more Anheuser-Busch InBev’s disposal of its stake in Tsingtao Brewery Co to Asahi Breweries (Japan) for US$667m. opportunities for Private Equity.” China Resources Snow Breweries (CR Snow), SABMillers joint venture in China with Hong Kong listed China Richard Shi, First Vanguard Capital Resources Enterprise, has acquired three breweries in Anhui, Liaoning and Zhejiang provinces in three separate transactions for a combined US$110m. The majority of the consideration was paid in cash. M&A activity growing strongly Domestic M&A across all sectors has, over the past four years, increased from US$20bn to around US$160bn in M&A activity in the F&D sector 2008, making China the biggest M&A market in Asia for the first time. Domestic M&A represented around half and Average Deal Value US$m much of the outbound deal volume consisted of Chinese 50 120 companies taking stakes in foreign natural-resource 40 100 companies. The F&D sector has mirrored the overall Deal Volume 80 growth trend and has seen a rising number of smaller, 30 mid-market deals as well as foreign inbound acquisitions. 60 20 40 The most high profile deal announcement of last year was 10 20 Coca-Cola’s friendly, but politically sensitive, acquisition of the Huiyan Juice Group. Huiyan is the country’s leading 0 0 2006 2007 2008 fruit and vegetable drink producer, and Coke’s proposed US$2.8bn deal would have been the fourth-largest cross- Total Deal Volume border acquisition of a Chinese company. However the Source: Mergermarket, Capital IQ Average Deal Value US$m Chinese Ministry of Commerce (MOC) blocked the deal in March 2009 in what is seen as an important test of the country’s new Anti-Monopoly legislation, first enacted in August 2008. World’s third largest economy MOC reasoned that the bundling of carbonated and juice China is now the world’s third-largest economy, trailing products would weaken competition in the overall soft only Japan and the US. Chinese companies are still small drinks market. Others interpreted the rejection as an in scale relative to the size of the industries they serve, indication of the Government’s intent to protect the particularly in areas where private ownership, rather than domestic market from foreign intervention, a policy state-ownership, predominate. China’s private sector is which could have implications for cross-border M&A. filled with minnows, not whales.14
  16. 16. The F&D industry accounts for only 22 companies in Recent F&D transactionsChina’s Top 500. With the exception of the largestplayers such as Bright Food Group, China Yurun Food Date Target Stake Description Acquiror Deal Value (U$m)Group and Shuang Hui, the food and drink market is Dec-08 Chongqing 18% Beer Carlsberg A/S n/despecially fragmented although it is among the country’s Beer Group (Denmark)fastest growing sectors, with output currently rising by Nov-08 QinQin 51% Confectionary Hengan 33over 20% annually. The alcoholic drinks segment is Foodstuffs International Sep-08 Zhejiang 54% Supermarkets Hangzhou 22by far the fastest growing. Gongxiao and mini-marts Tiantian Wumart Jul-08 Inner Mongolia 9% Dairy products China Mangniu 387Opportunities will continue to grow unabated driven Mengniu Dairy Diaryby population growth and urbanisation where higher Jun-08 Zhenghang 100% Cookies, crackers Kellogg Co (USA) 29 Food and biscuitsdisposable incomes and higher consumption power Jun-08 Heilongjian 100% Winery Shangri-La 17will create demand for new products and services. Province YuQuan Winery Jun-08 Yongji Andre 50% Juices AGRANA Juice 17 Juice (Austria) Jun-08 Guangzhou 67% Mineral water China Water 19Food safety top of the agenda Grand Canyon and Drinks Jun-08 Hunan Ava 100% Infant formula CITIC Capital 82 Holdings PartnersFollowing last year’s tragic Sanlu ‘poison milk’ incident, Apr-08 Binzhou Andre 49% Juices Yantai North 14food safety is a top priority for the F&D industry. Andre JuiceHigher risk sectors such as dairy, meat and vegetableprocessing, vinegar and beverages will be mostscrutinised. Manufacturers will increasingly need to fulfilnew food safety regulation and it is inevitable that this willdrive investment and present opportunities to acquire Predictionsparties who