Deal activity in the F&B sector is broadly holding its ground, with 51 transactions announced in Q3 2019, compared to 56 and 53 in the preceding quarters.
This contribution brings the total deal count so far in 2019 to 160; a level comparable to deal volumes of the past few years.
The challenging macro-economic environment and ongoing uncertainty, however, have contributed to the continued lack of mega-deals and total disclosed deal value remains low.
In 2017, there were five deals with disclosed deal values of over £1 billion. However, since then, there has just been one mega-deal: the sale of GSK’s Horlicks and other consumer nutrition products business for £3.2 billion in 2018. While deal volume and total disclosed deal value will always fluctuate from one quarter to the next, quarterly disclosed deal values continue to lag behind the levels typically achieved prior to the referendum.
That said, Q3 has witnessed a healthy surge in sizeable mid-market transactions, which lifted total disclosed deal value for Q3 to £1,664 million2 (consisting of 17 deals). This represents a 53% increase on the previous quarter (£1,089 million). The largest transaction saw Faroese salmon farming company P/F Bakkafrost acquire a 68.6% stake in fish farming company The Scottish Salmon Company, for £354.6 million. Other sizeable deals include US group Pilgrim’s Pride’s acquisition of pork producer Tulip for £290 million, Ebro Food's purchase of rice company Tilda from Hain Celestial for £280 million and Karro Foods Group's acquisition of Young’s Seafood for an estimated consideration of £175 million.
Since the referendum in 2016, inbound and outbound investment in the UK F&B sector has overall remained high. It seems that Brexit has served as a catalyst for companies to defend their exposure to potential EU import/export tariffs. We have seen overseas companies seek to establish or enhance their UK footprint through M&A, and UK companies increase their activities in other geographies. However, quarter-by-quarter throughout 2019, the domestic to cross-border ratio of transactions has shifted from being cross-border dominant to domestic-led. Q1 recorded a 43:57 domestic to cross-border ratio, which has switched in Q3 to 57:43.
The shift in the ratio has largely been driven by the fall in outbound M&A, with just five of the 51 transactions (9.8%) involving UK or Irish companies acquiring overseas. This compares to 14 deals (26.4%) in Q1 and 13 deals (23.3%) in Q2. Perhaps as the October 31 Brexit deadline approached, UK companies have been more focused on essential Brexit strategies to undertake at home, such as reviewing import and export processes, assessing supply chains and logistics, and getting systems in place for EU workforces. The weakness of the pound in the past few years is also likely to have deterred outbound M&A for some companies.
On the other hand, investment from overseas buyers into UK and Irish targets has stayed strong in Q3: with international investors accounting for 37% of UK and Irish targets in the period. Of the 17 deals, 59% were acquirers of EU origin and 29% were North American.
Private equity (PE) activity has also remained robust in Q3, with 13 transactions with PE involvement, falling just under the 16 deals in the previous quarter.
Spotlight on private equity
Following a notably quiet investment period at the start of 2019, PE activity in the F&B sector has rebounded strongly as the year has progressed, with 16 deals in Q2 (28.6% of deals) and 13 in Q3 (25.5% of deals).
UK PE houses CapVest and Exponent were particularly active this quarter.
CapVest supported investee companies Karro Food Group and Valeo Foods in strategic acquisitions. In July 2019, pork processor Karro announced the acquisition of Young's Seafood, the UK-based processor of frozen, chilled and fresh seafood, from Bain Capital. The £175 million acquisition significantly diversifies Karro’s offering from pork and creates a new multi-protein food group, in which Karro and Young's will operate as separate businesses. The combined group will generate sales of £1.2 billion and employ over 5,000 people across Ireland and the UK. The deal is the second for Karro since CapVest acquired the group in 2017, having acquired TS Bloor & Sons in 2018, which increased its value-added pork processing capabilities.
Valeo Foods is one of Europe’s fastest growing consumer food producers, with an expanding portfolio of food brands, which continues to pursue a strategy of growth and diversification through acquisitions across Ireland, the UK and Continental Europe. The group has more than quadrupled in size since its formation in 2010, when CapVest supported the original acquisition and merger of Origin Foods and Batchelors, going on to acquire the likes of Rowse Honey, Balconi and Tangerine Confectionery. The latest addition to the group was the acquisition in September of Campbell’s European Chips business, including UK-based Kettle Foods and Netherlands-based Yellow Chips, for around £66 million. Kettle Foods makes hand-cooked crisps, popcorn, rice snacks and vegetable-based chips under the primary brands of Kettle Chips and Metcalfe’s skinny popcorn. Netherlands-based Yellow Chips produces vegetable and organic potato chips under private label snacks and its own premium brands, such as Go Pure.
