Where is the smart money going inFood & Beverage?
Foreword In the face of continuing economic difficulties and a protracted recovery from the downturn, conditions in the food and beverage (F&B) sector in the UK and Ireland continue to be challenging Trefor Griffith Ciara Jackson Head of Food & Beverage, UK Head of Food & Beverage, Ireland and in many cases trading is flat. Acquisitive corporates are seeing Mergers and Acquisitions (M&A) as a way of acquiring skills and products and removing costs as a route to growth. Private Equity (PE) investors are seeing opportunities to benefit from the changing dynamics of the sector. To better understand what is driving investors to get Our research suggests the time is ripe for M&A activity. involved in the F&B market, Grant Thornton has While some businesses might still be feeling the pressure, The key findings from the research are: commissioned a research project to assess the views of many others have reacted to the downturn by tightening senior representatives from PE houses and companies • 80% of PE houses plan to do some form of M&A their processes. This philosophy of streamlining is currently investing in the F&B sector across the UK activity in the F&B sector in the next 12 months. reaping benefits as businesses focus on embedding and Ireland. We would like to thank them sincerely for • Acquisition of brands is a route to new products on-going innovation into their organisational culture their invaluable assistance with this project. and markets for investors. in order to deliver from a lower and more productive In Ireland, the F&B sector is the biggest indigenous • M&A activity is defensive rather than offensive. cost base. Strategies such as re-engineering products, export sector, tipping the €9 billion mark in 2011. removing waste and cutting out non-value-adding • Innovation, Research and Development (R&D)Contents Ireland, with its population of 4.6 million, produces activities are all having an impact. These leaner, battle and New Product Development (NPD) are key enough food to feed 36 million people. UK F&B to stability and growth. hardened businesses need to push on now and the M&AForeword 1 (non alcoholic) exports increased in 2011 by 11.4% to markets at home and abroad are the next logical step. • There is a huge opportunity waiting to beUK and Ireland Food & Beverage review 2 just over £12 billion¹. In both countries ambitious F&B At the same time PE houses are awash with unspent seized in growth markets.Investor predictions 6 growth targets have been set. In Ireland the government capital and are keen to deploy this to companies that set a target of 42% growth in exports by 2020². In the • Mid market PE is mainly focused on niche can offer growth, security and sustainability in theseDrivers of growth 8 innovative businesses. UK the Food and Drink Federation (FDF) have set a uncertain times. Although the incentives to buy amongConsumer trends 12 • Corporate acquirers are also keen to add to their target of 20% for overall sector growth. Given these both camps are different, the recent statistics and the offering, as well as consolidating operations andConsolidation 14 targets, future wars may not be fought on battlefields. reducing costs. forward looking predictions suggest that M&A activity As the global population continues to grow, demand for in the F&B sector is set to rise further, irrespective ofAccess to finance 16 food is increasing, consumer preferences are changing the global economic worries.Conclusion 18 and people are living longer, therefore the battles mayAbout us 19 well become economic.Contact us 20 ¹ UK Food & Drink performance – Full year 2011 (FDF) ² Food Harvest 2020 – A vision for Irish agri-food and fisheries. Department of Agriculture, Fisheries and Food Where is the smart money going in Food & Beverage? 1
UK and Ireland Food & Beverage review Trefor Griffith Head of Food CASE Before looking ahead to the prospects for 2012 2009 saw M&A deal volume and value in the F&B sector & Beverage, STUDY Announced PE activity in the F&B sector, 2007-2011 Examples of PE backed deals include: Grant Thornton and beyond, it is worth casting an eye back fall to its lowest point in some time. Since then volume UK 35 4 • Blackstone’s acquisition of Tangerine Confectionery over M&A activity in the sector over the last has been climbing steadily buoyed by restructuring and 30 3.5 for a reported £124 million which then acquired Value of deals (£ billion) five years. consolidation as businesses seek to strip out dead weight “A large proportion of the recent transactions were 25 3 the Wham and Highland Toffee brands from Hain Celestial acquired Daniel’s Group from No. of deals and operate in a more efficient way. driven by the need to consolidate supply channels 20 2.5 Millar McCowan. and diversify customer bases. The current market SATS (Ltd) In 2011 overall M&A deal numbers rose 22% on 15 2 • Exponent Private Equity and Intermediate Capital’s M&A activity in the F&B sector, 2007-2011 conditions and pressures from customers are forcing The acquisition has enabled Hain to expand its existing the previous year reaching almost pre-recession levels. 