More consolidation to come in Britain’s food manufacturing sector

Overcapacity within the sector, rising input costs and retail cost reduction pressures on suppliers will prove to be major drivers behind much of this consolidation, said Trefor Griffith, head of food and beverage at accountancy firm Grant Thornton.

“If you look at almost every category, there has to be consolidation because there are businesses that are not making money,”​ said Griffith.

While there have been more mergers and acquisitions this year, there have also been 13% more business failures than during the whole of 2011, according to a recent Grant Thornton report on activity in the sector.

Most have taken place in bakery, dairy or among meat, fish and poultry suppliers.

Unless companies improved their margins they won’t be able to invest in essential product innovation, he added.

“You’ve got to have money to invest in innovation. But how can you do that when everything is tight and cut to the bone. That’s the real challenge,” ​he said. “If you don’t innovate you are probably not going to cope with the pressures the supermarkets put on you.”​

Griffith viewed the biscuit sector as being particularly ripe for further consolidation. He expected a private equity (PE) buyer to acquire United Biscuits’ recently formed KP Snacks business. “I think there is further consolidation to do in the biscuit space, so I could see why PE would be interested.”​

He thought a PE acquisition of KP Snacks would stimulate subsequent interest from potential trade buyers. “It wouldn’t surprise me if it was bought by PE and then something else was bought fairly soon after and further consolidation resulted.”​

Despite the pressures within the sector for further consolidation, Griffith thought the interest shown in UK manufacturers by overseas buyers was because of the high standards prevalent in the UK’s food and drink supply chain and the fact that the UK was a good place to do business.

Chinese and Indian purchasers​

He expected Chinese and Indian purchasers of UK companies to introduce the products they manufacture and approaches to doing business into their own developing economies.

Griffith cited the recent acquisition of Weetabix by China’s Bright Food Group and India Hospitality Corporation’s acquisition of Adelie Food Holding in April, as typical examples of this trend.

There were three times as many private (PE) deals in the sector in the second quarter of this year compared with the same period last year, said Griffith. There were twice as many as in the first quarter of this year.

“So the activity is coming through,”​ he said. The six PE deals in Q2 (the second quarter) were worth about £416M, Grant Thorton has reported.

“A lot of the private equity deals that have been done are almost ‘platform deals’ where they will go on to consolidate,”​ he said. “We are also seeing a continuing interest from overseas.”​

Premier Foods’ disposals​

He said US group, Hain Celestial’s acquisition of Premier Foods’ sweet spreads and jellies business in a deal last month [August] worth £200M was “opportunist”​  and another example of what could be expected from trade or PE buyers. He expected further Premier disposals to follow.

“There are continued opportunities like that in the UK, but it is also a target for overseas buyers … and I can’t see any of that changing,”​ he said.

“When we did the ‘Smart Money report:Where is the smart money going in Food & Beverage sector?’,​ [published earlier this year] we spoke to 75% of private equity houses that had invested in the sector in the last 10 years and 80% of them said they would do a deal this year,”​ said Griffith.