David Pattison, senior analyst at Plimsoll, said that there is a group of ‘wounded animal’ companies in the market place which have a “long and distinguished history, yet their recent performance has deteriorated”. He suggested that such companies, undervalued but which, with hard work could be turned around, could be ideal for firms looking to grow through acquisitions. For those with the necessary courage and capital, the downturn could represent “one of the biggest opportunities in a generation”.
Although Pattison’s view is focused on the UK food manufacturing landscape, it echoes the expressed strategy of Israeli flavour and speciality ingredient firm Frutarom. In 2007 Frutarom made no fewer than seven acquisitions, and following integration into its operations has reported an increase in sales of 25 per cent to US$474.3m in 2008, and a 34.8 per cent in annual gross profit to bring home $176.3m.
CEO Ori Yehudai said in 2008 that he expected the economic crisis to yield more rich pickings for his company, which entered the period of economic instability as a “global, stronger-than-ever company, with a solid capital structure, experienced global management and varied and diversified customer base”.
He reiterated the strategy last week, saying that the company plans to carry on acquiring companies, and it has the backing of financial institutions to help it do so. So far in 2009 Frutarom has made two acquisitions – UK flavour firm Oxford, and US firm Flavor Specialties – although these were both private firms so their performance in the downturn is not disclosed.
Moreover, Yehudai expressed confidence that the food industry will show relatively little sensitivity to the downturn. “We are partners in the creation process of essential products, which answer the basic human needs of consumer around the world,” he said. “Such needs do not vanish in times of economic crisis.”
Despite the CEO’s confidence, Frutarom has seen some effects of the downturn – and Yehudai said his management team is “wisely and determinedly preparing for and coping with the effects of the economic crisis”.
For instance, it adjusted its selling prices in 2008 to account for higher raw material costs. And in Q4 there was a “considerable trend” among customers all around the world of reducing inventory levels, thus holding back sales.
Frutarom does not break out sales from newly acquired companies from its overall sales, as integration is often well progressed by reporting season. But in addition to the contribution from the companies acquired in 2007, the Israeli firm said it has seen organic sales growth in both the flavour and the fine ingredients divisions, and that cross selling opportunities also yield growth opportunities.
In 2008 the currency trends also played out in Frutarom’s favour, since it reports in US dollars and, with the exception of Q4, the European currencies and the Israeli shekel were strong against the dollar.