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When uncertainty is the only constant, F&B holds strong

Trefor Griffith Trefor Griffith

In our latest food and beverage (F&B) insights round-up, Trefor Griffith looks at the deals and mergers activity in the sector. See what lies ahead for the rest of 2020.

The second quarter of this year saw 27 deals announced1. This is a 39% decrease on the 44 in the preceding quarter. It's also lower than the 52 deals in the second quarter of 2019.

Total disclosed deal value for Q2 2020 was £2 billion across 11 deals with publicly disclosed values2. This 578% increase on Q1 was propped up by two large deals with the combined value of £1.6 billion:

  • The first was the £820-million acquisition of frozen food retailer, Iceland, via a management vehicle led by Sir Malcolm Walker and Tarsem Dharliwal
  • The second was the joint venture between Marston PLC and Carlsberg to form Carlsberg Marston’s Brewing Company (£780 million)

The remainder were largely growth-capital investments as buyers sought haven in established F&B trends.

There were five reported insolvencies in Q2, up from three in Q1. While rising, this remains a relatively stable number. It is likely that this number will increase later this year, particularly when the government’s furlough scheme comes to an end.

For certain sub-sectors, this will rebalance long-term overcapacity, creating a stronger position for those remaining.

Spotlight on private equity

Of the 27 deals in Q2, only eight involved private equity (PE) and related investment. As a percentage, this was considerably lower than Q1 - 30% versus 50%.

Several factors have dampened PE’s willingness to invest in F&B. Foremost, is short-term uncertainty, which has seen some companies, such as large-retail suppliers, outperform, while others are effectively mothballed due to the forced closure of their customers.

In Q2, PE played it safe with several minority investments in sub-sectors that are largely pandemic-resistant, such as indulgence foods and healthy/functional eating.

The largest PE/venture capital deal was the £33-million minority investment in food box delivery company, Gousto, by MMC Ventures, BGF and YouTube fitness coach, Joe Wicks. The target taps into a growing acceptance of direct-to-consumer brands, caused by lockdown. The investment will enable Gousto to improve its technology, including a higher level of personalisation.

Other deals in the good-for-you sector included Blue Horizon Venture’s undisclosed stake in organic baby food company Mia and Ben, which uses high-pressure processing (HPP) instead of heat to retain natural vitamins, colour and flavours.

Away from healthy eating, Pembroke VCT LLC acquired a minority stake in ice cream brand Hackney Gelato. Stocked by Wholefoods and Ocado, flavours such as Bronte Pistachio and Bakewell Tart are well placed to feature as a treat item in the weekly shop.

Elsewhere, London foodtech firm Vertical Future secured £4 million in seed funding from Earthworm Capital to finance its sustainable food production technology. It will use the investment to drive efficiencies in its Deptford facility and increase production of its vertically grown crops.

International interest

Cross-border activity continued at a normalised level (a 56:44 domestic to cross-border ratio), continuing the trend from Q1.

Inbound overseas activity remained robust at 26% (seven deals) and the number of UK/Irish companies investing overseas was relatively healthy (five transactions, 18.5%).

Key international deals in Q2 2020 included Japan’s Nagatanien Holdings Co’s acquisition of the interests in freeze-dried fruit processor Chaucer Foods that it didn’t already own. This aside, US and European investors accounted for the majority of investment into the UK.

Nestlé's US entity Purina PetCare acquired UK natural pet food brand Lily’s Kitchen, proving the healthy eating trend isn’t just for humans. Its product range in natural wet and dry dog foods and snacks complements the US company’s brand portfolio.

Also stateside, Powerplant Ventures acquired a minority investment in UK chilled food firm, The Coconut Collaborative (see below).

Q2 2020 sector spotlight

While lockdown has grounded some sub-sectors, such as foodservice, it has actively boosted, or at least not harmed, others. The consumer flight to the large retailers led to most suppliers to that channel outperforming forecasts.

Major winners included healthy eating, indulgence foods and artisan alcoholic drinks and mixers. These categories were prominent in Q2 transactions, and while all of the deals reported would have been underway before the pandemic, the favourable trends would have helped them complete.

Healthy eating

Health has understandably been propelled to the front of the nation’s mind during COVID-19. With the government recently announcing a ban on supermarket junk food promotions, it is no surprise that healthy snacking continued to be a hot target in Q2.

Snack bar brand, Primal Pantry, was acquired by plant-based snacking group Nurture Brands, which showed a hunger for its almond and cashew stamina bars. Rival, Natural Balance Foods, which makes Nakd and Trek bars, was all but fully acquired by Belgium based Lotus Bakeries, upping its stake from 67.2% to 97.7%.

Meanwhile, premium plant-based yoghurt and dessert brand The Coconut Collaborative received a USD 7-million, series A investment from PowerPlant Ventures. It will use the investment to triple its product offering and expand its sales channels.

Premium drinks and mixers

Another trend that continued from Q1 was a thirst for early-stage alcoholic drink and mixer companies.

