Private equity spies opportunities in small consolidators

By Jess Halliday

- Last updated on GMT

Related tags Private equity Investment

Consolidation in the food sector during the recession is throwing up opportunities for private equity to invest in smaller companies – if they have a unique product and a diverse customer base.

During the recession big retailers are extending the amount of credit required from their suppliers, which puts small companies under financial pressure. With banks unwilling to extend more credit to them in turn, this makes struggling suppliers a target for acquisition.

Bob Henry, a partner at Matrix Private Equity Partners, told that these acquirers, who are driving consolidation in the market, are attractive targets for private equity investment. “We’re talking about deals up to £20m,”​ he said.

Henry explained that there are ready-made opportunities for cost savings as recently acquired businesses are integrated, and more products can be pushed through the same distribution channel.

There is a need for just one sales manager who can deal with both apples and pears, for example, and one transport director instead of two.

But the private equity is often seen as being all about job cuts and asset stripping – when in fact the opposite is the case, he said. By bringing in a professional focus and identifying the products that work best for a company, it speeds growth in the space of three to four years. Turnover of a moribund business in need of a refocus can increase four-fold in the time it is in a private equity firm’s hands.

But when investing, private equity firms have to make sure the deal dynamics are right.

“There is some hesitation about investing in SME’s whose main customer is a supermarket because of their market presence and power – but many small suppliers do make a reasonable return if they have a diverse customer base with a big retailer underpinning some volume,”​ said Henry.

Two big questions to ask are: “Who are your customers – and is your product special enough?”

Smaller companies do tend to be innovative, but it is a challenge to build a brand or other form of competitive advantage. In particular private label is a looming threat, as retailers' own brands are going head-to-head in competition with branded goods – and private label is becoming increasingly diverse. For instance, a supermarket may now offer parallel products in a fair trade range, a luxury range, an economy range…

Sectors of interest

Henry said that the sectors of interest are currently value and indulgence.

“Value for obvious reasons – indulgence because no matter what people say they will or do eat, they eat a lot of very nice things that aren’t actually healthy!”

The healthy, free-from and fair trade sectors are also interesting, but growth has tailed off recently.

He noted an interesting recent deal in the frozen foods sector, which traditionally has not been very fashionable: the management buy-out of TSC Foods, a maker of chilled and frozen soups and sauces, by Key Capital Partners.

“Generally frozen food is making a come-back,”​ he said, citing reduced waste and nutrition benefits as reasons. “It will be interesting to see if this generates increased investment activity.”

Getting out

As for exiting a company once private equity’s turnaround work is done, Henry said the present climate means a firm would probably not sell to a big company. Big food and drink groups are likely to be more interested in divesting at the moment, after taking stock of what they have bought betweeen 2004 and 2007.

But he said: “As in all M&A, a high quality business with high potential can be sold. If it is a real niche business, you will always find a buyer for it.”

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