Food companies looking to acquire businesses in the sector are being priced out of the market as money is poured into private equity firms to chase deals, according to corporate finance experts.
Speaking at a recent seminar organised by Food Manufacture, Nicola Mallard, analyst at Investec Securities, said that the trend was stalling necessary consolidation.
Referring to Duke Street Capital, the private equity firm which had just acquired Burton's Biscuits in a deal reportedly worth £200M, she said: "How were they able to outbid trade buyers like Northern Foods?
"A trade buyer able to extract synergies by bringing two related businesses together ought to be able to pay more. Is private equity overvaluing assets, or is the trade undervaluing them?"
Patrick Groarke, who heads up the food sector team at corporate finance house Livingstone Guarantee, said the amount of private equity sloshing around was inflating prices to a worrying extent. "It's almost an artificial market at the moment," he said. However, he argued, manufacturers keen to snap up assets like Burton's had to find ways of buying cheaper debt. "Trade buyers don't know how to exploit their balance sheets and buy cheaper debt."
Nevertheless, there was not necessarily a shortage of funds in the food sector for acquisitions, suggested John Laud, food sector relationship director at Barclays business finance. "We are managing twice as much cash for food manufacturing companies as we were two years ago, so they do have cash to spend."
However, the view that private equity firms were purely asset strippers out for a fast buck but unable to add real value to companies, was unfair, said Richard Mathews, head of the consumer team at Hg Capital. "I don't think that private equity is stalling change. It is driving change."
Laud agreed. "Private equity can be very dynamic. Look at Weetabix - private equity backing has made it so much more dynamic and entrepreneurial."
According to PriceWaterhouseCoopers, private equity money had driven up the value of deals in the European food sector to £8.3bn in the first quarter of this year.
- See next month's issue for a full write-up of the seminar.