East London Liquor Co, which produces and imports gin, vodka, rum and whisky, acquired ready-to-drink (vodka and rhubarb, gin and grapefruit) specialist Longflint Drinks. Halo Business Angel Network invested in Northern-Irish spirits producer The Boatyard Distillery.

Reacting to over-capacity in the independent brewing trade, Phipps Northampton Brewery Company Ltd acquired Gundog Ales to consolidate production facilities.

Meanwhile, the Heineken Family acquired a minority stake in Double Dutch, a premium tonic and mixer brand owned by two sisters, who will use the investment and the drink giant’s network to expand internationally.

Indulgence foods

There was a burst of activity in indulgence foods, helped by the lockdown forcing consumers to eat at home rather than in restaurants. While there was no choice in the matter for consumers for the whole of Q2, there will likely be an ongoing switch to consumers trading up with meals consumed at home, reflecting behaviour that was observed after the 2008 credit crunch.

Manufacturer Ludwig Weinrich GmBH & Co acquired a majority stake in Fairtrade producer Divine Chocolate. Ice cream was a busy area with Hackney Gelato receiving additional funding, and Cheyne Capital Management taking a stake in Lacrem SA, owner of the consumer ice cream brand Farggi.

Looking forward

On March 23 2020, when the UK prime minister announced full lockdown, the nation’s F&B buying habits changed overnight. Out-of-home eating all but ceased, we fought for supermarket delivery slots, signed up to meal-kit schemes, and bought directly from local suppliers.

The industry was nimble to react – furloughing workers, re-allocating resources, simplifying ranges and switching up supply chains. While this agility reflects positively on the sector, there remain several unknowns about future consumer behaviour and the wider economy.

Will changes in buying habits be permanent? Will government incentives really inspire us to "eat out to help out"? How long will the recession last and what shape will it be? Will there be tax rises to pay for furlough schemes, when will they happen, and who will they hit? These questions can't be answered until there is more visibility on how coronavirus itself will play out.

Good news and bad news

These uncertainties began to take hold in Q2, which turned out to be a case of survival of the fittest in terms of deals. The remainder of 2020 and beyond is likely to be a game of two halves. It will be a rocky road for those servicing restaurants, office canteens, cafés and coffee shops, while those supplying directly, or indirectly to retailers, are likely to boom. 

It is worth noting that, as well as shaking up strategic priorities, coronavirus has also impacted our practical ability to transact in Q2; the face-to-face meetings and site visits that form a vital part of due diligence were off the table. As we emerge from lockdown, this will contribute to an unnatural rhythm in activity, as postponed deals (at least those still considered viable) will complete at a later date than intended.

Casual dining was already under pressure before lockdown, so it is no surprise that several big names fell in Q2. These included Carluccio’s, Le Pain Quotidien, Chiquito and Restaurants Etc (Mark Hix Restaurants).

Eat out to help out

The government’s efforts to boost the hospitality industry with diner discounts and a reduction in VAT may not be enough to save others. Eating out simply isn’t as appealing with social distancing in place and the office-lunch market will be hit by home working. Sandwich chain Pret A Manger has already announced it will close 30 shops.

Moreover, with a recession looming and rising redundancies, many consumers won’t be able to afford to eat out. There will likely be more hospitality casualties in coming months, which will have a knock-on effect on their suppliers.

On the flip side, some suppliers will benefit from the change in consumer habits. As mentioned in our sector spotlight, winners include consumer brands that are sold via retail or direct to customers, such as meal-delivery kit Gousto. We expect to see more deals in this area, especially early-growth, as the year progresses.

Having said this, we expect investors to value over-performing companies with caution. They must examine whether higher profitability is due to short-term conditions, such as stockpiling, lack of supermarket promotional activity and the channel change, or strong fundamentals.

This may lead to a mismatch between buyer and seller expectations. Coupled with a likely reduction in debt, this could harm deal volume. Transactions that do go ahead are likely to be more structured than before with performance-related deferred consideration.

With the world focused on coronavirus, the B-word has dropped off the agenda to a large extent. Britain’s post-Brexit trade deal, or lack thereof, with the EU will continue to climb the news agenda in Q3 and Q4. Clarity on this, for better or worse, will only help deal volume as we enter 2021.

We expect to see five trends driving deals:

1 Collaboration

Strategic alliances between companies to share capabilities and logistics.

2 Consolidation

Trade buyers will seek targets that drive efficiencies. In Q2, for example, Vibrant Foods, a PE-backed producer and distributor of South Asian foods, added Indian snack brand Cofresh Snack Foods to its stable.

3 Caution

With inevitable tax rises and economic uncertainty, business owners will look to de-risk their holdings. We are already seeing an uptick of activity in this area.

4 Crisis

A higher number of insolvencies in coming quarters will likely result in a rise in distressed M&A.

5 Creation

Investment in pandemic-proof growth targets.

Though there is no doubt that deal activity will be reduced for the remainder of 2020, it will be mitigated by these factors. Add to this that large corporates historically turn to established markets in times of global downturn and that F&B is a very defensive sector on the whole, it is in a relatively strong position when uncertainty is the only constant.

For more information about the current and future state of the F&B sector, 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 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 finance arrangements or as further detail is released by the acquirer.

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