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F&B insights - spring 2020

Trefor Griffith Trefor Griffith

The first quarter of this year saw 441 deals announced. This is a 10% fall on the 49 in the preceding quarter. It also compares to 52 deals in the first quarter of 2019.

Total disclosed deal value for the quarter was £298.8 million2, across 18 deals with publicly disclosed values. This is a major fall on Q4 2019’s total disclosed value of £3.8 billion (£792 million having removed the £3 billion Froneri/Nestlé mega-deal). The largest reported deal in Q1 2020 was BC Partners’ acquisition of Pasticceria Bindi SpA, an Italian frozen dessert manufacturer, for an estimated consideration of EUR 200 million (£169 million). A particularly high proportion of the 44 deals were growth-capital transactions, involving start-ups and early-stage businesses, and therefore also with lower deal values, where disclosed.

In Q4 2019, our analysis reported a sharp rise in companies being acquired from administration, with nine in the previous quarter. In Q1 2020, that activity has normalised to just three transactions. However, it is likely that the level of distressed M&A will rise again as we progress through 2020.

Spotlight on private equity

The number of transactions involving private equity (PE) and related investment toppled previously high levels. 22 of the 44 deals (50%) involved PE or venture capital investment, with a particular focus on growth capital provided to start-ups and early stage businesses.

As previously noted, the largest deal of the quarter was the circa EUR 200 million acquisition by BC Partners of Italy-based producer and distributor of frozen patisserie products, Pasticceria Bindi SpA. Bindi sells its products overseas in 40 countries and BC Partners intends to support Bindi’s growth through acquisitions, both domestically and abroad.

Other more sizeable deals in Q1 included the acquisition of an undisclosed stake in Tony’s Chocolonely BV, with an estimated deal value of EUR 36 million (£30 million). The stake was taken by Belgian PE house Verlinvest, in conjunction with JamJar Investments, a UK-based venture capital firm run by the founders of Innocent Drinks. The investment link-up with Verlinvest and JamJar is intended to accelerate Tony’s Chocolonely’s global expansion. Founded 15 years ago, the Dutch chocolate company’s ethos is that its chocolate is produced 100% free from forced and child labour. It is now the market leader in the Netherlands, and the investment will help it expand the brand internationally, as well as furthering education about the issues in the wider sector.

The pet food sector again remained a hot spot for PE investors. US-headquartered PE firm L Catterton took a significant strategic investment in Butternut Box, alongside White Star Capital and Five Seasons Ventures. Butternut Box is a provider of premium, cooked, fresh dog food, founded in 2016. The investment is intended to enhance Butternut’s operational systems as well as aid diversification in existing and new channels. Also in line with the growing trend for personalised and fresh nutrition for pets, was Bella & Duke’s fundraising, led by Mobeus Private Equity. The deal saw Mobeus invest £3.5 million in Bella & Duke, which operates a subscription home-delivery service for premium raw dog food. Bella & Duke is reported to be on track to deliver 105% year-on-year revenue growth, and plans to take advantage of its position in the niche market, with a focus on sales and marketing, as well as further recruitment.

At the smaller end of the scale, were a raft of transactions involving early-stage businesses active in on-trend areas; from healthy snacks (Well & Truly, Native Snacks and Dr.Coy’s Health Foods), to low-alcohol and healthy drinks (Clean Liquor Co and Dash Water), to alternative meat products (THIS and Better Nature).

International interest

The last quarter of 2019 recorded the lowest level of cross-border activity in the past few years (a 71:29 domestic: cross-border ratio). While domestic M&A continued to dominate in Q1 2020, the quarter brought a return to a more-normalised level of domestic to cross-border activity (57:43).

While overseas appetite rebounded to 31.8% of activity (14 deals), the level of UK/Irish companies investing overseas plummeted once more to just five transactions (11.4%). As ever, US and European acquirers accounted for the lion’s share of investment into the UK.

The sole Asian acquirer of the quarter was the acquisition by SATS Ltd, the Singaporean-listed provider of in-flight catering services and integrated ground-handling services, of Monty’s Bakehouse UK Ltd. Monty’s is a supplier of packaged, handheld food solutions to premium airlines and other customer segments globally.