1.5 acquisition of Marlow Foods which produces Quorn food manufacturers to think about cost control and UK portfolio, bolting on strong brands that complement 10 1 Deal value totalled £4.7 billion in 2011. This was reduction as well as effective pricing to maintain and Cauldron, the meat-free businesses which were 180 18 its current offering. New Covent Garden Soup Co. and 5 0.5 down 71% on 2010 value, due to Kraft’s acquisition margins. Companies can achieve economies of scale Johnson’s Juice sit well alongside Hain’s Daily Bread 160 16 owned by Premier Foods. of Cadbury’s for £11.9 billion. If the Kraft deal was through M&A which can then be used to improve control 0 0 (which it acquired in April 2004). The chilled foods to Value of deals (£ billion) 140 14 of the distribution process and to expand scale • Change Capital made an investment in McDuff, 2007 2008 2009 2010 2011 120 12 removed from the equation, deal value in 2011 would be and reach.” go offering and its International Cuisine, ready meals a Scottish seafood business. Its stated intention was business are a good fit with the Linda McCartney mealNo. of deals 100 10 up 6.7% on 2010, a steady improvement since 2009 but No. of deals to inject capital to accelerate growth and potentially range and all products slot comfortably within Hain’s Value of deals (£ billion) 80 8 still substantially below the £14 billion+ levels witnessed move into new geographies. 60 6 strong healthy eating offering, which is currently a in 2007. • Greencore’s acquisition of Uniq, the chilled and highly attractive sector. • Piper sold Bottlegreen to SHS Group in 2011 having 40 4 The sector has also suffered from a substantial reduction This steady rise in annual deal value can in part be frozen food producer for the own label market. invested in the company in 2007. It was reported they 20 2 In acquiring Daniels, Hain has also consciously moved in PE investment. Since 2007, when 32 PE-backed deals attributed to the activity amongst the large manufacturers Greencore paid in the region of £113 million. to broaden its geographic presence. Hain now has a made 5x money. 0 0 were completed, deal numbers have remained relatively that has taken place in 2011, which included: • Hain Celestial’s acquisition of Daniels Group from presence in seven countries, up from three countries 2007 2008 2009 2010 2011 low. • Bridgepoint backed Symington’s acquired the SATS (Ltd). This included New Covent Garden Soup at the end of 2010, and their intention is to continue to • Kerry Group’s acquisition of the UK flavour The discrepancy in deal volume vs. deal value is due ‘Chicken Tonight’ and ‘Ragu’ ambient sauce brands No. of deals Co, Johnson Juices and also hot pudding company make global acquisitions, looking at Asia, Australia Value of deals (£ billion) technology business of US F&B giant, Cargill, Cargill and the Middle East as well as Europe and the US. to economic conditions preventing opportunities for from Unilever. Farmhouse Fare. Hain are believed to have paid • Risk Capital invested in Bread, a London based Flavor Systems (UK). Kerry are believed to have paid This strategy is being adopted by many of the larger investors to get a lot more for a lot less. The trend of around £142 million for the company. corporates in order to spread their exposure to specialist bakery. around £146 million for the company. consolidation means companies are more likely to offload The rise and fall of M&A trends over this period • Premier Foods sold four Irish brands (including fluctuating exchange rates and commodity prices • Ranjit Boparan’s BH Acquisitions paid a reported parts of their business or brands that are not yielding • Manfield Partners’ acquisition of MCM Foods, demonstrates the context in which businesses today Chivers preserves, Erin’s soup brands, Gateaux as well as rationalising distribution networks. £342 million for Northern Foods which included high returns which represents a great opportunity for a canned fish and fruit supplier. and in the future will have to operate in order to grow. ambient cakes and McDonnells dried noodles) bakery, chilled and frozen foods, own label foods and savvy PE buyers. Between 2008 – 2009 tough economic conditions forced to Boyne Valley. Boyne Valley were reported to also the Fox’s biscuit brand and the Goodfella’s and a steep decline in M&A activity. In the UK and Ireland, have paid £34.5 million. San Marco frozen pizza brands. 2 Where is the smart money going in Food & Beverage? Where is the smart money going in Food & Beverage? 3
