Deal makers – advisers on how food M&A could take shape in 2022
Simon Harvey speaks to four M&A advisers on the outlook for deal-making in the food industry in 2022.
Perhaps unsurprisingly, 2021 was a busy year for M&A in the packaged-food industry following the uncertainties the previous year wrought by the pandemic. Covid-19 is expected to continue to play a part in the coming 12 months but with more optimism around the roll-out of vaccines globally.
However, there are elements of risk from rising input costs and inflation, and the prospect of higher interest rates, especially in the more developed economies, which are also facing constraints around logistics, supply chains and labour.
According to deal makers in the food industry, familiar categories are likely to stand out again – plant-based, especially meat replacements, better-for-you products and pet food, an area considered hot this year and for the next 12 months.
Shaun Browne, Houlihan Lokey
I think pet food continues to be super hot. Pet food is a very active arena and there’s no sign of that slowing down. I will be intrigued to see what happens there. If you look at some of the data on pet ownership as a result of lockdowns, it’s shot through the roof but what will happen if people end up going back to work full-time?
The plant-based trend shows no signs of abating and there are still plenty of people who want to get into it. Lots of interest and no doubt there will be further opportunities and deals coming on as well.
Houlihan Lokey advised on sale of UK vegan-food business Gosh Food to Portugal’s Sonae this year
I think plant-based meat will continue to attract a lot of interest. If veganism, vegetarianism, anti-meat, ESG, call it what you will, continue to gather momentum we need to have that bet covered. We’ve certainly seen plenty of meat companies who've expressed interest in going into meat alternatives.
I don’t think the seafood-alternative market is anything like as exciting as the meat-alternative market. I don’t think consumers believe that seafood has the same health or ESG connotations as meat. More and more consumers now realise red meat should be eaten in moderation because it’s not that good for you, whereas most think seafood should be eaten in copious quantities because it’s very healthy and good for you. I think for ethical, cost and health reasons, people are moving away from meat at a faster speed than they're moving away from seafood.
We’ve done a number of deals in the personalised nutrition arena, which is quite an interesting area, and I think we’ll see more in that space and more in the meat-alternatives and dairy-alternatives space.
The other area which I think is quite exciting and is already starting to play a role – and will play an increased role – is ESG. It’s impacting M&A because the brand owners are coming up with products the consumers want, particularly the younger generation because they see them as being more environmentally-friendly and sustainable brands than existing brands.
M&A activity in the food space in calendar 2021 has been very strong. There’s been lots of activity and valuations have continued to rise. That’s driven by low interest rates throughout the year and the massive availability of funds from the private-equity community.
Without any doubt, interest rates going up will adversely impact private equity’s ability to pay top dollar. There’s a lot of consumer initial public offerings that are not getting done at the moment. And that’s telling you institutional investors are getting a little bit concerned about the prospects for consumer spending.
Andreas Kulcsar, DC Advisory
There are still plenty of very keen investors. Some have lost out on assets in the food space and are keen to participate. Companies more exposed to the foodservice sector originally thinking of coming to market in 2021 have delayed that for next year. As foodservice across the world opens up more fully, I think those guys will trade back in a very strong fashion.
It will be tricky for the ones that are on the cusp and not so much for the market leader. For less distinguished and less differentiated assets, where the sellers decide to sell, the financing environment will be a little bit more difficult. That obviously impacts the financial sponsors that are looking at those companies and their respective valuations. I think corporates will have less of an issue.
DC Advisory worked on Alantra Private Equity’s investment in Spain-based olives supplier Agolives (Picture credit: Nat Aggiato from Pixabay)
Companies with a clear strategy and those that have shown they are either leading in a category that is well-established, or in a more nascent category where they are clear market leaders, shown in the top-line and in the margin profile that they run a very sustainable and successful model, I think they will still come out with strong valuations and will be hotly contested in an auction process.
In Europe, for example, in the ready-meals space, there are four, five, six decent-sized players where they could be further consolidated. It’s important to look at the businesses in how they coped with 2020 and what they’re planning to do this year and next year. If they’re owned by a financial sponsor, whether it’s worth bringing them to market on revised numbers for next year, or wait until there’s more clarity on, for example, logistics costs and how they will come down to a more pandemic-free level again.
