Deal volumes recovered, to an extent, from a drop during the initial wave of COVID-19, with 34 transactions in Q3 2020, compared to 27 in Q2. However, they were nowhere near the volumes achieved in Q3 2019, in which 53 deals crossed the line.
The value of the 18 Q3 deals that were publicly disclosed totalled £631.2 million. This was a 69% drop on the previous quarter, which contained a couple of particularly large transactions, such as the acquisition of Iceland Foods for £820 million.
The largest disclosed deal in Q3 2020 was Diageo’s acquisition of Davos Brands and Aviation American Gin for £256 million, as the drinks giant further strengthened its position in US premium spirits.
The majority of Q3 deals, however, were minority investments in innovative brands with high growth potential. A typical example is Kellogg Co’s stake in Mr Lee’s Noodles, a Bournemouth-based brand specialising in healthy instant noodles.
There were just four reported F&B insolvencies in Q3 2020, as the full economic impact of the pandemic was delayed by various government interventions. This compares to five insolvencies in Q2.
The food service sector was harder hit with 31 restaurant and café insolvencies in Q3 (versus six in Q2). This included big names, such as Byron Hamburgers, and ASK and Zizzi owner, Azzurri Restaurants since acquired out of administration.
Pressure on the hospitality sector will increase further with secondary lockdowns and the easing of government aid, and there will likely be a knock-on effect on its suppliers in future quarters.
Spotlight on private equity
Private equity and venture capital interest in F&B remained buoyant in Q3, accounting for 11 out of 34 deals (32% up from 30% in Q2). It was still depressed compared to Q1, which was an exceptional quarter for PE activity.
Deal value rebounded to £319.7 million after a very low Q2 2020 (£41.2 million), also comparing favourably with Q3 2019’s £403.2 million.
As we saw last quarter, there was an appetite for coronavirus-proof trends, such as health and wellness. Example deals included bd-capital’s acquisition of probiotics manufacturer Symprove, and US private equity investor Peak Rock Capital’s acquisition of Welsh cereal bar manufacturer Halo Foods, both for undisclosed sums.
Q3 activity was more skewed towards domestic investment this quarter, with 64% of acquisitions being made by UK and Irish companies acquiring local entities, compared to the previous quarters, which tended to be in the region of 50-58%.
From an acquisition perspective, only 11% of deals involved overseas companies investing in the UK or Ireland compared to 26% last quarter. This not only reflects the uncertainty that coronavirus has caused, but also the overhang of Brexit.
Key international deals that did take place included Kellogg Co’s minority investment in Mr Lee’s Noodles and Döhler Venture’s minority investment in RE:NOURISH Soups.
Conversely, the level of UK/Irish investment in overseas ventures remained robust at 25% of the total activity for Q3 2020.
Q3 2020 sector spotlight
Even before a global health crisis, the good-for-you trend had strong momentum. In Q3, it hit full tilt, accounting for the majority of deal volume. There was activity in healthy snacking, healthy children’s food, healthy (low) alcohol, and even healthy pet food.
Q3 served up a platter of deals in the healthy eating sector. Subcategories ranged from snacking and free-from food to flavoured hydration sachets (Liquid I.V.).
Notable deals included a £24-million minority investment in Meatless Farm from existing and new investors, and a £3.5-million investment in vegan protein brand THIS via crowdfunding site Seedrs. Interest in meal kit subscriptions continued with a £200,000 seed investment in Planty from Veg Capital.
The interest in healthy eating extended family-wide with two deals in children’s food.
UK healthy frozen meals manufacturer Kiddyum was acquired from administration by potato supplier Albert Bartlett, and organic baby food company Mamamade raised £300,000 in seed funding from a group of investors.
With the novelty of lockdown cocktail hour, or the daily ‘Furlough Merlot’ wearing off, investors saw an opportunity in better-for-you alcoholic drinks.
Low-alcohol brand Clean Liquor (43% owned by Spencer Matthews) and alcohol-free beer and cider producer Drynks Unlimited both received minority investments. Meanwhile, Modern Contradiction, whose Something and Nothing seltzers promise 'no nasties', raised over £0.5 million through crowdfunding.
That said, Q3 deal value was driven by the hard stuff, such as Diageo’s purchase of Aviation Gin, Davos Brands and Rhineland Distillers. Jiangxiaobai Liquor Co also raised £227.8 million from a group of investors.
As the nation’s pet-owning population rocketed over lockdown, so did investor interest in healthy pet food. IK Investment Partners acquired natural pet food brand, Forthglade, which followed Nestlé Purina’s acquisition of Lily’s Kitchen in Q2 and Mobeus’s Q1 investment in Bella & Duke.
As the impact of coronavirus overhauls almost every area of our daily lives, it will continue to transform how investors approach F&B:
Where we invest
In our last report, we noted the overnight change in consumer habits as the nation locked down. However, as restrictions relaxed in Q3, except for initial stockpiling of items like dried pasta, most of the consumer habits evidenced were an acceleration of previously predicted medium- to long-term trends.
The switch to online buying will likely become a permanent one as is supported by Tesco’s decision to permanently employ 16,000 staff to fulfil a surge in online grocery orders.
As well as responding to change, investors are seeking stability in long-term trends, such as healthy eating and drinking (detailed above). Companies that can combine these with the shopping habits of the post-coronavirus consumer will be attractive targets, as shown in the Q3 minority investments in meal-kit delivery companies Planty and Bakedin.
It would be naive to say that distressed M&A activity will remain at its current low as the impact of restaurant closures filters through. With furlough ending and unemployment set to rise, the hospitality sector faces the perfect storm of temporary closures, reduced capacity and a nationwide curtailing of disposable income. This will, no doubt, result in a shake-up, or at least a repositioning of its suppliers.
How we invest
Q3 has seen a trend for minority stakes in small, innovative companies, rather than full acquisitions.
Although a healthy number of deals are completing, they are taking longer than in previous times. This is due to practicalities, such as the difficulty in arranging face-to-face meetings and disrupted air travel, but also an added layer of uncertainty.
It is difficult to establish the impact of the pandemic on current and future trading, especially if you throw in temporary economic measures such as the ‘eat out to help out' scheme. More structure, such as earn-outs and retained shareholdings, is being built into deals to hedge against this.
It is also worth noting that the possibility of a no-deal Brexit and a potential increase in capital gains tax to pay for the furlough scheme has, in turn, increased many owner-managers’ appetite to sell. This will be a key driver of deal volume in the coming months.
Whether we invest
In addition to the uncertainty caused by the pandemic, a lack of clarity on whether there will be an exit deal with the EU has continued to act as a handbrake on activity in the sector.
The potential disruption caused by a no-deal Brexit and subsequent tariff arrangements would have a large effect on most parts of the sector in the UK. At the time of writing, the government has told the EU to prepare for a no-deal, but until a firm decision is made, investors will continue to be cautious.
A resilient sector
The F&B sector in the UK as a whole has shown incredible levels of resilience through this most difficult period and is still seen as a safe area in which to invest. While investors will continue to be cautious, businesses that are aligned with accelerating long-term trends will continue to be targeted.
Other transactions will continue to be driven by the need of the sector to consolidate and reflect the changing landscape.
For more information about the current and future state of the F&B sector, get in touch with Trefor Griffith.
1 All deal activity is based on the 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.
1 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 financial arrangements and/or as further detail is released by the acquirer.
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