Confectionery Dairy Acquisition activity in the confectionery sector has risen Ciara Jackson steadily in the last few years as cash rich backers hit the The dairy sector has (and will continue to be) an area Head of Food market looking to acquire ‘heritage’ brands. In July 2011 of activity. On the one hand acquisitions of branded & Beverage, dairy products will continue as large corporates seek to Blackstone acquired Tangerine Confectionery and followed Among the F&B sub-sectors, the main volume Grant Thornton bolt on to their existing portfolio of brands. And on the this up in September 2011 with the acquisition of the Alcoholic Beverages areas of Meat, Fish and Poultry, Dry Groceries Ireland other hand it is anticipated that commodity prices will Wham and Highland Toffee brands from Millar McCowan and Alcoholic Beverages fared relatively well, and in January 2012 with the acquisition of York Fruits continue to squeeze the liquid milk industry, creating and Smith Kendon, both of which they have bolted onto more consolidation opportunity for the few larger with modest growth in the last couple of years. players that remain in liquid milk. This is evidenced by “With EU milk quotas ending in 2015, Ireland’s milk output is expected to increase by 50%. The large Irish corporates the Tangerine portfolio. Zetar has also continued its push Deal activity in alcoholic beverages remained strong More robust growth was seen in the Bakery, are working hard to position themselves to capitalise on this, with Glanbia investing in new plant and Kerry acquiring into the UK confectionery market as has Glisten (via its the administration of Farmright (Quadra Foods) and in 2010 and 2011 with branded players selling off Confectionery, and Frozen Foods segments. Newmarket’s liquid milk business. Danone have invested €50m in a new plant to expand capacity to produce infant formula. parent Raisio). This is a sector that is backed by PE and Rock Farm Dairies this year as well as Müller acquiring non core assets to competitors – such as Heineken Ireland currently supplies 16% of the world supply of infant formula. Demand in China alone for infant formula is growing at large foreign conglomerates, all with money to spend Wiseman Dairies and Connaught Gold acquiring Donegal selling off its Youngers and McEwan’s brands to Wells an estimated rate of 20% per annum.” on building their portfolios. This is supported by our Creameries liquid milk business. For dairy products there & Young in October. Conditions have remained difficult research, which underpins the importance from a buyer’s was Uniq’s acquisition by Greencore, and the acquisition due to commodity prices and the reduction in consumer perspective of strong and performing brands. of Rachel’s by Lactalis in May 2010. pub spend. In reaction to this the larger brewers have targeted smaller specialist players to enhance UK and Ireland M&A activity by F&B subsector, 2007-2011 differentiation and innovation in their portfolios. 40 An example of such activity is the acquisition of Sharp’s brewery by Molson Coors in February 2011. 35 Dry Grocery Meat, Fish & Poultry The recent UK budget has provided no comfort to brewers as beer duty has been raised and large drinks companies will continue to seek acquisitions in order 30 to build their geographic footprint within the UK (and Activity in this sector has been steadily rising over the Activity in the sector has made a recovery since 2009, beyond) and diversify their offering. It is anticipated that 25 last couple of years as corporates seek to acquire with activity on the rise again. Here we have seen this trend will continue into 2012. brands to bolt on to their portfolios thus reducing companies acquire in order to consolidate their supply In Ireland, pubs have experienced a sharp declineNo. of deals 20 chain (such as Morrison’s acquiring supplier, Farmer’s expense on Innovation and R&D. They are choosing in trade, and as a result there is an expectation that 2007 instead to mix NPD with brand extension and brand Boy) or to enable diversification into aligned product this sub-sector is ripe for consolidation. Many pubs 15 reinvention. For example the acquisitions of Unilever’s offering, such as ABP acquiring RWM Group in order are individually owned, but we believe it’s likely that a 2008 Ragu and Chicken Tonight brands by Symington’s, to enhance its lamb processing capability. Ireland number of ‘super pub’ groups will emerge. 