The first quarter of 2019 has seen 47 deals1announced in the food and beverage (F&B) sector. This represents a fall of 19% compared to the preceding quarter’s deal volume. However, while this is a fairly significant dip, our analysis over the past few years indicates that the first quarter of the year is often the least productive in terms of M&A activity.
Total disclosed deal value for Q1 resides at £1,672 million2(across 14 deals), clearly boosted by the £975 million takeover of Dairy Crest by Saputo Inc. of Canada.
Private equity (PE) activity has also experienced a slightly subdued start to the year, with just eight deals, equating to 17% of all deals in Q1. This level represents a slight drop on the 11 deals recorded in the two preceding quarters.
Cross-border deal activity in both directions has continued to rise, compared to both Q4 2018 and 2018 as a whole. In Q1, there were 14 deals (29.8% of Q1 deals) with overseas acquirers investing in the UK/Ireland; and 12 deals (25.5%) in which UK/ Irish companies undertook outbound M&A. This compares to 21.5% and 22.5% respectively for the whole of 2018. 40% of the buyers of UK/ Irish targets were overseas acquirers; this compares to 27.8% overall in 2018.
Correspondingly, domestic deal activity has dipped further in this quarter, with 21 deals on home territory, representing 44.7% of the total. This compares to a level of 56% overall in 2018. It seems that Brexit is continuing to increase appetite for both inbound and outbound M&A with a 45:55 domestic to cross-border ratio.
Spotlight on private equity
UK PE house Investindustrial announced two overseas investments in the quarter. It took a 70% stake in Italcanditi, an Italian supplier of fruit-based ingredients and creams for the dairy, pastry and candied fruits sectors, for a rumoured £252 million. The funding is intended to support Italcanditi's growth in the bakery markets, including acquisitions to strengthen its position and enhance its product development capabilities. Investindustrial also made an institutional buyout (IBO) offer to Natra SA, a listed Spain-based company specialising in chocolate products and ingredients for private label and other food companies, as well as cocoa derivatives, equating to a deal value of £165.6 million.
The first quarter also saw US private equity firm Clayton, Dubilier & Rice acquire a significant stake in Westbury Street Holdings (WSH), the parent company of restaurant and catering brands such as Benugo, BaxterStorey, Caterlink and Searcy’s. The deal values WSH at a rumoured USD $1 billion including debt.
At the smaller end of the scale, Little Spoon, a US-based direct-to-consumer baby food and early childhood nutrition company announced the closing of USD $7 million in venture capital. This included significant investment from Vaultier7, a UK-based fund focused on building breakthrough consumer brands. Elsewhere, Spice Capital was part of a consortium that provided EUR 4 million growth investment to Beendhi, a France-based organic and vegetarian food maker. The fundraising will enable the firm to broaden and diversify its offer, from 50 to 500 recipes by 2020, and develop its online platform.
PE houses supporting bolt-on acquisitions to portfolio companies were Teachers' Private Capital, whose investee company Burton's Biscuits, acquired Dorset Village Bakery (trading as Thomas Fudge's), and caterer CH&CO (a portfolio company of MML Capital), which merged its Scottish operations with Inspire Catering, a niche caterer based in Stirling with operations across Scotland.
Spotlight on sectors
The first quarter heralded the outcome of the long-awaited auction of multichannel snacks supplier Nature Delivered, trading as graze. The deal provided an exit for US PE house Carlyle Group and Octopus Ventures, for a reported consideration of £150 million. Interest in the asset was driven by strategic buyers including Kellogg and PepsiCo. Anglo- Dutch consumer group Unilever was the eventual acquirer, with the acquisition fast-tracking Unilever’s presence in the booming healthy snacking and out-of-home markets. With 60% of revenues currently in the UK, and having launched in the US market in 2018, graze is now commencing its entry into several European markets.
Another high-profile transaction was the announced sale of Fuller’s brewing business to Asahi Europe and parent company Asahi Group, based in Japan. The businesses being sold comprise all of Fuller’s beer, cider and soft drinks brewing and production, wine wholesaling and distribution, as well as the Griffin Brewery, Cornish Orchards, Dark Star Brewing, Nectar Imports and London Pride. The deal has been valued at £250 million and a reported multiple of 23.6x EBITDA. The divestment allows Fuller’s to focus on the operation of pubs and hotels, and Asahi to leverage its European business platform and enter new categories, including cask ale and cider.