Q1 2020 sector spotlight

The alcoholic, and non-alcoholic, spaces continued to draw investment.

Distill Ventures, the venture arm of Diageo, made an investment in Ritual Zero Proof, a first mover in the US market for alcohol-free spirits. The investment is intended to drive Ritual’s growth in the US, investing in its direct-to-consumer business and supporting its entry into the off-trade channel. In the alcoholic spirits arena, transactions included Pernod Ricard’s acquisition of a 50% stake in Italicus Ltd, a uniquely flavoured, award-winning apertivo, from Koninklijke De Kuyper BV, and Halewood Wines and Spirits PLC’s acquisition of a 48% stake in Vestal Vodka Ltd.

The quarter also brought some more left-field transactions and joint ventures (JVs). AIM-listed drinks producer Distil entered into a joint venture with British Honey Company to produce a new range of branded botanical spirits and to increase their presence in this growth part of the sector. Elsewhere, British Honey Company acquired artisan spirits manufacturer The London Distillery Company Ltd from administration.

In the soft drinks/water segment, Danone agreed to take a majority stake in Harrogate Spring Water Ltd, for an undisclosed consideration. The transaction, which is subject to regulatory approval, is intended to enhance Harrogate’s product portfolio for future growth.

Elsewhere, sparkling water brand Dash Water raised £1.6 million in a Series A funding round from existing and new investors. Dash Water, founded in 2017, produces a range of sparkling water products, which use surplus fruit and vegetables that would otherwise go to waste to create sugar- and calorie-free soft drinks. Now, with over 5,000 retail listings, it plans to use the funding to boost its expansion in international markets and the on-trade.

The drinks distribution sector also saw a number of deals in the quarter. Luxembourg-based Amber Beverage Group (ABG) continued its acquisition spree by taking a majority stake in UK premium spirits distributor Indie Brands. The acquisition adds Indie Brands to ABG’s UK portfolio, which includes drinks distributor Cellar Trends. Founded in 2012, Indie Brands distributes a wide variety of spirits, including Mexican mezcals, Finnish vodkas and Spanish gins.

Q1 also saw German winery Reh Kendermann, the producer of Black Tower, acquire a 16% stake in North South Wines Ltd (NSW), an importer and distributor of wines. The deal will see NSW manage all of Reh Kendermann’s UK business in the wholesale, convenience, discount, independent wine specialist and on-trade channels.

The booming consumer trends for plant-based foods and healthy snacking also continued to draw major interest and investment in the quarter, with a particular focus on companies at an early stage of their growth trajectory. UK start-up Plant Meat Ltd, trading as THIS, which makes plant-based meat alternative products, secured £4.7 million in a funding round, led by investment fund Backed LLP. THIS’s products include THIS Isn’t Bacon, THIS Isn’t Chicken goujons and THIS Isn’t Chicken Tikka pieces, using peas and soya beans as the core ingredient. With food retail stockists including Waitrose and Holland & Barrett, THIS secured a distribution deal with foodservice distributor Brakes in February 2020. According to Mintel, sales of alternative meat products were up 40% to an estimated £816 million in 2019.

Also in the quarter, Better Nature Ltd, a tempeh-based organic food products manufacturer raised £430,000 in seed funding from angel investors. Tempeh is a fermented plant-based protein source, typically made from soya beans. Better Nature’s range includes mince, rashers and smoked tempeh and it plans to use the latest funding round to fast-track NPD.

The quarter also had a raft of transactions in the healthy-snacking arena. These include Wacky Snacks Ltd, trading as Cheeky P’s, which produces vegan, gluten-free, high-protein roasted chickpea snacks. It received funding from Dacsa, a Spain-based milling group, alongside undisclosed angel investors. Also drawing overseas investment was crisps manufacturer Well & Truly Ltd, which received £500,000 in funding from The Health Food Group, a South African industry fund focused on the wholesome snacks market. Well & Truly produces crisps that are low-fat, gluten-free and vegetarian, and are currently stocked in more than 2,000 outlets, including Tesco, Sainsbury’s, Booths, Wholefoods and Ocado. Health Food Group oversees a £250-million fund and to date it has backed the Simple Truth range of health snacks and the Oh My Goodness range (from chef Gordon Ramsay).

