Figures from M&A specialists Grant Thornton point to a near-30% decrease in UK mergers and acquisitions at the start of 2018. According to the group’s latest food and beverage insight report, 36 deals took place in the food and beverage sector in the first quarter, a 28% drop compared to the previous quarter.
Total disclosed deal values were also down due to a lack of “mega-mergers” comparable to the £6bn sale of Unilever’s spreads business, registered at the end of last year. “The first quarter of 2018 marks the lowest total disclosed deal value in comparison to the past six quarters,” Grant Thornton noted.
Oghma Partners deal tracking data confirmed depressed deal numbers this year. The advisory group described activity levels in the first four months of 2018 as “sedate” and noted that the majority of deals took place at the “smaller end of the value scale”.
Brexit confusion confounds
Grant Thornton suggested that “increasing interest” in British businesses from international operators is an “ongoing trend in this sector”, with the majority of overseas buyers coming from the US and Europe. However, the group noted a “slight dip in activity” from international players, which accounted for 42% of deals completed in this year’s period, compared to 49% previously.
The advisory group's food and beverage analyst Trevor Griffiths linked the overall slowdown to the “uncertainty around Brexit” that, he said, “continues to present challenges”.
However, Griffiths continued, Brexit can also be viewed as an opportunity for the sector. “Despite the continued lack of clarity in the market, there are steps food and beverage businesses can take to ensure they are properly prepared for a wide variety of Brexit scenarios. Businesses should be focusing on insulating their balance sheet, assessing the impact on their supply chain and reviewing their international growth strategy.
“From optimising processes to investigating new and existing markets, Brexit needn’t be the ogre it is often portrayed as. In fact, if approached correctly, there are significant growth opportunities for F&B companies going forward.”
The UK M&A advisory business of Alantra said that acquisitions are often an important part of Brexit planning for the F&B industry.
“Establishing a UK footprint or investing in a trusted UK food and drink brand is being viewed as a way to ward off potential tariffs that could be imposed on EU imports for trade. For private equity and private owners, healthy businesses in the sector are now being seen as strong bets for continued growth despite Britain’s impending departure from the EU,” Alantra suggested.
In contrast, Mark Lynch, partner at Oghma Partners, sees other factors at play. “One thing I would say is that with debt costs looking to increase and various term loans coming up this appears to be putting pressure on some parties to find disposal solutions to reduce debt. In addition, long held private equity assets are taking advantage of improved trading and stronger exit multiples to exit. So basically nothing to do with Brexit,” he told FoodNavigator.
Appetite for ‘revolutionary brands’ is key
The fact that the majority of deals have been made at the lower-end of the valuation spectrum also suggests buyers are increasingly looking to snap up high-growth challenger brands. This appetite reflects the fragmentation of the UK grocery sector and the difficulties that larger brands are having in delivering growth.
“M&A interest in exciting and often revolutionary brands in the mid and lower ends of the market shows no sign of abating,” Oghma Partners noted.
Simon Peacock, director at the UK M&A advisory business of Alantra, highlighted nine key deals that took place in the first quarter. The majority of these – seven in total – involved strategic trade buyers, while two transactions were led by UK financial investors. Significantly, many of them were in faster growing niche areas of the F&B space.
This trend can be seen in the purchase of Meridian Foods owner 3V Group by Ireland’s SHS. “Meridian has grown rapidly in recent years on the back of the explosion of interest in nut butter. This is due to the product being seen as more of a protein snack than a traditional spread and its subsequent health conscious marketing,” Peacock noted.
Oghma Partners also flagged this aspect of the M&A environment. “From a food perspective the sale of 3V Natural Foods (owner of recognisable organic brands such as Meridian and Rocks) to SHS Group and, in the wider market, the sale of bespoke pet food offering Tailsco to Nestle both highlighted how a unique, well-managed (and ideally “healthy”) brand should attract interest from all sizes of buyer.
“The Nestle / Tailsco deal has echoes of one of 2017's most unexpected combinations – Unilever and Pukka. Reflecting the concerns that Pukka fans had with Unilever’s business model and the integrity of the Pukka brand. It remains to be seen hoe Nestle will run its new venture without losing the innate qualities which consumers hold so dear and indeed which made it so attractive as a target for Nestle in the first place.”