Other beer deals were the acquisition of Eden River Brewery in Penrith, Cumbria by Eden Mill, Scotland’s first single site brewery and distillery, and that of Huddersfield-based craft brewer Magic Rock Brewing by Lion (and ultimate parent Kirin, also of Japan). The acquisition will help Magic Rock to expand capacity and to develop its reach both in the UK and globally. Spirits deals included Halewood Wines and Spirits’ acquisition of Ironbark Distillery in Australia, and Stock Spirits Group’s acquisition of Italian grappa distillery Distillerie Franciacorta SpA. In drinks import and distribution, Classic Drinks of Ireland was acquired by Pallas Foods of Ireland (owned by US foodservice group Sysco Corp.), strengthening its alcoholic beverage offering to the on-trade sector, and English wine producer Bolney Wine Estate more than doubled the size of its vineyard by merging with neighbouring Pookchurch Vineyard.
The ingredients sector continues to see a high level of M&A activity, in particular cross-border interactions. In addition to Investindustrial’s acquisitions of Natra and Italcanditi, the quarter brought the acquisition of Watson Inc. in the US by Glanbia plc and Swedish ingredients group AAK’s acquisition of BD Foods. Watson is a US-based supplier of value-added ingredients for the food and supplement industries; the acquisition extends Glanbia’s footprint in the US and strengthens its technology capabilities. BD Foods is a UK producer of restaurant-quality meal accompaniments, such as sauces, coulis, gravies, dips and soups. Its portfolio of over 3,000 products are supplied to a wide range of customers, including restaurants, hotels, airlines, wholesalers, and food manufacturers; the acquisition will increase AAK’s capabilities and broaden its product portfolio in the foodservice market.
The dairy sector is also drawing increased M&A activity and appetite, with deal activity in Q1 2019 led by the £975 million sale of Dairy Crest plc to Canadian group Saputo. The acquisition gives Saputo a platform footprint in the UK, and Dairy Crest’s Cathedral City and Davidstow cheese brands and Country Life butter are complementary to Saputo’s existing cheese business, including Armstrong Cheese and Cheese Heads. The deal follows Dairy Crest’s transition from a more commoditised dairy group to one focused on added value dairy ingredients, following the sale of its milk dairy operations in 2015 to Muller.
Elsewhere, Ambrosi SpA, a premium speciality Italian cheese producer, acquired Anthony Rowcliffe and Son Ltd, a family owned cheese and fine foods distributor in the UK, on the back of a long-term supply and import relationship.
So, while deal volume in Q1 was lower than the preceding quarter, it was slightly ahead of Q1 2018 and is consistent with the apparent trend for M&A volumes to be slightly subdued in Q1.
Deal volumes will always vary quarter by quarter but, in recent years, there is a tendency to link any decline in M&A activity with Brexit. This time last year, our view was that overall appetite and rationale to undertake M&A in the F&B sector remained strong and that Brexit could act as a catalyst for heightened cross-border activity. The data continues to support this, with sector appetite and cross-border activity - both inbound and outbound - currently elevated.
However, while the immediate threat of a no-deal Brexit has been removed, food and drink businesses continue to operate in a highly uncertain environment. We have seen a number of potential overseas buyers pull out of sales processes to acquire UK assets, citing Brexit as the reason. Anecdotally, we have seen a significant increase in the number of business owners seeking partial exits or cash-out deals. This is reflective of the ongoing uncertainty due to Brexit, but more so the increasingly volatile political environment, which could have an impact on capital gains tax as well as the general business environment.
On a positive note, despite the significant pressures on the industry, companies are continuing to innovate and develop new products and routes to market. Hopefully, when there is more clarity and less volatility, operators will be able to thrive in a less constrained environment and we will see an upturn in M&A.
1 All deal activity is based on announced date of the deal and includes deals where there has been any UK or Ireland involvement (target and/or acquirer). Administrations, liquidations and receiverships are collated but not counted as M&A unless they have subsequently been acquired.
2 Deal values are primarily sourced from corporate websites, however if no press release is available they are sourced from deal databases including BvD Zephyr and mergermarket or from press commentary released at the time of the deal. Deal values may subsequently be amended pending earn outs or other finance arrangements and/ or as further detail is released by the acquirer.
M&A appetite in the F&B sector remained strong in 2018Find out more
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