While the global food sector in general is performing reasonably well, the margins of many food producing and processing businesses were being squeezed, according to the Market Monitor report from Atradius.
The sector’s susceptibility to sudden downside risks, such as commodity price volatility and health issues, only added to the difficult trading environment, the report added.
The need to ease the pressure on margins was the catalyst for new M&A activity within the sector, Atradius said.
Ease the pressure on margins
“Positively, food is fairly resilient to business cycle downturns, but other factors in play are taking their toll on the health of smaller producers and processors,” said Stuart Ramsden, UK & Ireland commercial director at Atradius.
“Efficiency and low production costs are necessary for sustaining a competitive edge, sales growth and margin improvement. This, along with economies of scale and increased bargaining power, is best achieved through concentration.
“Therefore, it comes as no surprise that in many markets M&A activities and a subsequent consolidation process have accelerated among food businesses,” Ramsden added.
Caroline Viney, director at financial advisor Oghma Partners, used last month’s Food Manufacture’s Business Leaders’ Forum, to highlight a “substantial uplift” in overseas investment in UK food and drink manufacturers in 2016.
‘30% decline in takeovers’
“Across all sectors, there was a 30% decline in takeovers of UK firms by foreign investors in the second half of the year, but in the food and beverage sector there was an increase in activity,” she said.
“There were 21 deals by foreign investors post-Brexit, versus 14 pre-Brexit, and I guess this raises certain questions as to whether overseas firms are trying to move ahead of Article 50 being triggered.”
Clive Black, head of research at City analyst Shore Capital, told the forum he expected 2017 to be an active year for M&A deals, led by foreign investors into the UK.