can’t afford to comply with the regulation. China’s economy will stabilise rather than going into deflation. The overall performance of the F&D industry is expected to be relatively resilient in 2009.Key legislation change The Government’s US$4 trillion stimulus plan will help thisGuidelines for the Risk Management of Merger andAcquisition Loans granted by Commercial Banks was M&A will inevitably be impacted during 1H2009,issued in December 2008 by the China Banking where some projects have been postponed. ThereRegulatory Commission (CBRC). This overturns long- will be more opportunities for partnership with localstanding restrictions on the granting of bank loans for F&D operators and M&A will pick up graduallyequity investments in China. Under the Guidelines, during 2H2009onshore commercial banks are allowed to engagein M&A financing. Longer term, the new financing regulations are expected to boost both domestic and outboundThe initiative will expand the financing channels available M&A activity and facilitate consolidation within theto Chinese businesses and is expected to boost both F&D sector. It will facilitate more managementdomestic and outbound M&A activity and facilitate buy-out activity funded by mid-cap Private Equityconsolidation within Chinese industries.We expect that the Guidelines will facilitate much moredomestic management buy-out (MBO) activity, which hasbeen constrained by the absence of acquisition financing.This will present more opportunities for Private Equityplayers to participate in these transactions. 15
  17. 17. Deal Focus Capital City: New Delhi Area: 3,287,590 sq km Population: 1,166,079,217 Time zone: GMT +5:30 India “The Indian food and Some eight Indian tea companies have been acquired in the last year which indicates further consolidation in the drink sector is still strong. part of the market not dominated by Tata and Unilever (Brooke Bond and Lipton). Deal numbers will be lower than last year and M&A activity in the F&D sector valuations will be especially affected by the global downturn. Average Deal Value US$m 12 70 Deals are however still there to 10 60 be done, and we see many Deal Volume 8 50 40 attractive opportunities in the 6 4 30 20 Indian mid-market.” 2 10 0 0 Abhijeet Biswas, Singhi Advisors 2006 2007 2008 Total Deal Volume Steady growth in M&A Source: Mergermarket Average Deal Value US$m Indian M&A activity in the food and drink sector has been growing steadily from a low starting point, with some Agri-Food sector attracting very high profile acquisitions involving leading Indian Private Equity corporates. This has been particularly true in the drinks sector, most notably alcohol and tea. There has been gradually more and more interest in the food sector from India’s developing Private equity (PE) In 2007, spirits giant United Breweries (UB), led by the industry. Indivision India Partners (Future Group’s PE arm) charismatic Vijay Mallya, paid almost US$1bn for the has made a number of food related investments and Glasgow based Scotch whisky distiller, Whyte & Mackay acquired the multi-cuisine lifestyle restaurant chain, to plug a ‘missing link’ in the UB product portfolio. Blue Foods at the end of 2008 (US$38m). Diageo, the largest beer, wine and spirits company in the world is now understood to be negotiating with Mallya on Actis, a UK based fund which has US$1bn to invest in making an investment in UB Group subsidiary United India acquired The Nilgiri Dairy Farm, a dairy and Spirits in the region of US$309m. confectionary products manufacturer. Goldman Sachs invested in Punjab-based food major, Cremica, which Tata Tea, a subsidiary of Tata Group (the largest private 20 800 Average Deal Value ($m) Value ($m) 18 makes biscuits, condiments and sauces and is also a 16 700 corporate in India), has employed an acquisition strategy 14 600 Deal VolumeDeal Volume major supplier to McDonalds, Pizza Hut and Cafe 12 500 to become the worlds second largest global tea group. 