Ethical sourcing boosts M&A activity in food sector
year, boosted by increased activity at the top end of the market
and the growing influence of ethical sourcing, according to
The consumer products corporate finance team disclosed that the value of deals increased by 44 per cent to € 10.5bn, compared to euro; 7.3bn in 2004.
The number of deals was also up 11 per cent to 350, compared to 315 in 2004.
And interestingly, the report pinpointed ethical supply chain management as a growing issue in food sector M&A, with consumer demand for ethically sourced products continually rising.
PricewaterhouseCoopers highlighted recent transactions such as Cadbury Schweppes' acquisition of the Green & Blacks chocolate brand. The accountancy firm said that retailers were now acutely sensitive to shifting consumer ethical attitudes, such as the trend for luxury brands with a built-in ethical component, like organic or Fairtrade ingredients.
As a result, they are increasingly seeking to minimise unprecedented social, ethical and environmental risk in their complex supply chains.
"Ethical sourcing is now a factor in M&A," said Neil Sutton, head of the consumer products corporate finance team at PricewaterhouseCoopers.
"High-profile adverse publicity can have a major impact on brand value."
While the number of UK deals in the European food sector as a whole increased slightly last year to 59 from 56 in 2004, Scandinavia saw the most conspicuous rise in deals, with 23 more food sector transactions in 2005, including a run of deals in the rapidly consolidating fish and seafood sector.
Eastern Europe emerges
Food industry deals in Central and Eastern Europe (CEE) increased from 43 in 2004 to 59 last year, mainly due to 15 taking place in Serbia and Montenegro, where none were recorded in 2004. This activity illustrates the growing stability of these less-developed areas of the CEE region and the quest by Western companies for less expensive sources of labour near the large European Union market.
Private equity investment
Private equity investors continued food sector acquisitions, buying 68 companies last year in deals worth a total of € 2.0bn. This compares with 57, totalling € 2.6bn, in 2004. Private equity firms exited from 25 food companies last year (compared with 27 in 2004), with realisations of particular interest including the Initial Public Offering of RHM, Montagu Private Equitys sale of Marlow Foods and the divestment of the Noon Group by Bridgepoint Capital.
While the European food sector generally remains attractive to private equity houses, the volume of unquoted investments in the UK by private equity firms declined last year to seven deals from 11 in 2004. PricewaterhouseCoopers said that this reflects not a reduced appetite by private equity firms but rather a resurgence in the importance of corporate buyers in the sector: the auction of HP Foods attracted a broad spread of well-qualified trade interest.
And while the mature UK food market remains highly competitive, with Golden Wonders administration highlighting the markets challenges, private equity companies continue to be attracted by the chilled food sector, as well as iconic brands and secure niches such as 'functional', 'organic' or 'healthy eating'. An example of this is the acquisition of Orchard House, the UK cut fruit, smoothie and desserts business, by privately-backed Wellness Foods.
"Food M&A continues to be driven remorselessly by retailer pressure, rising energy and raw material costs, regulatory and consumer demands and cheaper imported goods," said Sutton.
"M&A this year will be concentrated in some of the fragmented sub-sectors: freshly prepared fruit, salads and vegetables; poultry; and sugar and chocolate confectionery. Cross-border deals remain driven by companies looking further afield to achieve economies of scale and to position themselves to access rapidly the emerging consumer markets - notably Asia-Pacific and Central and Eastern Europe."
2006 has already started well, indicating a positive outlook for deal flow during the rest of the year, with the acquisition of Orangina SA by Blackstone Group and Lion Capital; the disposal of Heinzs European seafood business to Lehman Brothers Merchant Banking; the sale by BC Partners of Galbani, Italys largest cheese maker, to the French dairy group Lactalis, and CapVests acquisition of Findus, the Swedish frozen food manufacturer, from EQT Partners.
Spain remains the hot target destination for private equity houses. No fewer than 15 Spanish food businesses were bought by private equity houses last year (compared with nine in 2004). Benelux also remained active with nine private equity-related deals (there were 11 in 2004), bolstered by the acquisition by NPM Capital in the Netherlands of Premier Foods Dutch canned vegetable business Jonker Fris and Premier Foods BV, as well as Heinzs Hak brand of preserved vegetables.
The Corporate Finance teams within the member firms of PricewaterhouseCoopers International Limited have more than 800 corporate finance specialists in more than 60 offices in key centres throughout the world. In 2005, PricewaterhouseCoopers International Limited advised on over 350 M&A deals globally, valued at over $45 billion.