Food and Beverage focus
What are the key trends driving dealflow in the Food & Beverage (F&B) space in the Europe and elsewhere?
Dealflow in the food and beverage (F&B) sectors certainly continues to be robust, with 283 deals closing in the year to April 2019, and what we’re witnessing is a continuation of the trend that has seen the sector driven by increasingly demanding and discerning consumers – especially among the ‘Generation-Z’ customers: health and wellbeing and snacking, combined with the demand for bold and exotic flavours are increasingly at the forefront for consumer food preferences.
More importantly people have a growing interest not only in what the product is, but how it is produced and by whom; provenance is king. And this is rapidly undermining the importance of the big F&B brands as consumers gravitate towards small to medium-sized ‘niche’ providers.
Of course, these themes are having an impact on the M&A market. To begin with the more established brands have been quick to pick up on the consumer shifts and are looking for quick wins via strategic acquisitions which expand their reach in geographical terms and establish a foothold outside of their core businesses. Examples include Hershey, which acquired Amplify Snack Brands to become a broader snacking company as opposed to just a chocolate company, and Amazon, which acquired Whole Foods as part of a strategic plan to expand market reach to physical retail stores. A local presence is increasingly becoming an essential factor for success because of market penetration, as proximity to the customer helps to better understand their needs.
There is a lot of private equity interest in this sector also. Typically, PE investments are strategic – they tend to buy companies at different links in the supply chain and integrate.
An especially noteworthy consumer-driven trend is the overall reduction in sugar intake, which has become a serious threat to many F&B businesses, including the carbonated soft drink manufacturers. In attempt to stay relevant, Market leaders Coca Cola and PepsiCo have expanded their horizons within the beverages category to retain market share, leading to business expansions and multiple acquisitions into juices, energy drinks, tea, coffee, bottled water and snacks.
Increasingly demanding and discerning consumers – especially among the ‘Generation-Z’ customers.
How are these trends impacting the prices commanded by assets in the sector?
High levels of consolidation could potentially drive down prices, as companies adjust to maintain competitiveness and market share. Consolidation in the supply chain will also lead to more timely delivery of food products, reduced wastage and create higher economies of scale. Consolidation in the retail sector and the rapid entry of new players is also intensifying competition, which could further erode margins in the sector as a whole, though there will be niche areas that remain buoyant.
From a sub-sector perspective, where are the ‘hot spots’ in terms of premium multiples?
Companies in the Better-For-You, Dairy and Confectionery/Snacks segments commanded the highest median EBITDA multiples driven by product premiumization and the introduction of new flavours and healthy ingredients. Better-For-You products continue to benefit from younger generations’ focus on health, as they constitute a growing portion of the overall demand, with median multiples increasing, according to industry research.
Strong strategic corporate activity and product innovation in the Non-Alcoholic Beverages sector has also supported higher median multiples, leading to a 15.0x median for the sub-sector as of March 31, 2019. What’s more, large businesses in this market are beginning to acquire companies in the cannabis space in anticipation of national legalization in the United States, following the precedent set by Canada last year.
To what extent are economic and political headwinds having an effect on the sector?
On the plus side it appears that Brexit has not impacted M&A in the F&B sector in the way many had initially feared. Deal volumes since 2015 have been the highest in the preceding 10-year period, and almost double the level seen in 2009. Part of this is down to overseas companies engaging in M&A to establish or strengthen a UK footprint prior to the UK’s exit from the EU. On the flip side we have noted a pick-up in outbound M&A as UK F&B companies seek to increase their routes to market, alongside developing export channels.
However, in 2018, valuations reached their highest level in more than a decade. This, as well as concerns about slowing economic growth and increased scepticism about mega-mergers driven mainly by synergy opportunities, is serving as a headwind to deal making.
Other marketplace uncertainties include rising labour costs, and the tightening labour market. Consumers will absorb only so much of the cost and so companies will have to look to new, innovative solutions to help control their costs and still grow. The Chinese tariffs are also creating excess supplies and driving down other prices.
Nevertheless, while these headwinds may have caused some strategic agendas to be postponed, in other instances it will have served as a catalyst for M&A, whether to diversify or to safeguard. So, on balance our view is that acquisition interest remains robust – especially for innovative companies in the ‘better-for-you’, plant-based, snacking and other on-trend categories.