Consolidation in the food industry shifts down several gears as the global credit crisis cuts into financing opportunities for merger and acquisition activity and cash-rich firms with strong balance sheets sit and wait.
"Today it is very, very difficult to borrow money in the debt-market, it has all but dried up," says Peter Seary, a corporate partner at Shoosmiths solicitors that specialises in M&A in the food sector.
The massive billion-euro deals, such as Mars' €15bn acquisition of chewing gum concern Wrigley earlier this year and the joint purchase of United Biscuits for €2.4bn by private equity houses Blackstone and PAI, have disappeared with banks hit hard by the credit crisis no longer in a position to back the loans.
Since April this year the Bank of England estimates €3 900bn has been made available by governments and central banks to bail out the world's banks. This is equivalent to about a sixth of the total annual economic output of the entire world.
And while in June this year FoodNavigator.com predicted that mid-market transactions - €25m to €60m - would remain buoyant, the picture has since changed.
"A lot of deals are being pulled across the board," Seary explains to FoodNavigator.com. Not only is it difficult to borrow to finance the deals, but crucially, trade players are hanging onto their cash to ensure they are in a strong position and "to wait and see how the market develops".
If a company is put on the market today, there is a real uncertainty relating to its profit streams. Potential buyers will wait until they feel the market has reached the bottom and will chase a reduced price.
"Even the mid-size transactions are impacted. Consolidation will slow down into 2009, and possibly later," comments Seary.
And further compounding the slow-down of acquisition activity, strong food manufacturers are picking up new business without necessarily acquiring.
"The retailers are turning to the stronger elements in the food supply chain," says Seary.
Private equity food deals
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.
But in terms of private equity, the highly leveraged, very large private equity deals can only come back when private equity can again syndicate their funds. 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. Today this option has all but dried up.
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.