Challenges Opportunities Food Drink

7/27/2019 Challenges Opportunities Food Drink

http://slidepdf.com/reader/full/challenges-opportunities-food-drink 1/3

FINANCIERWORLDWIDEcorporatefinanceintelligence

8

REPRINT | FW March 2010 | www.financierworldwide.com

Like many other sectors, parts of the food

& drink industry have suffered during therecent financial turmoil. But several trends have

emerged which are expected to substantially

drive deals going forward. The Kraft/Cadbury

transaction, completed in January 2010, is one

sign that businesses are willing to take some

risks again, encouraged by their improved

financial positions and greater stability in

worldwide markets. But challenges are common

and companies should be well prepared before

entering a transaction. In addition, some legal

and regulatory developments, particularly with

regard to food safety, have created further

hurdles for the industry.

Absence of mid-sized deals

Unsurprisingly, food & drink companies have

been impacted by the financial crisis that

started more than 18 months ago. In terms

of M&A activity, there has been a relatively

modest decline in deal volume. Between 2008

and 2009, the number of deals in the food &

drink industry went from 3036 to 2949, a drop

of only 3 percent, according to Zephyr ‘Annual

M&A report 2009’. Comparatively, global deal

volume in the transport sector fell by 6 percent,

while it dropped by 7 percent in the construc-

tion industry. Only the chemicals and the insur-

ance sectors saw the number of deals increase

between 2008 and 2009. But in terms of dealvalue, the drop in the food & drink sector was

severe. In 2009, the global deal value for such

transactions reached just $127.4bn, 52 percent

lower than the previous year. This reduced ac-

tivity mainly comprised of smaller deals and a

few large transactions, as mid-sized deals were

relatively absent due to the unavailability of fi-

nancing, which hampered the ability of many

companies to conduct transactions.

Among the larger transactions conducted in

2009 and the beginning of 2010 was the ac-

quisition of brewer Anheuser-Busch Inbev’s

Central European operations by CVC CapitalPartners Group, a UK-based private equity

firm, for $3bn. Also in 2009, US-based

Pinnacle Foods Group announced it would

buy frozen food provider Birds Eye for $1.3bn.

Two months later, in January 2010, Dutch

brewer Heineken NV said it had agreed to

buy the beer division of Fomento Economico

Mexicano SAB (FEMSA), producer of Dos

Equis and Mexico’s second-biggest brewer, in

an all-stock deal valued at €5.3bn ($7.7bn), to

tap faster sales growth in Latin America.

But one of the sector’s largest deals in years

was the Cadbury/Kraft transaction. On 19

January 2010, it was announced that Cadbury

and Kraft Foods had reached an agreement,

and that the largest confectionary, food and

beverage company based in the US would pur-

chase the British confectioner for £8.40 per

share, valuing Cadbury at £11.5bn ($18.9bn).

Kraft, which issued a statement saying thatthe deal will create a “global confectionery

leader”, has had to borrow £7bn ($11.5bn) in

order to finance the acquisition. “The food &

drink sector had several high-profile trans-

actions that changed the landscape in some

segments of the industry,” explains Steven

Ellcessor, a partner at Frost Brown Todd. “The

Kraft/Cadbury deal is a demonstration of the

more global landscape of the industry and of

the continuing drive by the major players for

growth. Elsewhere, the acquisition by Pinnacle

Foods of the Birds Eye’s frozen foods busi-

ness reflects its ongoing attempts to bundle

its strengths across several parts of the retailstore.”

Large deals are also a sign of confidence re-

turning to the markets. Companies with strong

performance and healthy balance sheets in 2009

are expected to contribute to a rebound in the

number of transactions through 2010. Indeed,

with valuations for struggling companies at

historical lows, many healthy companies may

pursue growth-oriented acquisitions. “We’re

seeing considerable interest from both strate-

gic and financial buyers,” says Pete Mulvey, a

managing director at RSM McGladrey. “Many

food companies have been delivering strong

financial results, enabling them to reduce

debt loads and enhance their cash positions.

