UK food businesses attract private equity buyers
Analyst Julian Wild, food group director of Rollits, said private equity investors were likely to find good value in some UK food businesses, despite margin pressure across the industry.
“There are several potential transactions on the go at the moment,” he told FoodManufacture.co.uk. “Businesses are either being forced into selling, or private equity is starting to circle around some food businesses because they’re sitting on an awful lot of cash and need to find investments.”
He added that the current economic situation “makes it difficult for trade players” to enter the fray. “They’re under a lot of pressure themselves so I would be surprised if there are many UK food businesses that are looking to acquire. They’ve got their heads down trying to run their own businesses and preserve margins.
“It’s making some UK food businesses look pretty cheap and potentially quite good value if you take the view that margins are not going to remain low indefinitely.”
Fragmented
Consultancy firm Grant Thornton says there is scope for more merger and acquisition (M&A) activity in the sector. It reports that such activity fell back in the UK in the third quarter of 2011, but, overall, the year was looking healthier than the previous two years.
Head of food and beverage Trefor Griffith said: “We are continuing to see a subdued M&A market in the food and beverage sector and, as is the case with most other industries, volumes are still quite a way off pre-recession levels.”
He added: “On the whole, the food sector remains very fragmented, especially when you compare it to the drinks sector, and there is still room for consolidation across most sub-sectors. These markets also lend themselves to economies of scale and we have seen how M&A can drive performance improvements and profitability very successfully in these areas.”
Grant Thornton’s quarterly M&A Tracker, which analyses announced deal activity in the UK food and beverage sector, reports that the number of transactions fell by 5.5% this quarter compared with Q2 2011.
Margins
Griffith added: “Transactions are still happening, and the first three quarters of 2011 have been significantly stronger than both 2009 and 2010. We have seen a good amount of activity in the smaller company bracket but, more interestingly, the big ticket deals have continued despite the economic climate, as demonstrated by the acquisition of Northern Foods by Ranjit Boparan and Uniq by Greencore.
“These larger deals are largely driven by the need to consolidate supply channels and diversify customer base. The current market conditions are forcing food manufacturers to think about cost control and reduction as well as effective pricing to maintain margins.
“Companies can achieve economies of scale through M&As, which can then be used to improve the control of the distribution process and to leverage the business’s existing position across bigger markets and gain access to more products.”
Grant Thornton said the dry grocery segment has seen the most activity so far in 2011 with 15 deals, followed by meat, fish and poultry with 13 deals. This is broadly in line with the pattern of 2010.