Exponent Private Equity supported investee company Meadow Foods in its acquisition of decorations, topping and inclusions firm Nimbus Foods, for an undisclosed sum. The deal represents the first deal under the ownership of Exponent, which took a 35% stake in the B2B dairy ingredients player in 2018, acquiring the stake from former PE investors Paine Schwartz Partners. Meadow Foods is continuing to pursue an inorganic growth strategy, having undertaken the acquisitions of Fayrefield Liquids in 2017 and Roil Foods in 2018, with Paine Schwartz’s support.
Finally, Exponent Private Equity is widely reported to have acquired Asian ingredients supplier East End Foods. Founded in Birmingham in 1972 by the Wouhra family, the £200 million turnover business’s product range includes rice, spices, canned food, flour, sauces and pastes sold under the East End brand throughout the UK. It has also been rumoured that Exponent agreed to acquire Asian food wholesaler TRS in Q3, seeking to acquire the two businesses simultaneously, which would suggest that Exponent is targeting a consolidation play in the highly fragmented ethnic foods wholesale sector.
Other PE houses supporting bolt-on acquisitions to portfolio companies in the quarter were Teachers Private Capital and Equistone Partners Europe. UK biscuits group Burton's Biscuit Company, a portfolio company of Canadian PE group Teachers Private Capital, itself owned by Ontario Teachers’ Pension Plan, acquired Paterson Arran for an undisclosed consideration. With two sites in Scotland, Paterson Arran produces the Paterson’s shortbread brand, along with foodservice biscuit and chutney brands, Brontë, Café Brontë and Arran Fine Foods. The acquisition diversifies Burton’s product portfolio, as well as increasing its access to the foodservice channel and capabilities in portion packing.
In August 2019, CH&CO Catering Group announced the acquisition of Mitie Catering, comprising Gather & Gather and Creativevents, the workplace catering and events businesses of Mitie, for a consideration of up to £85 million in cash. Mitie Catering is a leading provider of contract workplace dining, hospitality and event catering services in the UK and Ireland, employing over 3,600 people at over 330 sites across the UK and Ireland. The deal represents the first bolt-on CH&CO has made since Equistone’s initial investment in May 2019 and is indicative of its ongoing acquisitive growth plans.
Spotlight on sectors
As consumer demand for plant-based foods continues to grow, M&A of attractive targets remains high.
In September 2019, Channel 4 announced an undisclosed seven figure investment into The Meatless Farm Co. Founded in 2016 and based in Leeds, the company produces a range of meat alternatives using plant proteins and now has retail listings including Sainsbury’s, Morrisons, Co-Op and Whole Foods, as well as supplying to the foodservice sector. Channel 4 undertook its investment via its Commercial Growth Fund, in exchange for a new TV advertising campaign that will initially run regionally across Channel 4’s main channel and streaming service, All 4.
Also in September, US PE house Goode Partners acquired an undisclosed stake in Strong Roots, the Ireland-based producer of frozen plant-based foods such as root vegetables, veggie burgers and cauliflower hash browns. Already firmly entrenched with the major UK multiples, Strong Roots now supplies over 3,000 US stores including Target, Wegmans and Whole Foods Market. The company anticipates retail sales of USD 50 million this year and is targeting sales of USD 300 million by 2023.
The products of both The Meatless Farm Co. and Strong Roots tap into the growing trends for plant-based and healthy foods, as well as meeting the demand for convenient foods for time-pressured consumers.
In a similar vein was Greencore’s acquisition of Freshtime for £56 million. Freshtime is a supplier of food-to-go salads, chilled snacks and prepared produce to the grocery and convenience channels; the acquisition boosts Greencore’s presence in the categories of food-to-go salads and chilled snacking.
Finally, protein-led food group Cranswick diversified its portfolio from its heritage focus on pork and poultry, with the acquisition of Katsouris Brothers, trading as Cypressa, for a net cash consideration of £43.5 million, and deferred contingent consideration of up to £7 million. Cypressa is a leading processor and multi-channel supplier of continental and mediterranean food products, with latest revenues of £68 million and adjusted EBITDA of £6 million. While the acquisition is complementary to Cranswick’s existing continental products business, it also increases Cranswick’s exposure in the fast-growing, plant-based non-meat product categories.
The premium baby food market also continues to attract a high level of M&A appetite. Q3 saw organic baby food brands Babease and Piccolo Foods secure funding to capitalise on their expansion.
Babease is a vegetable-focused baby food range, available in all major food retailers including Tesco, Waitrose, Sainsbury’s, Whole Foods, Ocado and Boots. In August, it received £5.1 million of funding led by Amitis Partners, whilst fellow organic baby food producer Piccolo also raised £2.2 million in a further funding round.
