As the hospitality sector continues to open its doors following the end to restrictions across the UK, new research from leading business and financial adviser Grant Thornton UK LLP finds that after a record-breaking Q1 for M&A activity in the food and beverage sector, activity declined significantly in Q2 2021.

The firm’s latest ‘Food and Beverage Insights’ report finds that deal volumes almost halved in Q2 2021, compared to the previous quarter (33 versus 63). However, the research explains that activity in Q1 was supercharged by two exceptional factors: the thawing of deal flow frozen by COVID-19, plus concerns about changes to capital gains tax in the March Budget.

Trefor Griffith, head of food and beverage, Grant Thornton UK LLP, said:

“The significant decline reported last quarter might not be as shocking as it first appears and, in many ways, was to be expected. The revival of old deals and concerns around capital gains tax changes go some way to explaining why the traditionally busy months of April, May, and June actually experienced a drop-off in comparison to earlier in the year.

“Another contributing factor may have been that businesses hit by coronavirus decided to shift their focus to operational strategy instead of M&A. Anecdotally, throughout the second quarter this year, we have witnessed a strong appetite for deals from our clients and are confident that volumes will rebound again over the coming months.”

In contrast to the decline in deal volume, the disclosed deal value in Q2 remained robust. In Q2 2021, total deal value for the 16 disclosed deals was £3.7 billion, compared to £1.3 billion for Q1. The research finds that the substantially higher value of disclosed deals in Q2 was largely due to the Bain Capital’s acquisition of Valeo Foods Group from CapVest.

Interest from overseas investors remained steady in the second quarter of the year. In Q2 2021 overseas entities acquiring UK and Irish companies accounted for 10 of the 33 deals recorded, compared to 11 of the 63 deals in Q1 2021.

While interest from overseas investors continued, private equity (PE) activity dipped in Q2. PE activity only accounted for a third of the 33 deals in Q2, compared to 54% in Q1. Total PE deal value for Q2 was £2 billion, up from £552 million in Q1, but, similarly to total deal value, this figure was inflated by the £1.5 billion Bain Capital/Valeo Foods Group deal.

Alcohol and plant-based products show no signs of losing their allure for investors. Deals in alcoholic drinks continued to dominate, accounting for 18% of Q2 activity. Most transactions occurred in niche corners of the industry, such as artisanal drinks and alcohol-free beers.

Demand for plant-based foods also continued, accounting for 12% of all Q2 deals. Notable transactions in this space included BGF Investment Management’s £11 million Series A investment in plant-based ‘meat’ brand, THIS.

 Trefor Griffith added:

“The trends we’ve seen over the last few years in alcohol and plant-based products continues to dominate and we expect appetite from overseas investors to continue as buyers from Europe and North America continue to snap up UK firms to establish a post-Brexit foothold.

“While the sector has repeatedly demonstrated its resilience there are a number of challenges ahead. The government furlough scheme that has kept the UK hospitality industry afloat is set to end in September 2021, while many restaurants and bars continue to face a recruitment crisis. Affected venues face three ‘choices’: don’t open at all, accept fewer bookings, or open with a skeleton staff and risk customer dissatisfaction. 

“The government’s recent National Food Strategy report outlined a number of recommendations including the introduction of salt and sugar taxes and cutting the nation's meat intake by a third (though it stopped short of a meat tax), and a white paper has been promised within six months. This will inevitably create uncertainty for food and drink suppliers and prudent players will be keeping a careful eye on developments.

“In spite of these challenges, the next few months could bring great opportunities for firms to strengthen their position. It is a prime time for investors to seek consolidation, and target companies that can resist price pressure with a unique offering. By its vital nature, the food and beverage industry will always remain resilient. What will change, however, is the distribution of winners and losers.”