They’re now actively investigating strategic

acquisitions. Meanwhile, private equity firms,

which are drawn to this sector for its consist-

ency, are demonstrating a strong appetite for

investment,” he adds. Opportunities in the

current climate also lie in the underperform-

ing dollar and sterling, encouraging foreign

firms to target food & drink companies in the

US and UK. In addition, the next few months

should see an increasing number of consoli-

dations, according to Willy Kruh, Chairman

of KPMG’s Global Consumer Markets prac-

Challenges and opportunities in the food & drink sector

BY PAULINE RENAUD

FOOD & DRINK

http://www.financierworldwide.com/






http://rsmmcgladrey.com/



tice. “Financially stronger firms can strengthen

their core businesses through consolidation and

look to purchase growing firms with diversifi-

cation potential,” he says. Larger companiesmay indeed seek to acquire distressed rivals in

order to enhance their brand reputation, extend

their product lines and expand their geographic

presence. But for such consolidations to be suc-

cessful, realistic valuations are essential, as illus-

trated by the Kraft/Cadbury deal. In November

2009, Cadbury rejected a renewed offer of

$16.4bn from Kraft, saying the bid was under-

valued. The US confectioner had to raise its bid

by about $3bn before it was finally accepted two

months later. Besides consolidation, other recent

trends in the sector are expected to contribute to

more M&A or further growth in the months tocome.

During the downturn, many companies have

sought to expand their businesses in develop-

ing economies to ensure continued growth.

This has been the case for Nestlé, SAB Miller

and Danone, all of which have established op-

erations in Russia in recent years. Not only are

companies seeking to expand geographically,

they are also looking to diversify their product

range. “Private label offerings are currently

among the fastest growing segments in the in-

dustry,” explains Mr Mulvey. “They provide a

natural complement to branded products and

can help strengthen relationships between retail-ers and consumers. While private label offerings

deliver lower margins, they don’t require ad-

vertising investments or promotional allowanc-

es typical of their branded counterparts. They

also are supported by retailers,” he adds. But

some experts believe this trend may reverse as

the markets pick up again. “The weak economy

has benefited retail brands and private label, as

consumers have eaten at home more and traded

down to cheaper choice at retail. Foodservice

suppliers have suffered, as restaurant sales, es-

pecially higher end, have declined. A strength-

ening economy will likely reverse those trends,”predicts Mr Ellcessor. “That could make retail

brand companies more in need of acquisitions

for growth, and foodservice businesses with

cash may have opportunities among competi-

tors that are strapped for cash coming out of the

recession,” he continues. As private label of-

ferings may not remain attractive opportunities

going forward, food & drink companies are also

launching new nutritional items and healthy life-

style products to target ageing populations and

concerns over childhood obesity. In addition,

green initiatives are being implemented by of-

fering, to customers, environmentally-friendly

packaging and biodegradable cups. Such prod-

ucts are expected to boost sales through 2010.

Getting over hurdles

But for companies to achieve success andstronger performance this year, they first need

to tackle current challenges in the industry. The

most common include fluctuations in commod-

ity prices making it difficult to predict pricing in

the long term, declining sales and profits, rising

interest rates, unrealistic valuations for M&A

bids, declining interest from private equity firms

for deals and the difficulty of obtaining financ-

ing. But declining consumer demand and con-

fidence is the main concern for many food &

drink companies, which are forced to be crea-

tive with their packaging and product offerings

while maintaining reasonable prices. But savvycompanies can, by demonstrating the value they

bring to their products, expect to strengthen their

customer relationships and drive sales while im-

proving margins. Problems may also arise for

companies that established an international pres-

ence recently, or are considering doing so, due

to different regulatory environments and the ne-

cessity to adapt to local market demands. “Also,

cross-border M&A can represent a potential chal-

lenge because some governments or unions may

oppose foreign takeovers of local companies for

fear that jobs could be lost,” points out Mr Kruh.

“For instance, the Cadbury takeover bid by

Kraft was opposed by the British Governmentand trade union Unite, since the deal could result

in layoffs. Cadbury currently employs more than

7000 people in the UK and Ireland.”