Another fast-growing trend in the F&B sector is the rise of products containing Cannabidiol (CBD), an active ingredient in cannabis derived from the hemp plant. July 2019 brought the acquisition by Canadian pharmaceutical and cannabis company Tilray of UK-based Smith & Sinclair, which produces a range of alcohol-infused confectionery, edible fragrances and other unique cocktail treats. Tilray acquired Smith & Sinclair as a vehicle to create a line of new CBD-infused edibles for distribution in the US and Canada. The acquisition will also help Smith & Sinclair build its international footprint and bring more innovative products and ranges to market.
Deals in the alcoholic drinks sector continued apace in Q3, with seven deals and accounting for 13.7% of the quarter’s tally. However, perhaps the stand-out deal in the category was Diageo’s acquisition of a majority stake in Seedlip, a UK-based distilled non-alcoholic spirits manufacturer. The deal followed Diageo’s minority investment in Seedlip in 2016 through the Diageo-backed accelerator programme Distill Ventures. Launched by Ben Branson in 2015, Seedlip’s three variants (Spice 94, Garden 108 and Grove 42) are supplied to over 7,500 of the world’s bars, restaurants, hotels and retailers across 25 countries. The company has first-mover advantage in tapping the trend for low and no-alcohol spirits / drinks, as many consumers want to reduce their alcohol intake and are seeking interesting alternatives. Drinking rates among UK adults are now at their lowest level in 18 years, and a quarter of 16 to 24 year olds do not drink alcohol at all. While the non-alcoholic spirits category is relatively new, volume and value sales in this burgeoning market in the year to February 2019 increased by 407% and 418% respectively3.
Lastly, the ingredients sector continues to draw a high level of M&A activity, with six key deals in Q3 2019, and three deals alone in the bakery ingredients sub-sector. Dr Oetker acquired cake decoration and sugarcraft supplies business Cake Craft World; HMS, the parent company of ingredient distributors Kent Foods, BFP and Garrett Ingredients, acquired Henley Bridge Ingredients, a distributor of high-end ingredients to chocolatiers, ice cream manufacturers, bakers and the foodservice industry; and as already mentioned, Meadow Foods acquired Nimbus Foods, a UK-based producer of inclusions, decorations and toppings for the food industry. Elsewhere, Swedish group AAK acquired an 80% stake in Soya International, a UK-based manufacturer and supplier of food ingredients and non-GMO and organic products, and Swiss flavours and fragrances group Givaudan acquired UK-based fragrances and natural extracts producer Fragrance Oils.
Despite ongoing uncertainty due to a seemingly never-ending Brexit process and wavering political landscape, our analysis shows that M&A activity in the F&B sector remains fairly resilient. While deal volumes have stayed moderately consistent since the referendum, the impact is clearly more evident in the lack of mega-deals in the sector and muted total disclosed value.
It is hard to predict how the coming months and years will impact on the F&B M&A landscape, and of course on the sector as a whole. From both our own experience advising clients on their strategic agendas, as well as insight into other processes in the sector, it is evident that Brexit has made a number of vendors and acquirers put strategic agendas on hold until there is more clarity.
Some processes that have got off the starting block have subsequently been pulled due to insufficient buyer appetite (such as Premier Foods’ proposed sale of custard brand Ambrosia) or buyers withdrawing from processes, specifically due to Brexit trepidation. In the case of some high-profile auctions, deals have concluded but at a level much lower than the targeted price, such as snack supplier graze. On the other hand, some companies have clearly adopted a strategy of “carry on regardless” and undertaken M&A as a defensive play to address the likely threats and complications of the UK exiting the EU.
One way or another, when the dust finally settles in the new world, there could be a proliferation of businesses coming to the market due to a Brexit backlog. This in turn could create a buyers’ market, in which acquirers may be able to be highly selective at what they pursue and lead to further failed processes.
It is reassuring to note the pick-up in more sizeable transactions this quarter, such as the sales of Tulip and Tilda. As we head towards the end of 2019 and a possible EU exit in the near future, some groups are clearly not being deterred from major non-core divestments, such as US group Hain Celestial, which is exploring the sale of its UK Hain Daniels portfolio, either in its entirety or piecemeal. Similarly, Premier Foods is now revisiting the sale of parts of its portfolio, alongside a possible sale of the whole group, albeit driven by activist investors.
The quarter has also demonstrated that key drivers and consumer trends continue to drive M&A – especially the demand for plant-based and healthier products, including the growing interest in no/ low alcohol products and the nascent trend for CBD products.
Fast forward to the start of 2020 when we next come to write F&B Insights, the political landscape could be very different following December's general election and its impact on Brexit. The one thing that we can predict is the unpredictability of the coming months and its impact on the F&B sector.
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 receivership 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.