A ‘step-change’ in M&A: Private equity ‘wakes up’ to the opportunity in food ingredients
Reflecting on the mergers and acquisitions of ingredients companies in 2020, compared to 2019, reveals somewhat of a mixed bag.
This year, a total of 20 deals have taken place so far – down 11 compared to 2019’s figures. A majority of deals for both years (14 in 2019 and 10 in 2020) were sized between £1-10m. An impressive 13 in 2019 were priced between $10-50m, compared to just three of this size in 2020.
For Mark Lynch, partner at advisory group Oghma Partners, this deal tracking data show that there were perceptibly fewer deals this year, but final figures indicate ‘greater average deal size’.
If one excludes 2019’s IFF-DuPont deal – which saw DuPont Nutrition & Biosciences and International Flavors & Fragrances join forces to create a €40bn nutrition and flavour business – this year’s deal value is ‘actually up on last year’, Lynch told FoodNavigator. “So, it is a mixed picture.”
Of particular note, said Lynch, was growing interest in the ingredients sector from private equity funds – a trend he expects to continue into 2021.
A ‘step-change’ in activity
2020 saw at least two key private equity takeovers in the ingredients sector.
In January, private equity investor Ambienta completed its acquisition of French flavour house Nactis Flavours. In September, Dutch ingredients company Chr Hansen announced plans to sell its Natural Colors division to Swedish private equity firm EQT for €800m.
Oghma Partners was involved in an acquisition with a private equity tie: French savoury ingredients supplier Solina – a company majority owned by private equity company Ardian – purchased Bowman Ingredients in the springtime.
For Lynch, growing interest in the ingredients industry from private equity firms is noteworthy. “Historically, the industry has not been subject to too much action from private equity players, but the private equity purchase of Chr Hansen’s colours business was pretty interesting in that respect,” he told this publication.
“We’re beginning to see more interest from private equity. There are more funds looking at the sector…So that’s a bit of a step-change in activity.”
Such deals make Lynch believe private equity is ‘waking up’ to the opportunity in food ingredients and the stability of its cash flow.
In addition, the Oghma partner expects private equity firms are attracted by the valuations of quoted ingredients players. Some have EBITDA (earnings before interest, taxes, depreciation, and amortization) multiples in their 20s, he explained, “They’re pretty punchy.”
Lynch continued: “I think private equity funds see that they can buy businesses for anywhere between eight and 13 times EBITDA, and if they put a bunch of them together…[and] they’re lucky, they can sell them for 15-20 times EBITDA.”
Against a backdrop of ‘pretty stable demand’ and a ‘growing market’ in the right segments, it makes leveraging these sorts of businesses ‘relatively easy’, he said.
Predictions for 2021 and beyond
Across the board, food M&A was undoubtedly hit by the coronavirus pandemic this year.
Oghma Partners was involved in the sale of a foodservice business, for example, which was due to clear in early April. In the last week of March, the company’s turnover dropped dramatically, recalled Lynch, suspending the sale.
Another deal impacted by COVID-19 was the September divesture of Givaudan’s pectin business to Herbstreith & Fox (H&F Group). Oghma was also involved in this sale, which was delayed due to travel restrictions preventing the team from announcing the deal to its workforce.
“There will have been a dip at some point during the year just because of logistics,” Lynch told FoodNavigator. “I think people now have a workaround to those problems. That might have affected the overall performance of the year, and I would be surprised if there wasn’t an impact, but [these days] we are seeing fewer trading issues affecting it.”
Moving forward into 2021, Lynch predicts interest from private equity companies to continue. Without revealing too much, the advisor said Oghma is currently looking at a number of processes that has six to eight private equity firms interested.
Whether industry players will be able to match, or indeed beat, private equity offers is the big question. In any case, Lynch expects to see an ‘enhanced level’ of interest from private equity: These funds ‘have got plenty of liquidity’ and the sector is seeing ‘renewed interest’, he said.
Lynch also suggested we may see a ‘flurry’ of activity before the end of Q1 2021, although ‘how much, is difficult to say’. With the UK increasing debt levels amid the current second wave of coronavirus, the advisor said Chancellor of the Exchequer Rishi Sunak has an obvious ‘hole to fill’.
One way of achieving this could be to increase tax. “There is talk of the Government changing Capital Gains Tax in line with Income Tax. That could impact Entrepreneurs’ Relief. There will people thinking ‘I don’t want to pay a lot more tax’, so that would mean we would see a flurry of deals at the end of February/beginning of March. That’s a possibility.”
Concerning the frequency of ingredients transactions, Lynch predicts activity levels will ‘remain pretty consistent’.
Another area of note, the advisor continued, is food tech. “I’ve worked in the food industry for over 30 years and I don’t think we’ve ever seen this level of excitement about…reinventing the food wheel, growing meat in Petri dishes etc.
“I think we’ll continue to see fund raises and some more corporate related activity – maybe some IPOs. It’s an interesting phenomenon.”