Another major regulatory challenge faced by

food & drink companies concerns food safety,

according to Mr Mulvey. “There has been a fair

amount of media coverage regarding contami-

nation and product recalls, with considerable at-

tention focused on the challenges of tracing the

sources of food-borne illnesses. In recent years

manufacturers have seen the border closed to

critical raw materials, as well as increased scru-

tiny over the sourcing of key ingredients. It isan issue the industry takes very seriously, since

the financial and reputational costs of a recall

are so high.” He adds that, with the rapid expan-

sion of the food industry and the introduction of

new products, companies need to be particular-

ly careful. This cautious behaviour should also

be applied in M&A situations to avoid surprises

once the deal is completed. Thorough due dili-

gence can help mitigate most of the potential

risks. In the meantime, food & drink compa-

nies have been faced with an increasing number

of lawsuits brought against them for market-

ing products as presenting certain health bene-

fits. This has been the case for Cheerios cereals,

which said that its products lowered cholesterol,

as well as frosted Mini Wheats, which claimed

that eating these cereals reinforced children’s

concentration at schools. Although companiesshould exert caution when making health-related

claims on their products and be aware of regula-

tory limits, experts believe that lawsuits have not

really hampered the growth of so-called “func-

tional foods”, and such claims will remain very

useful marketing tools.

Not all regulatory developments may pose

challenges. Some, on the contrary, present op-

portunities as is the case in China, where the

government relaxed its M&A regulation in

2009. Aimed at attracting foreign investment

and capital, these new rules consist of greater

powers delegated to local governments, andChinese banks are now allowed to extend loans

to finance M&A. Foreign food & drink compa-

nies may therefore find it easier to conduct deals

in China, according to Mr Kruh.

In general, many companies in the industry

will likely start or continue expanding in devel-

oping countries in the months to come. “Due to

the economic crisis, market factors and chang-

ing consumer trends, the market growth poten-

tial has slowed down in developed economies.

Therefore, many companies are eyeing devel-

oping economies to expand their businesses, in

order to counter the maturing domestic market

sales,” explains Mr Kruh. In the meantime, stra-tegic deals are expected to continue increasing,

as the number of private equity deals remains

subdued. Companies are looking to grow exist-

ing operations and divest their non-core assets,

in order to meet investor demands. As a result,

niche companies will remain attractive acqui-

sition targets as they allow larger companies

to expand their brand offerings or capitalise on

recently developed products. “Many strategic

buyers sat on the sidelines last year, perhaps due

to financing issues. As a result, many private

owners with strong businesses to sell had good

reason to hold off and wait to see if the marketimproved,” recalls Mr Ellcessor. “Many of them

are concerned about the possibility of an increase

in capital gains rates. So, if financing becomes

more available, expect an uptick in deals done and

in multiples.” Overall, the next couple of years

should see an increase in all types of M&A trans-

actions, due to improving economic conditions

and improved access to financing. According

to experts, large global transactions should also

characterise M&A activity in the food & drink

sector going forward, as evidenced by the deal

between Kraft and Cadbury. Although challeng-

es will continue to emerge, the outlook for the

sector appears to be positive.


INdepth



Pete Mulvey is a managing director with RSM McGladrey and a leader in

the firm’s Food Industry practice. Mr. Mulvey, who is based in Chicago,directs the accounting, tax and general business consulting needs of

a diverse range of entrepreneurial, publicly traded and private equity-backed clients, which include middle-market food processors, co-packers,

distributors, co-ops, retailers and more. Mr. Mulvey, who frequently speaksto food industry groups on a range of financial topics, is a member of the

North American Meat Processors Association, the Chicago Midwest Meat

Association and several other industry organizations. He also serves on the

Great Chicago Food Depository’s board of directors and is chairman of itsAudit Committee.

Mr. Mulvey received both a bachelor’s degree in accounting and a master’s

degree in business administration from the University of Illinois – Chicago.He is a Certified Public Accountant and a member of both the American

Institute of Certified Public Accountants and the Illinois CPA Society.

Peter Mulvey

Managing Director, RSM McGladrey

T: 312-634-3923

E: [email protected]

www.rsmmcgladrey.com

This article first appeared in Financier Worldwide’s March 2010 Issue.

© 2010 Financier Worldwide Limited. Permission to use this reprint has been granted by the publisher.For further information on Financier Worldwide and its publications, please contact James Lowe on

+44 (0)845 345 0456 or by email: [email protected]


INdepth

mailto:[email protected]










Documents

Challenges Opportunities Food Drink