Article

M&A appetite in the F&B sector remained strong in 2018

Trefor Griffith Trefor Griffith

The final quarter of 2018 concluded with 58 deals1, an increase of 13.7% on the 51 deals in the preceding quarter. Q4 also registered the highest total disclosed deal value for the year, recording £4,590 million across 14 deals2.

This total was clearly elevated by the £3,190 million acquisition by Unilever of GlaxoSmithKline's (GSK) health food drinks portfolio in India, Bangladesh and 20 other predominantly Asian markets. Removing this mega-deal from the analysis equates to a disclosed deal value of £1,399 million, still the most lucrative quarter of 2018, with £1,122 million in Q3 a close second.

The total number of transactions in 2018 sits at 209, compared to 202 in 2016 and 215 in 2017, equating to a fall of just 2.8% on the previous year’s M&A activity. The numbers indicate that Brexit has not had a significant impact on M&A in the food and beverage (F&B) sector, and appetite for both inbound and outbound M&A by UK/ Irish groups remains strong.

A more pronounced year-on-year decline was seen in 2018’s total disclosed deal value, at £7.5 billion, compared with £21.7 billion in 2017. The major cause of this fall lies in the absence of sizeable transactions in 2018. In 2017 the sector boasted five transactions valued at more than £1 billion, including Tesco’s £3.6 billion acquisition of Booker and the £6.2 billion sale of Unilever’s spreads business. However, 2018’s deal value is not far behind that of 2016, which stood at £8,435 million.

International interest

Q4 2018 marked a significant up-take in the volume of cross border transactions, with cross border deals just tipping the balance ahead of domestic deals (52%). There were 15 deals in which overseas companies acquired in the UK/ Ireland, matched by 15 UK/ Irish companies concluding transactions overseas, with 28 domestic deals.

Overall, 2018 saw a 56:44 ratio breakdown in favour of domestic deals, which is not dissimilar to 2017 and 2016. Of the deals with overseas buyers, 66.7% of acquirers were of European origin (30 deals), compared to 51% in 2017 and 44% in 2016 – suggesting a notable pick-up in European countries investing in the UK.

Consistent with previous years, North American acquirers were the second most dominant. There was, however, a notable fall in Asian acquirers this year, with just three deals - a significant drop on 2017’s eight transactions.

There was also an increase in the volume of UK/ Irish companies acquiring overseas: from 20.9% in 2017 to 22.5% in 2018 (47 of 209 deals). It is interesting to note that outbound M&A is more geographically diverse than inbound M&A. The lion’s share of inbound M&A is accounted for by European and north American acquirers, equating to 92% of overseas buyers in 2018. In terms of outbound M&A, European and north American jurisdictions accounted for 64% of overseas buys by UK/ Irish companies. The remaining countries span all continents, covering Oman, Taiwan, Brazil, Mexico, South Africa, Australia, China, Nigeria and India.

Unilever M&A activity

British-Dutch consumer goods company Unilever was one of the most prolific acquirers of the year, both in terms of volume and geographic expansion. Unilever has undertaken significant transformational M&A in the last 12 months. Having sold the legacy spreads business at the end of 2017, the company then branched into the health food drinks category with its acquisition of GSK’s health nutrition business, including brands such as Horlicks and Boost. In 2018, it further progressed its health and wellness offering with the acquisition of The Vegetarian Butcher, a Dutch manufacturer of meat substitute products. Unilever also enhanced the more indulgent side of its portfolio with the acquisitions of Denny Ice Cream in Bulgaria and Betty Ice in Romania, to join heritage brands such as Magnum, Cornetto, Ben & Jerry’s and Carte D’Or. The strategic moves mark the end of the reign of highly regarded CEO Paul Polman, who stepped down from a decade at the helm of Unilever in January 2019.