20 10 800 400 Average Deal Coffee Day. 18 8 700 300 Over the past decade it has acquired Tetley (UK) for 16 6 14 600 200 4 US$432m, Good Earth Teas (USA), Jemca (Czech 10 0 is 12 2 Dutch based Rabo Equity Advisors 0400 currently managing 500 100 Republic) and Tata Coffee acquired the Eight OClock 8 2005 2006 2007 2008 300 a US$100m dedicated Indian Food 200 Agriculture fund. 6 & 4 Coffee Company (USA). It has also just announced that it The sector2 is attractive to PE investors for a number of 100 0 0 is set to acquire 51% in Grand, Russias tea and coffee reasons, not least its recession2008 2005 2006 2007 proof nature. major, expected to be completed in the first half of 2009. Whilst tea is Tata’s primary focus the company is now steadily transforming itself into a broader beverages company. It recently acquired a 46% stake in Mount Everest Mineral Water and has launched T!ON, a tea and fruit-based cold beverage targeted at the youth market.16
  18. 18. The world’s fastest growing Recent F&D transactionsmiddle class Date Target Stake Description Acquiror Deal Value (US$m)India is one of the world’s largest emerging markets, Dec-08 Fun Foods; 100% Syrups and Dr. August Oetker 23with a population of over 900 million and a 250 million VRB Foods dessert toppings KG (Germany) Nov-08 Blue Foods 50% Restaurant chain Indivision 38strong middle class which is rapidly growing. The Indianfood market is consequently estimated to be now worth Nov-08 United Spirits 18% Spirits Diageo Plc 309US$182bn. (UK) Oct-08 Gokak Sugars 87% Sugars Shree Renuka 14 SugarsRapid urbanisation, increased literacy and rising per Sep-08 RDHKS, 50% Food service Radhakrishna 25capita income, have all caused rapid growth and changes SHRM, Allied Groupin demand patterns. It is estimated that 300 million Jul-08 Cream Bell 50% Ice cream Devyani Food 95 Industriesconsumers currently purchase processed and packaged Jun-08 Crown Beers 100% Brews Budweiser Anheuser-Busch n/dfood. This population is expected to grow to 500 million beer (USA)in the next five years. This extraordinary expansion will Jun-08 Godrej Foods 51% Poultry processor Tyson Foods Inc n/d (USA)drive growth in the food processing industry at almost Mar-08 Sanghvi Foods 50% Wheat flour Crowlas Limited 1720% each year. milling (Cyprus) Jan-08 Iceberg 76% Breweries Cobra Beer (UK) n/dIndia’s largest food companies command strong market Industriespositions. They include the food division of theconglomerate ITC, biscuit maker Britannia and the fooddivision of Godrej. Godrej is partnering with several USplayers, such as Tyson Foods and Hershey, to developits capacity to meet the demand for processed foods, Predictionsprimarily in meat and confectionary. The F&D sector will remain strong. The focus willDespite the presence of these majors, the food sector is be on mass market processed products, which areextremely fragmented, the majority of which are private good quality but economically priced. M&A will becompanies. This leaves considerable opportunity for targeted at brands rather than specificconsolidation. manufacturing units M&A deal numbers will be lower in 2009 mainly due to funding constraints. However deals are still to beFinal obstacles to FDI may be done, with many attractive opportunities still presentremoved in the Indian market, made even more compelling by the reduced valuation levelsAs the global financial crisis has deepened, demand inthe country and from its export markets has slowed. It is expected that the alcoholic drinks and fastA lot of Indian companies are now reconsidering their food and restaurant sub-sectors will attract moststrategies, especially with regards to M&A. This could be M&A activity in the short term, both inbounda missed opportunity for local firms given that valuations and outboundare at historic lows, although this could open the door toforeign buyers.A number of barriers have remained however in cross-border M&A, such as the foreign direct investment (FDI)caps in the relatively undeveloped food retail sector.International companies have failed to gain a footholddue to current legislation protecting small, local retailers.Foreign equity ownership has only allowed up to 24% inthe small-scale sector (SSI). The Indian Government isconsidering removing the current caps which wouldencourage greater investment by foreign food retailers.This would have a positive effect in the development offood retail within India. 17