The latest UK Food and Beverage Sector M&A report from corporate finance house Oghma Partners found that the first four months of 2023 had seen an increase in the volume of deals (33 transactions) compared to the same period in the prior year (up 17.9%).
While deal value had increased by 60.3% (circa £450m), excluding the Glanbia Cheese transaction (enterprise value of £304.6m) deal value actually declined.
More than 80% of deals had an estimated value of £10m or less, a figure Oghma attributed to a significant absence of middle to higher market deals during the period. Only 6% of transactions were above the £50m mark, falling below the five-year historic average of 12.5%.
Overseas buyers were responsible for 21.2% of the reported period’s deals, down from 25$ in 2022. The number of deals with a financial buyer also decreased to 15.2%, with the shortfall made up by an increase in UK-based corporate buyers – just over 60%.
Mark Lynch, partner at Oghma Partners, said this year’s opening tertial had highlighted the resilient and defensive characteristics of the food and beverage M&A sector, with T1 deal volume at its highest level since 2017 – despite relentless market challenges.
However, the continued low value of deals – especially compared to the historic average – signalled the major impact the persistent macroeconomic headwinds have had on the industry.
“Inflation remains stubbornly high forcing further interest rate hikes and increasing the cost of debt, a cost-of-living crisis has reduced consumer spending, geopolitical tensions have increased market uncertainty and supply chain issues have piled more pressure on the industry,” he explained. “These factors have manufactured a significantly less favourable environment for larger transactions with 81.8% of deals having an estimated enterprise value of less than £10.0m.
‘Distressed M&A activity’
“The increase in deal volume and low value deals can also be explained by a surge in distressed M&A activity with 12.1% of T1 deals being an acquisition out of administration. The amalgamation of a challenging macroeconomic climate and a Covid hangover has resulted in food manufacturing insolvencies rocketing by 250.0%.”
This has sparked M&A opportunity, with acquirors snapping up distressed assets and benefitting from synergies at lower, ‘dislocated’ prices. Lynch noted that many such deals were in the seafood space, highlighting both The Big Prawn Co’s and trout farmer Dawnfresh Farming’s acquisitions out of administration by Sykes Seafood and Mowi Scotland respectively.
“Bolt-on acquisitions were a common theme in these opening months, both corporate and private equity buyers focused their strategy on smaller deals,” Lynch added. “The proportion of UK corporate acquirors augmented by circa 10.0% with many looking to consolidate their market position.
“Financial buyers declined by c. 5.0% and were glued to a lower price range as they pursued smaller options to bolt-on value to their existing portfolio companies ahead of a potential recovery in value after inflation and interest rates eventually plateau.”
Looking forward, Oghma predicted that deal value would show a sustained recovery, with carve-outs, the partial divestiture of a business unit in which a parent company sells a minority interest of a subsidiary to outside investors, forecast to be an increasingly common divestment option.
Examples in recent years include 2 Sisters’ sale of its Holland Pies and Portumna pastry businesses at the end of 2022, and Kerry Group’s plans to sell the trade and assets of its Sweet Ingredients Portfolio to IRCA for a consideration of €500m at the start of 2023.
“Moreover, despite the turbulent market conditions, there remains plenty of room for M&A optimism, especially as an increased volume of corporate acquisitions highlights that strategic acquisitions remain a high priority,” Lynch concluded.
“Furthermore, given the greater transparency surrounding genuine financial performance as earnings are no longer distorted by Covid-19 and as inflationary cost pressures abate, this could also lead to greater M&A activity and potentially the reduced use of contingent earnout structures as acquirors have greater confidence and certainty over deals.”