Spotlight on sectors

The ingredients sector continues to pull a high level of activity, with six deals in Q4 contributing to 22 deals in 2018 (10.6%). Ireland-headquartered Kerry Group plc accounted for four transactions alone in Q4 2018: three acquisitions in the US, of Ariake USA and Southeastern Mills North American coatings and seasonings business, and Fleischmann's Vinegar Company Inc. It also acquired AATCO Food Industries LLC, an Oman-based provider of culinary sauces to the foodservice channel.

Another key transaction was William Jackson Group’s acquisition of the premium vinegar and olive oil producer Belazu (The Fresh Olive Company Ltd), for an undisclosed value. The deal wrapped up a year of significant strategic change for the sixth-generation family business: selling frozen food brand Aunt Bessie’s to Nomad for £210 million, entering the fast-growing premium segment of the foodservice channel through its acquisition of Wellock’s and, finally, bringing premium ingredients brand Belazu into the fold.

Kerry Group was the most prolific acquirer in the ingredients sector in 2018, with eight transactions and a total disclosed value just shy of £700 million. The acquisitions are in line with Kerry’s strategic goals of expanding its global footprint, enhancing its foundational technology portfolio and its access to the foodservice sector. Acquisitions earlier in the year included the China-based Zhejiang Hangman Food Technologies and SIAS Food Co, as well as Season to Season in South Africa and plant-based protein manufacturer Ojah NV in the Netherlands.

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The impact of consumer demand

In line with the ongoing rise in the popularity of vegetarian, vegan and flexitarian diets, it is notable that there were three acquisitions by UK/ Irish groups of alternative meat producers, with all three targets based in the Netherlands. In addition to Kerry’s acquisition of Ojah, Hilton Food Group acquired a 50% stake in Dalco Food and Unilever acquired The Vegetarian Butcher. With The Vegetarian Butcher’s plant-based meat products already sold in 17 countries, the acquisition gives the acquired business access to Unilever’s international network across 190 countries, while simultaneously increasing Unilever’s presence in the key category of plant-based foods.

In conjunction with consumers’ growing interest in health and wellness, appetite for deals in the functional sector remained robust in 2018, recording a total of 10 transactions. These ranged from Glanbia’s £265 million acquisition of US Slim-Fast Foods Company, to Science in Sport’s £32 million acquisition of sports nutrition brand PhD Nutrition and Highland Europe’s £20 million investment in nutritionally complete powdered food brand Huel. The interest in wellbeing is not restricted to humans: alongside the ongoing trend for humanisation of pets and premiumisation of their food, Archer Daniels Midland of the US acquired UK healthcare and probiotic supplements manufacturer (for both humans and animals) Probiotics International for £185 million, and Inflexion Private Equity took a significant stake in pet nutritional supplements company Lintbells.

The snacks sector recorded a particularly high level of M&A in 2018, in both the more indulgent and healthy segments of the market. There were 10 transactions involving UK producers of crisps, popcorn and snacks. Q4 concluded with the sale of Seabrook Crisps by LDC to Japanese snack group Calbee (whose key existing brand is Yushoi), Pipers Crisps was snapped up by PepsiCo and coconut-based snacks brand Ape Snacks was sold to a private investor. There were three deals in the popcorn sector in 2018: Fairfields Farm Produce acquired crisps and popcorn brand Ten Acre, Tayto acquired Pop Notch and Burts Potato Chips acquired popcorn producer Savoury & Sweet. And it would be remiss not to mention another change of ownership for Tyrrells, now part of KP Snacks and the German Intersnack group, for a rumoured £60 million. Both consumers and M&A appetite for convenience and snacks remains strong, as demonstrated by the auction battle for Graze that resulted in Unilever securing the deal for an estimated £150 million.

