With 2020 firmly behind us, and 2021 well underway, there's positive news for the food and beverage industry. Trefor Griffith looks back at the year and considers what's to come.
The final months of 2020 performed strongly in terms of both value and volume of deal activity, even outperforming the same (coronavirus-free) period the prior year.
The 55 deals announced 1 in Q4 represented a significant uptick in volume compared with the beginning of the COVID-19 situation, where there were 27 deals in Q2 and 34 in Q3. It was also up 12% on the same quarter in 2019.
Announced deal value for Q4 was also strong at £9.6 billion. It was bolstered by two mega-deals: Walmart’s £6.8-billion sale of ASDA to TDR Capital and EG Group, and Coca-Cola Europe’s £1.3-billion acquisition of its remaining shareholding in Coca-Cola Amatil.
Even without these exceptions, deal value (£1.6 billion) still outperformed Q4 2019 by 94% and Q3 2020, by 147%.
The strong numbers can partly be explained by the fruition of deals that were put on ice at the start of the coronavirus situation. A few lockdown-free months in the summer meant in-person due diligence was possible. As the year progressed, the business world also became more comfortable with remote working, enabling more deals to cross the line.
Food and beverage triumphant, considering...
Compared to 2019, deal volume in 2020 was down by 25%. Year-on-year deal value fared well, up 43% on 2019, if the two mega-deals are included. Without these, it was down 48%.
As mentioned in previous editions, coronavirus has caused the biggest shake-up in consumer habits since World War II. Against this backdrop, and given the UK hospitality industry was shuttered for several months, 2020’s figures are a triumph.
It's also worth noting that 2020 deal activity has topped each of the three years following 2008’s credit crunch, our last major economic shock. This bodes well for a strong recovery and demonstrates the sector’s resilience and attractiveness to investors.
It's also encouraging that large corporates have remained active (for the right assets), with Diageo, Ferrero, Baxters and Unilever having made multiple acquisitions this year.
International interest in food and beverage
Overseas interest in UK and Irish companies bounced back in Q4 2020, accounting for 18.8% of deals, a 233% increase on Q3.
UK and Irish companies buying domestically accounted for 60.4% of Q4 deals, while 20.8% involved UK and Irish companies buying overseas.
Q4 international deals of note include US consumer group Spectrum Brands Inc’s acquisition of the UK’s Armitage Pet Care for around £140 million, Swiss group Nestlé’s acquisition of UK meal kit provider Mindful Chef, and Italy’s Ferrero buying Eat Natural.
For 2020 as a whole, the domestic/cross-border ratio (domestic versus all deal activity involving one overseas party) was 59:41, which is pretty much in line with previous years.
Interestingly, North American interest in UK and Irish companies was at its highest in recent years, accounting for 33% of overseas investment (27% in 2019, 24% in 2018).
This special relationship was reciprocated with domestic companies increasingly investing in North America. The region accounted for 33% of all overseas acquisitions by UK and Irish companies in 2020, compared with 19% in 2019.
This could be explained by similarities in the food and beverage products of the two regions. It could also be inspired by several big successes over the last few years, including expansion into the US by Manchester bakery group St Pierre and premium tonics and mixers company Fevertree, among others.
Spotlight on private equity
Q4 had the highest numbers of private equity (PE) transactions in 2020, with 24 deals – a 118% increase on Q3. More impressively, it marks a 71% hike on the same (pre-coronavirus) quarter in 2019.
Three factors drove volumes:
1 Dry powder
Many PE firms had unspent cash committed to the wider consumer sector. With the future of hospitality and leisure in question, food and beverage offered a lower-risk option.
2 Capital gains tax
Business owners were keen to sell before a widely expected rise in capital gains tax, potentially tipped for March as the government vies to fund coronavirus-related relief.
3 PE houses continued to identify roll-up opportunities
Creating groups from compatible companies. In November, for example, PAI Partners acquired Addo Food Group and Winterbotham Darby to merge the two chilled food companies.
For the entire year, private equity deal volume was up 24% on 2019 and was at its healthiest level since 2016.
Deal value for Q4 2020 didn't disappoint either, coming in at £7.6 billion. Even stripping out the £6.8 billion ASDA deal, values were still up 169% on the previous quarter (yet down 77% on the same quarter in 2019).
Excluding ASDA, deal values for 2020 in its entirety were down 71% on 2019, which happened to be a bumper year for PE deals. It does, however, compare favourably to less-sensational years, suggesting that there is no significant fallout from Brexit and coronavirus.
There were just four food and beverage insolvencies (excluding bars and restaurants) during Q4. This marked no movement on Q3, likely due to ongoing government support of UK businesses.
While there have understandably been bar and restaurant failures in Q4 (and 2020 as a whole), these have been tempered by several recovery and rescue stories demonstrating confidence in the sector’s eventual recovery.