10 Kellogg’s acquisition of the household brand ‘Pringles’ exports 90% of its beef almost exclusively to the EU. 2009 Demand for Irish whisky is growing at a rapid rate from Procter & Gamble, Boyne Valley’s acquisition of There is speculation in Ireland that America will ‘re-open’ (11.5% in 2011), and the large players are positioning Premier Foods four Irish brands and Baxters acquisition for trading of Irish beef. This is a huge opportunity 5 2010 themselves well to capitalise on this opportunity. of Fray Bentos (from Princes). for the sector, and there is strong demand for grass Jim Beam acquired Cooley Distillery for a reported fed premium quality beef. On the flip side changing 0 2011 consideration of $95 million. Meanwhile, Irish Distillers consumer demand in the emerging economies is pushing es ry ry iry De li ry ds Ve g al ry ks Pernod Ricard are due to invest $100 million on its r ag ke ne Da ce oo tion ult rin up the price of meat and making it more difficult for ve Ba ct io Gr o F & nc Po D whisky distillery in Cork in 2012. Be fe en uit Fu & ft n Dr y oz Fr h So some corporates operating in this space. ol ic Co Fr Fis h t, co ea Al M F&B subsector 4 Where is the smart money going in Food & Beverage? Where is the smart money going in Food & Beverage? 5
Investor predictions Corporate prediction of investment in the F&B sector Our research indicates that 46% of corporates predict Financial buyers warm to a resilient sector PE prediction of levels of investment in the F&B sector Does your firm plan to make an investment in the F&B sector over the next 12 months PE investors do not expect to see a huge amount of over the next 12 months over the next 12 months? that investment in the F&B sector will increase in 2012. Activity in the early half of the year suggests that this is change in the levels of investment over the next year. accurate. For example: Just 5% of PE investors surveyed expected activity to What are Yes • Kellogg’s bought Pringles from Procter & Gamble increase significantly. This is in line with relatively flat investors No after Diamond Foods pulled out of the acquisition due investment trends post-recession. The deterioration in thelooking for? banking environment has hit the PE community harder to funding problems. 18% • Robert Wiseman was acquired by Müller. than the corporate buyers who often fund M&A deals 5% 5% • Wessanen acquired Clipper Teas. directly from their balance sheets. 23% 23% Despite this conservative view of future funding, over Our research shows that PE houses value 80% of corporate respondents believe growth will be innovative businesses offering niche services 80% of the PE investors interviewed did have plans to driven by acquisition, a higher proportion than amongst which do not depend entirely on the multiple invest in the F&B sector in the next 12 months. 27% 27% financial buyers. In days gone by this may have been a retailers to survive. The corporate acquirers we 82% spoke to value niche offerings, innovation and sign that the sector was showing aggressive expansionary R&D just as highly but they are further looking tendencies, in today’s market it is more of an indication for businesses with a capacity for overseas that the industry is adapting to survive. expansion or to acquire strong consumer It is clear that a lot of M&A activity is still being brands to add to their stable. 23% Trefor Griffith 31% driven by the continued trend for restructuring and Head of Food consolidation but realistically the high volume, low value 36% & Beverage, of these deals is likely to continue. 31% of our corporate Grant Thornton At Grant Thornton, we respondents believe that nothing will change at all, UK believe that this sentiment whilst 23% think investment will in fact decrease. is probably an indication The fact that our respondents’ opinions are so evenly of the strength, safety and “Only 5% of PE investors expect a significant increase divided demonstrates not only the uncertainty driven by in levels of investment in the sector, yet 80% of those potential of the sector. Increase significantly current economic conditions but also the widely differing Increase slightly we spoke to plan to make an investment in 2012. It is Increase significantly opinions held by the broad spectrum of businesses within Won’t change difficult to see how these two positions reconcile but Increase slightly Won’t change this sector. Decrease slightly it is very encouraging to know that PE is committed to Decrease slightly Decrease significantly further investment in the sector.”6 Where is the smart money going in Food & Beverage? Where is the smart money going in Food & Beverage? 7
