NEW YORK — While the past year was relatively lackluster for mergers and acquisitions in the food and beverage sector, the year ahead is expected to bring a rebound, said Anthony Valentino, deputy editor of Mergermarket, a mergers and acquisitions intelligence service.
“Last year wasn’t a bad year, by any means,” Mr. Valentino told Food Business News. “We had such a torrid pace the prior couple years, and I think people expected that run to continue, which was why it was so surprising.”
In 2016, there were about 600 food and beverage deals worth a total of $56.6 billion, according to a new report from Mergermarket. This compared to roughly the same number of deals totaling $119.3 billion in 2015, including the $54.5 billion mega-merger of Kraft Foods and H.J. Heinz Co.
“If you look at deal value, Kraft Heinz was massive,” Mr. Valentino said. “You’re naturally going to get that drop in value from 2015 to 2016 because that was a monster transaction. That was probably a once-every-25-years transaction. It’s pretty odd that you’re going to have another $55 billion tie-up driving deal value.
“From a value perspective, are we going to get back to 2015? No, it’s very likely that we won’t. But the expectations are that value and volume will pick up this year compared to last year.”
In an interview with Food Business News, Mr. Valentino shared his forecast for food and beverage M.&A. in 2017, including which aspects of the sector are of particular interest to acquirers and whether the new presidential administration will affect activity in the near term.
Food Business News: Why do you expect 2017 will be a rebound year for M.&A.?
Anthony Valentino: The enthusiasm from the M.&A. community has been pretty strong. That, coupled with the macro factors, it’s very difficult to imagine we won’t be rebounding a bit.
Even though last year was a down year, if you look at it compared to years prior … 2016 was still quite a bit of ahead of where 2009-2011 were. Broadly speaking, it was still a good year. It just happened to follow two years that were extremely good.
But there’s no cause for alarm here. Food and beverage M.&A. is still very attractive to investors, and that shows no signs of changing in the near term.
What factors are driving food and beverage M.&A.?
Mr. Valentino: You have a lot of cash sitting on the sidelines for a lot of the big food and beverage conglomerates. There is a lot of dry powder for private equity right now, and a lot of pressure for private equity funds to put that dry powder to use. So there’s plenty of cash out there.
You also have the slower growing legacy brands of some of the publicly traded companies, who are under constant pressure by shareholders to keep growing. Yes, they may be great cash generating businesses, but they’re growing at 1% or 2% a year. Naturally, at that point you’re going to either look for innovation internally or you’re going to acquire a business.
Frankly some of these bigger food businesses are just not that nimble in the way they innovate, so a lot of innovation is coming out of the middle market, and that’s where they’re looking. That macro trend is still out there. These companies are still very interested in making acquisitions.
Generally speaking, in the past 5 to 10 years and even further back than that, the big food guys weren’t necessarily looking at assets that had $50 million in revenue or less. They were really looking for bigger acquisitions that could move the needle more substantially.
However, a lot of these companies are so starved for growth now that even a $25 million revenue company that is growing like gangbusters is interesting, and while it won’t potentially move the needle from an earnings per share perspective immediately, you start to combine a few of those and you ride that growth trajectory for several years out, then it becomes a very interesting growth strategy.
Last year, a number of large food companies, including General Mills, Kellogg Co. and Campbell Soup Co., established venture capital funds to invest in food and beverage start-ups. How does that trend figure into your M.&A. forecast for this year?
Mr. Valentino: Venture funds are an interesting emergence of late because that’s very much a playbook of tech companies — Nokia Ventures and all of these tech companies that have their own venture arms. It’s basically a farm league. You are trying to get in the door with these companies very early on and grow with them a little bit, and it essentially gives you a strong leg up in being able to acquire the business further down the road. You see that in the tech world all the time. It’s pretty commonplace that strategic investors, especially venture arms of corporates, will end up acquiring a company.
I do think we’ll see those venture arms play a bigger role. I think you’ll see some of the bigger guys who haven’t established one yet look to get into the fray…
I don’t think it’s affecting numbers in a negative way or responsible in part for having a down year in comparison to prior years, but I do think it’s going to play a big role moving forward.
Why is food and beverage such a hot target for investments and acquisitions?
Mr. Valentino: The biggest macro factor that’s really keeping food and beverage M.&A. relevant and very poignant in the eyes of investors is changing consumer tastes and profiles. Especially around these healthier alternatives, functional food and beverage, organic, natural, simple and clean ingredients.
Another area where consumer profile and shifts are changing the game is around snacking. Obviously you have the trend of consumers slowly moving away from three big meals and toward six small meals per day. There has been a lot of interest, and it’s definitely an area that will continue to be very interesting to acquirers as we move into 2017 and beyond.
The report identifies businesses using a subscription model as a target of M.&A. interest. How will this play out in the food and beverage industry?
Mr. Valentino: For meal kit companies in particular, you’re probably more likely to see a food retailer buy one of those businesses. Who’s losing market share to meal kit delivery companies? Directly, it is food retailers, themselves, the grocery chains who are losing immediate share, and to a degree, restaurant companies. I would say the food retailers, grocery chains, Kroger, Whole Foods. Those types of guys. But it’s certainly not out of the realm of possibility that a C.P.G. could look at investing in or acquiring a meal delivery company.
Why was 2015 such a robust year in terms of M.&A.?
Mr. Valentino: I think a lot of it was a success-breeds-success environment. You had a few really big deals as well. Obviously Kraft Heinz was a monster deal. When you’re looking at pure numbers, I almost feel like you have to take that out. It’s such an unusual transaction. There are only a few companies that can combine, and Kraft and Heinz being two of them at that time, so there’s very few left over that can make that size deal happen.
The macro factors really fueled the initial surge, but as things started to really turn, it was impossible to slow it down because people were so excited about the valuations, and investors couldn’t get enough.
The United States leads the way in consumer sector M.&A., according to the report. Is this expected to continue?
Mr. Valentino: The U.S. is a hub for innovation with food, and I would expect that would continue, and part of that has to do with cross-border interest as well. There is a lot of interest in U.S. food assets from European companies and a lot of interest from Asia.
Will the new presidential administration have an impact on M.&A. in the food and beverage space in the near term?
Mr. Valentino: Generally speaking, the consumer environment, food and beverage being very much included, is so driven by consumer confidence that if the consumer confidence remains high, there will be minimal impact from a new administration. Especially within food and beverage because, as simple as it sounds, everybody has to eat. Food and beverage is so insulated.
If confidence dips or the economy dips, there could be struggles with certain price points or certain nonessential food items, potentially, but generally speaking food and beverage is pretty immune from major changes.
If you’re looking for a word on the effects of the new administration, I think it’s pretty much status quo as far as what to expect from food and beverage M.&A., and the impact would be pretty negligible, if any.I wish there was something juicier to say, but bankers aren’t really concerned about it.