Large global groups in the flavours, fragrances and ingredients sector are looking to take advantage of the strong fundamentals in the industry in order to make acquisitions which bring economies of scale, provide them with international expansion opportunities, or which reduce their internal costs. They are also keen to differentiate their own product offerings in order to compete more effectively with their peers. Equally, some large groups look to make acquisitions in order to mitigate the effects of their own lower rates of organic growth.
Ongoing corporate appetite for bolt-on acquisitions is also driven by the fact that there are strong margin enhancement opportunities in the sector, whilst acquisitive groups with strong balance sheets can make multiple acquisitions in order to satisfy their demand. The end result is that there is increasing competition for any acquisition targets which demonstrate strong innovation and access to growth markets, which in turn keeps valuations of businesses high.
The fragmented nature of the sector means that large groups have considerable opportunities to make acquisitions, although the modest rate at which targets become available means that it is a sellers’ market which allows vendors to be much more selective with regard to which potential buyers they interact with. The scarcity of high quality acquisition targets means that potential buyers can no longer benefit from finding uninformed vendors who might sell at a low price. The result is that valuations from both private equity and trade buyers are typically in the range of 8 to 10 times earnings before interest, tax, depreciation and amortisation (EBITDA), and sometimes even higher.