Michael Neary Corporate FinanceDrivers of growth Partner, Grant Thornton IrelandWhat will be the main drivers of growth over the next New Product Development However, whilst NPD is vital for survival it also Acquisitions “While many well capitalised businesses in the F&B12 months? It is clear from our research that both PE and corporate sector are seeking to grow by acquisition, smaller less represents significant capital outlay in tough economic According to our research the second most popular PE View well capitalised businesses may consider merging to Investment in skills base and staff 7% respondents view NPD as the key driver of growth for times. Consequently some businesses have acquired driver of growth in the sector, as viewed by our deliver operating synergies and improve performance. the sector over the next 12 months, a view supported brands to bolt on to their existing portfolio with a view respondents, are acquisitions. The last Grant Thornton In the market today, a key consideration for many F&BInvestment in plant and machinery 7% in a recent Grant Thornton UK report commissioned to adding value to these brands rather than innovating IBR report, which surveys businesses globally, tells a businesses is insulating themselves from commodity by the Food & Drink Federation³ and in the Grant from scratch. This is evidenced by the acquisition of Fray less optimistic tale with only 17% seeing M&A as an price fluctuations and we believe M&A can be a keyExpansion into overseas territories 20% strategic tool in helping to achieve this objective.” Thornton International Business Report (IBR)4. Product Bentos by Baxters and the recent activity by Symington’s important area of focus (although this is increasing in development and R&D are huge differentiators and which has been acquiring brands such as Chicken many countries). The main driver of M&A activityInvestment in sales and marketing 20% important factors in staying competitive. Consumer Tonight and Ragu. This type of model has recently among food businesses in the current market is the on- New Product Development 73% tastes are changing and their time is becoming more proved very successful for businesses like Tangerine going process of consolidation, which will be discussed in precious so the emphasis is now to develop new over the coming year. Perhaps the only caveat is that and Big Bear. more detail later. However, a good indicator of whether functional and technical ingredients as well as products obtaining these at the right price may yet be difficult as Acquisition 60% Programmes such as the Manufacturing Advisory this appetite turns into significant activity may well come that have health and nutritional benefits which will meet price expectations on the part of vendors have yet to fall Service (MAS), which Grant Thornton UK is delivering to light in 2012, with the much publicised sell-off of the 0% 20% 40% 60% 80% consumer needs. to levels that fully reflect the market realities. One senior on behalf of the Department for Business, Innovation and non-core divisions of debt-laden Premier Foods. With Percentage of respondents Irish respondent explained, there have been relatively few Skills, are dedicated to helping manufacturers improve PE buyers likely to be among the most interested parties Corporate view ‘tail brands’ (typically the large, but not market-leading any aspect of their manufacturing operations, processes, all eyes are on the process: if Premier succeeds in selling Investment in skills base and staff 20% brands) put on the block so far, but this might change production or materials technologies and can provide units off at attractive multiples it may encourage other and these could represent attractive opportunities forInvestment in plant and machinery 27% welcome assistance to businesses looking to conduct trade vendors to test the water, thereby increasing the larger, well-funded UK corporates. NPD or R&D. Similarly in Ireland Bord Bia, Enterprise flow of opportunities for financial bidders. However, as a number of interviewees stressed, speedExpansion into overseas territories 33% Ireland and Teagasc all provide strong support for Risk management and mitigation is a further driver is of the essence in this rapidly changing M&A landscape. F&B businesses. of M&A activity, as acquisitions can help reduce over As one respondent explains: “The key to making theInvestment in sales and marketing 27% dependency on any one customer and maximise potential most of the opportunities in this environment is to buying power thus significantly helping to reduce risk. New Product Development 87% be flexible and prepared to act quickly, both to seize Whatever the motivation, there appears to be real opportunities when they arise and to axe things that confidence among industry professionals that there Acquisition 80% aren’t working”5. will be a plentiful supply of acquisition opportunities 0% 20% 40% 60% 80% 100% Percentage of respondents ³ Sustainable Growth in the Food and Drink Manufacturing Industry, 2011, Grant Thornton report commissioned by the Food and Drink Federation 5 UK Food & Drink performance – Full year 2011 (FDF) 4 Managing through uncertainty: Food & Beverage industry in transition, Grant Thornton International Business Report (IBR)8 Where is the smart money going in Food & Beverage? Where is the smart money going in Food & Beverage? 9