Private equity backed, billion-euro deals in the food sector are gone as the credit crunch impacts the landscape, but smaller transactions will remain and today's difficult climate will throw up acquisition opportunities for trade players with strong balance sheets.
The context for today's food business is tough: rising raw material costs, price inflation and energy costs are combining to put growing pressure on the margins for food and beverage firms.
And while a clear solution to ease margins is through passing costs on to customers, food firms are meeting with difficulties in this area.
For Peter Seary, a corporate partner at Shoosmiths solicitors, specialising in M&A in the food sector, these difficulties could translate as market openings for trade players and private equity.
"What we'll see is a lot of opportunity," he tells FoodNavigator.com. Firms unable to weather the storm will reach the market, and trade players, "in particular those which are long-standing and that have not borrowed too much" will see the market in their favour.
Indeed, in such a challenging market, the potential purchasers - private equity and/or trade - could expect a good deal based on "better prices and less competition", continued Seary.
The opening up of such opportunities will enable companies to grow through buy-and-build strategies with, additionally, the possibility to pick up the unwanted - and often undervalued - assets.
However, the massive billion euro deals, such as Mars' €15 billion acquisition of chewing gum concern Wrigley earlier this year and the joint purchase of United Biscuits for €2.4 billion by private equity houses Blackstone along with PAI are set to disappear in the short term with banks, following the credit crunch, no longer in a position to back the loans.
"The highly leveraged, very large private equity deals can only come back when private equity can again syndicate their funds," added Seary.
Many of the large private equity houses required a banking market that saw banks getting together to syndicate loans, allowing the houses to borrow 100s of millions of euros.
But since the US credit crunch, that the International Monetary Fund (IMF) forecasts could cost banks and other financial institutions around $1 trillion, this option has all dried up.
Robin Skelton, group food sector leader at Eversheds lawyers agrees: "Across all industries, I suspect that the very large deals, those reliant on large amounts of bank debt, will drop off," he told to FoodNavigator.com.
But the mid-market transactions - €25 million to €60 million - will remain buoyant. "Firms will still be active, and private equity, although increasingly risk averse, will fish for quality purchases. We are not seeing a turn-off in activity, quality is still at work," he added.
In 2007, the value of private equity investments, numbering sixty six, in European food and drink companies tipped more than €8.47bn, according to recent figures from Private Equity Insight. This actually represented a fall on 2006 and 2005 figures that saw deals pulling in €14.21bn and €10.53bn respectively. But interest is clear.
Frost and Sullivan noted in a recent report on consolidation that, while private equity firms accounted for about 13.8 per cent of overall deals in the food additives and ingredients market, from 2005 onwards, their relative share of acquisitions grew to 20.3 per cent of overall deals.
Although perceived as a mature industry, private equity firms are attracted to the sector for several reasons.
"First is the innovation imperative, with manufacturers and retailers seeking innovative products, from healthier and functional foods for the booming market for ready meals. Private equity investors are experts at matching innovative businesses with networks of suppliers, partners and customers, and this can create real value in the food and drink sector," says private equity investor 3i.
Second is the ongoing consolidation, that saw the number of inter European mergers and acquisitions rising in the past two years, and subsequently creating opportunities for bolt-on acquisitions.
"Third is the evolution of continental Europe's food market, which remains highly-fragmented. The take-up of convenience products, for example, is far below the levels seen in the UK or the US."
Historically, the bulk of private equity investment in the food and drink sector has been in the UK. But now the centre of gravity is shifting to the continent. In 2000, 80 per cent of the value of private equity deals in the sector was in the UK. In 2004, by contrast, 83 per cent of deals were in continental European countries, claims 3i, citing data from Initiative Europe.