Although M&A in the food sector suffered alongside other industries during the recession, the market showed signs of recovery in 2011 and looks to be almost buoyant by comparison in 2012. This resurgence is being fuelled primarily by M&A deals at the top end of the market, driven by consolidation amongst the corporates such as Greencore and 2 Sisters as well as overseas buyers picking up larger assets with both Weetabix and Adelie going to international acquirers. Additionally, Private Equity are circling Iglo Birds Eye, Findus and Symingtons, as well as the non-core brands of Premier Foods. This supports the view amongst investors that the food sector is seen as a safe haven in difficult times.
Private Equity investors have long been attracted to the food sector although returns have been mixed e.g. Duke Street’s challenges with Adelie and Lion Capital’s well-publicised problems with over-leveraged Findus. Within the lower-to-mid-market, most of the M&A activity has been trade rather than PE driven, although this is likely to change as debt markets stabilise to some degree and alternative funding through ABL can be supported by the nature of the balance sheets in food businesses.
Other factors have combined to heighten interest in the food market. Raw material price fluctuations which have long been a driver of performance in the food market have remained relatively stable recently, with some – including wheat and meat – forecast to decrease in 2012. This trend, combined with the strong performance of Sterling against the Euro and the fact that companies are boasting stronger balance sheets, has led to an increase in confidence and a desire to invest.
There are a number of food sectors that will continue to consolidate, including the seafood sector, with others ripe for consolidation such as fresh produce and bakery products. These markets are currently fragmented with a significant amount of supply that would benefit from rationalisation.
Livingstone continues to monitor developments in the food sector and hosted a round table dinner debate focusing on the key issues facing this sector. The dinner was held in Bristol, chaired by Adam Leyland, editor of The Grocer. Update to follow.