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Intense competition in UK grocery market driving food and beverage M&A

New analysis from Grant Thornton UK LLP reveals that intense competition in the UK grocery market is the main driving force for mergers and acquisitions (M&A) in the UK food and beverage sector.

Grant Thornton has released its complete 2014 analysis of food and beverage sector M&A deals which shows that the total deal value for the year was £6.7 billion compared with £5.8 billion in 2013.  The total number of transactions for the year was 153, up 13% on 2013 (125 deals).

Trefor Griffith, Partner and Head of Food and Beverage at Grant Thornton, said: "As 2015 gets underway there is continued evidence that price competition between the big supermarkets is impacting suppliers. This is filtering down the supply chain with well-publicised 'demands' for 'supplier support' from some of the larger food and beverage businesses. There have been a number of store closures announced by the big four supermarkets and this, added to the rationalisation of products sold, will continue to squeeze the mid-range suppliers.

"Premium and value brand producers appear for the most part to be better placed to achieve increased market share and as a result will have different challenges to face. We think that this environment is and will continue to drive consolidation and underpin increasing M&A volumes."

Whilst the overall number of company liquidations in the sector fell in 2014 there was an increase in the number of companies entering insolvency, impacted by the supermarkets' price war and resulting margin squeeze.

Trefor Griffith adds: "Strong companies are looking to diversify their portfolios, while those under pressure will benefit from a reduction in their overheads; some will look to M&A to achieve this.  In order to reduce dependency on the major multiple retailers some businesses are having to diversify and find alternative routes to market such as food service or export. However this requires investment and if a business is already on the back foot it may not have the capital to invest – this again can lead to opportunities for M&A and for outside investors to enter."

Private equity was involved in 34 deals last year - an increase of 89% on 2013. However total disclosed deal value fell 74% to £826 million from £3.5 billion in 2013. The decline is accounted for by the significant number of large deals in 2013 (five deals accounted for 91% of the annual overall value).  Private equity demonstrated a persistent affinity for buy and build strategies in 2014. For example Langholm Capital supported investee companies Bart Ingredients and Purity Soft Drinks with acquisitions.

Looking to the future Trefor Griffith predicts: "The General Election may hamper activity due to market uncertainty and greater scrutiny in to any large transactions. Equally the threat of post-election tax hikes might serve as a catalyst for deals.  Overall we expect the current trends and drivers in the sector will drive the growth trajectory for M&A deals throughout 2015. A number of large companies have stronger balance sheets than in previous years and M&A can provide a faster means of achieving growth than organic expansion."

Other M&A trends identified by Grant Thornton's analysis include:

Increased overseas appetite for iconic brands

Deals closed in the last quarter of 2014 provided clear examples of emerging market buyers' growing interest in well-established western brands. The most notable demonstration of this trend was the sale of United Biscuits to the Turkish food and beverage giant Yildiz Holdings for £2 billion.

'Food to go' in demand

Last year 6.5% of all disclosed deals were convenience or deli products, a 150% increase on 2013.  Notable deals include Symington's acquisition of Tanfield Foods and Edward Billington and Sons' acquisition of TSC Foods, best known for its Glorious! soup brand. The on-going shift in the snacks market has also contributed to this trend as nimble new market players continue to take market share from traditional players.

Bakery market consolidation
Investor appetite for bakery businesses was upheld in 2014. Europѐenne des Desserts entered the UK with the acquisition of the Handmade Cake Company. The French bakery business stated its intention to take advantage of the fragmented UK bakery market by making further acquisitions.

Securing the seafood supply chain

In the UK and globally the seafood sector witnessed a high level of activity in 2014. This is being driven by the need for vertical integration throughout the supply chain, a global footprint and reduced exposure to restricted farming licenses and constrained supply.

All deals research is produced for the quarterly Bite Size publication which is available from the Grant Thornton UK website.