One of the hottest areas has been pet food, not just in the UK but across the world. I think that will be one of the hot factors going forward. There’s been quite a bit of [pet food] investment from private equities but also from trade over the last two years. You still see new companies popping up and others that have had VC investment and are interesting to private-equity firms and also more established corporates. I think there will be more consolidation in the space. What will be interesting as a result of increased pet ownership during the pandemic is what sort of services businesses will come around that.
You also have other more traditional food segments that will be interesting, bakery or confectionery and other food staples such as seafood. I think there’s going to be a mix of more food staple companies, but also the more nascent categories, fast-growing companies, meat replacement, and any kind of meat alternatives that will continue to be a hot topic. Another area that was in the limelight this year and last is the vitamins and supplements market. There have been a few transactions on both sides of the Atlantic over the last 24 months and there will be more to come.
In the UK and Europe as a whole, there’s going to be plenty of activity and in the US as well, because there’s so much investment from some large trade and private equity that are looking at both established businesses and more nascent consumer-facing businesses. Then you’ve also got some of the large Japanese and other Asian conglomerates looking to diversify outside of their home markets. The US just because of the size and the investment opportunities there and the growth opportunities.
There are some uncertainties but, on the other hand, demand still really outstrips supply of assets
Jeroen van den Heuvel – Oppenheimer & Co.
The market was more active than I had expected it to be [coming out of Covid]. It turned out there was really loads of activity. I’m expecting a similar level of activity but I think there is a little bit more risk creeping into the market.
There are some uncertainties but, on the other hand, demand still really outstrips supply of assets. There’s very healthy demand from trade buyers and private equity. Because of that strong demand, but a little bit higher risk, I still think the market will be more or less the same as in 2021.
An owner of a company, whether it’s a trade buyer or private equity that wants to sell an asset or subsidiary in Q1 next year or Q2, will want to know: can I pass on the price increases to my customers? Those discussions are actually taking place now but it’s easier if everybody is passing on these price increases. Private equity needs to make investments and money is still cheap, and also for trade buyers.
I don’t think there will be a lot of change in categories from this year or last year. In plant based, I think there will be as much demand and interest next year as we had this year.
Anything related to pet is super hot. If you own an asset in pet, you’re very fortunate because there is enormous demand. We are working on a few mandates and I also know from competitors they have a lot of mandates. There’s tremendous interest both from trade and private equity. As well as more people buying pets during Covid, there is also the ageing population, a very strong driver.
I don't think plant-based dairy next year will be bigger than meat-free. There are companies emerging and there’s demand in these companies at a really significantly higher level than this year or last year.
We had a really good year but our pipeline is quite promising. I think next year will be a little bit better than this year.
Mike Burgmaier, Whipstitch Capital
I’ve been surprised at the level of activity. It's incredibly strong right now. We’re definitely going to have our biggest year ever in terms of the number of deals and there’s going to be a massive amount of activity between now and the end of the year. We’ve got a lot of deals teed up to go out in January and February.
Around two months ago, I was a little bit concerned there were so many deals happening
in the marketplace this year that there could be a slowdown next year. But, based on the influx of potential deals and companies that we've signed up to sell for next year, I don't think there will be a slowdown.
A lot of companies recognised that, if they had an increase in sales due to Covid, it was very difficult to measure true growth. So instead of looking at a one-year growth rate, a lot of strategics are looking over two years.
The private equity world in Q4 2021 is probably about the busiest I've seen
M&A for better-for-you in general will continue, there's no doubt about it. If you look at the data over the complete time period of Covid, the better-for-you and healthier products and emerging brands have taken more share and grown faster than the legacy brands, and that's going to continue.
Grass-fed meat is incredibly strong and grass-fed meat is much larger than a lot of these alternative plant-based proteins. And we’re seeing some good growth there as well.
Ethnic brands that have true authenticity and can play across multiple ethnicities of food are also in demand from the strategics. Authentic brands that have reached scale that are focused on low- and no-sugar, we’re seeing incredible demand and growth in those brands.
A lot of strategics also took the time to clean up their portfolios. They shut down some smaller brands that weren't performing, they sold some other brands that didn't quite fit but, now they’ve done that assessment of where their portfolios are, they're looking to fill those holes.
I think private equity is going to be incredibly active. The private equity world in Q4 2021 is probably about the busiest I've seen. For the past four to six weeks, there are even a large number of firms who have said they’re done for the year because they have all they can handle in terms of deals they're trying to close or deals they're looking at. That’s a strong signal because there are probably several deals where obviously there's multiple private-equity firms competing for that deal.