The food and beverage sector has long been regarded as stable and attractive – a safe haven in more turbulent times. The leveraged finance market values the defensible market positions of strong brands and the predictable growth profiles of groups that have deep penetration with staple products. More recently, the ability to truly globalise brands – tapping into increasing consumer demand in emerging markets – has added to the sector’s attractiveness.
Certainly, major players have been adept at brand innovation in order to diversify and extend the growth prospects of key product ranges. That said, such sector strengths may no longer be a given. In particular, strong headwinds are coming from the rise of private-label and hard-discount groups taking advantage of the current recessionary environment. Also, commodity price volatility, driven by demographic and environmental pressures, as well as increased transportation costs – and general top-line pressure from extreme market maturity in Europe and the US – are all undermining the strength of the branded food and beverage sector.
However, acquisition multiples are holding up well, stimulated by continued private equity sponsor demand for a historically attractive sector, and by established corporate groups looking for economies of scale or higher value-added brands and products. Indeed, a number of private equity firms have a strong track record in growing branded food and beverage businesses, which ensures there is a good level of competitive tension between sponsors and trade buyers in auction processes.
There has also been a steady flow of Asian inward investment into this sector, albeit on a highly selective basis. Asian acquirers often look for targets that can provide a platform for geographic diversification or penetration of new products into their domestic markets. Meanwhile, consolidation trends in response to some of the headwind factors are also underpinning valuations.
Furthermore, although the food and beverage sector has not been immune to recent economic pressures – and continues to face significant future challenges as a result – there are a number of supply-side drivers that should ensure private equity investors and leveraged debt houses continue to see a strong and attractive deal pipeline.
Certainly, the food sector has also not been immune from depressed global M&A activity over the previous several years. Yet it has exhibited a relatively stable deal volume profile. Boosted by disposals from major food and beverage groups looking to deleverage or refocus their business, in response to the financial downturn, the supply of interesting opportunities should continue.
Such groups looking to rejig their product portfolios will often seek higher value-added activities, either through premium branding or by tapping into the increasing healthy lifestyle segment. They will also typically look to exit non-core activities where they may have failed to gain critical mass in certain geographic markets or product ranges. Spin-offs of this nature offer private equity sponsors good opportunities to implement strategic add-ons or to create new buy-and-build strategies in the sector.