Mergers and acquisitions (M&A) activity in the food sector could pick up in the second half of 2010 as confidence returns and vendors that have been sitting on assets in the hope that things will get better finally accept that valuations will not return to former peaks and decide to exit, according to corporate finance specialists.
While deal activity has been very sluggish over the last year and few experts believe things will return to 2007 levels, most predict the market will pick up again - in part because sellers fear increases in capital gains tax and want to sell up before they kick in.
Bob Henry, partner at Matrix Private Equity Partners, said there were three things that would drive M&A activity in food this year: continued financial distress (prompting further consolidation); a renewed drive on research and development and new product development among larger companies that could prompt them to buy smaller, more innovative companies with exciting ideas and concepts; and the desire of privately owned companies that have been sitting on their businesses for a couple of years to exit.
As to which businesses could change hands over the next 12 months, two names worth watching are United Biscuits (owned by PAI Group and Blackstone) and Birds Eye Iglo (owned by Permira), which have been in private equity hands since December 2006 and August 2006 respectively, which means their owners could be looking for an exit, according to analysts’ predictions.
It would also be interesting to see whether the former Northern Foods businesses [bread, chilled pastry and cakes businesses sold to Vision Capital in January 2007] came back into play this year, said Investec Securities food producer analyst Nicola Mallard.
Bob Henry predicted more action in fresh produce, which is still quite fragmented, and frozen food, which has become more sexy both from an environmental perspective (no waste) and an economic one (better value for money in straitened times).
Tangerine Confectionery is also understood to be on the look-out for acquisitions, while Gü is seeking additional financing.
Mark Lister, head of corporate finance for the north of England at business advisory firm PKF, predicted buyers for some more attractive UK assets could come from overseas: “We’ve had a few bits of intelligence that food manufacturers are looking to acquire in the UK.
“It’s hard to predict what will happen in 2010, but United Biscuits is one likely acquisition target for a trade player in the next few months.”
Other deal activity could also be ‘distress-driven’ in that banks that have extended a lifeline to certain companies over recent troubled months might decide that things were not going to get better and pull the plug before they lost any more money, noted Lister.
While private equity funds did not have the firepower that they once had, they still had money to spend, noted Grant Thornton (GT) corporate finance partner and head of GT’s food sector team Phil Jackson.