Bars and restaurants suffered 11 administrations compared to 31 in Q3 2020. Casualties included gastro-pub group, Whiting and Hammond.
In good news:
Casual-dining brand BarBurrito restructured, securing the future of 14 of its 17 restaurants
Fast-food operator Abokado was sold in a pre-pack administration
Boporan Restaurant Group acquired GBK Restaurants from administration
Meanwhile, Iceland-founder, Sir Malcolm Walker, acquired Individual Restaurants Group from administration in a deal said to be worth around £40 million, and a pre-pack deal saved over 50 jobs at London chain, Birley Sandwiches.
Q4 and 2020 sector spotlight
As 2020 progressed, so did interest in lockdown-compatible trends, such as pet food, health and wellness, and alcohol. Unsurprisingly, there was a downward trend in wholesale and distribution (down 78.6% versus 2019) and catering (down 90% versus 2019).
Compared to 2019, there was also a 62.5% uptick in pet food activity and a 240% increase in functional foods, such as probiotics and protein powders.
Investors approached these trends strategically in Q4 with a focus on innovation – examples include, luxury dog food, vegan powdered nutrients, and a yeast dairy alternative.
Authentic brand stories also proved a differentiator. For example, spirits group Diageo acquired Chase Distillery, owned by William Chase, formerly a potato farmer and founder of Tyrrells and Willy’s Wellness.
Pet food accounted for 16% (nine) of Q4 deals. 3i Group acquired a majority stake in natural pet food producer MPM, Assisi Pet Care (backed by Harwood Capital) acquired pet treats specialist Hollings, and Capvest bought Inspired Pet Nutrition, which focuses on quality ingredients.
Health and wellness
Health and wellness, a well-established pre-coronavirus trend, showed no sign of slowing down in Q4 2020, with eight deals. Innovation-wise, these included investments in Better Dairy, a yeast fermentation company looking to remove animals entirely from the dairy chain, and MPowder, a range of vegan powdered nutrients.
Healthy snacking also remained popular with Valeo Foods’ acquisition of It’s All Good pitta chips and Ferrero’s acquisition of Eat Natural.
Deals in functional foods included Unilever’s acquisition of chewable vitamins provider SmartyPants, and FutureYou Cambridge’s acquisition of mature-market supplements business Prime Fifty.
Alcoholic drinks were once again an active subsector with innovation key to activity. Pernod Ricard took a majority stake in non-alcoholic gin firm Ceder’s Drinks, while Bacardi bought Tails, a premium producer of batched cocktails.
Q4 2020 also saw the acquisition of three ingredients businesses. Investindustrial VII LP acquired CSM Bakery Solutions, and The Hut Group acquired nutrition suppliers David Berryman and Claremont Ingredients. Meanwhile, the owners of food coatings business Bowman Ingredients successfully sold to Solina.
Looking forward for food and beverage
We expect a robust start to 2021 as delayed deals continue to complete, and sellers try to beat the anticipated rise in capital gains tax. Three main themes will influence activity:
1 Consumer habits
It remains difficult to determine the extent to which underlying earnings have been skewed by lockdown-specific consumer behaviour.
With the hospitality trade paused, spending has been channelled towards supermarkets. The challenge is predicting how much this imbalance will remain in a post-coronavirus world.
It's unlikely, for example, that people will be as office-based as before. This will clearly have a knock-on effect on sandwich shops and convenience stores in business districts. We may also see a boom in eating and drinking out as people embrace normality, in what many are predicting will be the 21st century’s 'roaring twenties'.
Four and a half years after the Brexit referendum, UK business finally has clarity on a trade deal with Europe. The first few weeks of January saw fishermens' protests, stranded food lorries, and Marks and Spencer’s Percy Pig become the 'poster child' for rules of origin debates. These teething problems are unlikely to stymie deals, but may temporarily shift focus from strategic agendas to operations.
The Brexit deal has presented a need for overseas companies to open a UK base, and conversely for UK companies to gain a footing in Europe. This will be a driver of deal activity in 2021.
Government measures, such as the furlough scheme, currently support UK household finances and businesses. The termination of this will no doubt lead to restructuring activity.
We expect a repeat of the post-credit crunch years, in which only the fittest food and beverage businesses survived a shake-out of a perpetually fragmented and overcrowded market. The challenge for investors is identifying those businesses that will build back better.
No matter how the above uncertainties play out, 2020 has demonstrated the quality and resilience of the UK food sector. I anticipate a similar, if not better, performance in 2021.
For more information about the current and future state of the food and beverage sector, get in touch with Trefor Griffith.
1 All deal activity is based on the announced date of the deal and includes deals where there has been UK or Irish involvement (target 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, 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 financial arrangements and/or as further detail is released by the acquirer.