The alcoholic drinks sector continues to see a high level of M&A, accounting for 14.8% (31) of 2018 deals; a similar level to 2017 at 16.5%. 2018 brought a move to overseas ownership for UK cider brands Aspall and Aston Manor, to Molson Coors of the US and Agrial of France respectively. Craft brewers changing hands included Fourpure (to Lion Pty Ltd of Australia and its Japanese parent Kirin), Beavertown Brewery (where Heineken took a strategic stake), Dark Star Brewing (to Fuller Smith & Turner plc) and Purity Brewing Company (receiving investment from BGF).

Food and beverage

The sector is evolving at a pace that has never been seen before.

Looking forward

Irrespective of broader macroeconomic and political headwinds, deal volumes will always fluctuate one quarter to the next. While the outcome of the Referendum vote has not changed that pattern, some quarters since June 2016 have demonstrated a more pronounced dip in deal volume. More recently, activity has stabilised again and overall the message is clear: Brexit has not impacted on M&A in the F&B sector in the way initially feared.

In fact, deal volumes in 2018 and since 2015 have been the highest ever in the preceding 10 year period, and almost double the level of 2009, when M&A activity following the financial crisis of 2007 was significantly subdued. That period, like the one today, was a time of immense uncertainty, and both consumer and investor confidence were at rock bottom. But there is one key difference: the financial environment is not a barrier to M&A as it was a decade ago. Today, if you want to transact, access to cash or debt is not a constraint.

While Brexit has inevitably caused some strategic agendas to be postponed, in other instances it will have served as a catalyst for M&A, whether to diversify or safeguard. Some overseas companies have engaged in M&A to establish or strengthen a UK footprint prior to the UK’s exit from the EU. Furthermore, we have noted a pick-up in outbound M&A as UK F&B companies seek to increase their routes to market, alongside developing export channels.

Navigating change

There is no doubt it is a testing time for companies in the F&B sector, with much more pronounced headwinds than a decade ago. Notwithstanding the vast challenges triggered by Brexit and the need for companies to plan for all possible scenarios, the food retail environment continues to go through unprecedented structural change. In the space of just a few years, we have seen the demise of out-of-town superstores, the rise and rise of the discounters, the resurgence of convenience, the consolidation of Tesco/ Booker and now the proposed merger between supermarkets J Sainsbury's and ASDA. The £15 billion merger is currently being deeply scrutinised by the Competition & Markets Authority. If the deal were to be approved, it will see the big four become three and comes at a time of huge upheaval for the sector and consumers alike, as the potential impact of a no-deal outcome looms. It is impossible to avoid the headlines: stockpiling, tariffs, customs clearance, traffic gridlocks, reduced availability and price increases. And then another great unknown: what will Amazon do next in the food retail sector?

On top of all of this are the long-term and quick-shifting disruptive consumer trends at play, from demand for experiential offerings, to premiumisation, to the rising importance of technology/ online through to consumer brand fatigue. Both consumer confidence and pockets are constrained, and consumers are becoming even more discerning: value is becoming more prominent and brand loyalty less so. It is the small and agile disruptors that continue to win the hearts, minds and pennies of the consumer. Brands that address the wellness theme continue to prosper, for example, where the upsurge in veganism and vegetarianism and demand for alternative meat products shows no signs of slowing.

The need to be alert to these fast-changing trends is more important than ever. In recent years we have seen the large fast-moving consumer groups wise up to the need to review their portfolios to ensure they are still relevant and fit for purpose. This in turn has led to the divestiture of heritage parts of their businesses, while simultaneously snapping up the small disruptors nipping at their heels. Unilever is a prime example of this portfolio rationalisation and refreshment.

Strong consumer appetite in turn translates into M&A appetite, from both trade and PE investors. Stellar UK brands in the F&B sector continue to attract both international trade and PE appetite, across all deal sizes.

As the Brexit deadline approaches, it would be plausible if investors and consumers demonstrate an element of a wait-and-see approach, as no-one thrives on uncertainty. While consumers and investors will continue to be cautious about where to invest, one thing is certain: deal-makers, just like consumers, will not go away.

For more information, please get in touch with Trefor Griffith.

Footnotes

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.