Looking forward

As our analysis shows, while deal volumes and total disclosed deal value was lower in Q1 2020, the large majority of the quarter functioned in a fairly normal business environment. With Brexit headwinds still at play, the COVID-19 situation has magnified the uncertainty exponentially, and it is far too early to have a perspective of the long-term impact.

The arrival of COVID-19 has inevitably thrown M&A in all sectors into disarray and, in the food and beverage sector, the majority of processes are on hold. Any process at or before the due-diligence stage have mostly been paused, and processes at an earlier stage or about to kick off have been delayed. It is reported that the sales processes for MPM Products (pet food), Gosh! Food and Grenade (sports nutrition) have been halted.

Transactions that are close to completion stand in good stead to complete. Just missing the Q1 window have been the sales of Lily’s Kitchen to Nestlé Purina PetCare and The Primal Pantry to plant-based snacking group Nurture Brands. Deals in the pipeline for which funding is already secured may slow down, but should still be on track to cross the finishing line. However, if the target has exposure to the food service sector, the story is likely to be somewhat different.

With any major global event, there will always be opportunities. The financial crisis of 2008 led to a boom in ready meals (with the likes of Charlie Bigham particularly benefitting). Perhaps COVID-19 will trigger a similar boom in premium ready meals, given that consumers have no choice but to eat at home and seek to trade up sometimes, alongside a rise in delivery, whose boom was already well-progressed.

Literally overnight and with no advanced warning, the sector saw the most profound change in the way the nation buys their food, with an immediate shutdown in the ability to source and eat meals out of home, which was estimated to be between a third and 40% of food and drink consumed in the UK. Businesses supplying food staples to the food retail sector are currently experiencing a major boost in demand for their products in the supermarkets, as a consequence of consumers stocking up and the removal of the eating out channel. Clearly food e-commerce is also partaking in that boom, and the online offerings of the supermarket groups likewise have seen demand increase dramatically. But the hospitality operators and food suppliers to the hospitality sector have literally been shut down overnight (with the exception of those that have been able to shift to a delivery offering, or repurpose products for retail).

There is no doubt that the coming months, and quarters, will see a slowdown in M&A. The majority of processes are on hold or postponed, public companies are more likely to focus on cash conservation (as well as waiting for their share prices to mend) and PE houses will be more focused on aiding their portfolio companies. There is also the practical issue of being unable to hold face-to-face meetings and site visits. Inevitably, there will be a rise in distressed and accelerated M&A processes.

The major crystal ball questions are when will normal service resume and what will that look like? Clearly, that will all depend on how long respective countries and economies are in lockdown mode, what the competitive landscape looks like and how consumers behave in the medium term. A shorter lockdown of around three months could enable a reasonably swift recovery, but a longer time-frame will inevitably require an extended economic recovery period and is likely to lead to more businesses being unable to continue to trade.

The current situation contrasts dramatically with the financial crisis of 2008 and therefore it is hard to draw comparisons at this stage from a funding perspective. Financing is not as much of a limiting factor compared to 2008/9 as things stand, but of course there are a number of different views on how much debt will be available post lockdown, albeit it is prudent to assume that there will be less and this will have an effect on multiples and potentially the appetite of vendors as a result.

While M&A activity for 2020 is going to be drastically reduced, we are expecting that a number of deals now on hold will likely resume once the situation stabilises and come to market in late 2020/early 2021, which added to a higher level of distressed activity and potentially clarity around trade agreements post Brexit, could in turn lead to a surge in sector M&A next year.

 

Footnotes

All deal activity is based on announced date of the deal and includes deals where there has been UK or Irish involvement (target and/or acquirer). Administrations, liquidations and receiverships are collated but not counted as M&A unless they have subsequently been acquired.

Deal values are primarily sourced from corporate websites, however, if no press release is available they are sourced from deal databases, including BvD Zephyr, CapitalIQ 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.

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