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
7/27/2019 Challenges Opportunities Food Drink
http://slidepdf.com/reader/full/challenges-opportunities-food-drink 2/3
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.
REPRINT | FW March 2010 | www.financierworldwide.com
INdepth
7/27/2019 Challenges Opportunities Food Drink
http://slidepdf.com/reader/full/challenges-opportunities-food-drink 3/3
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
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]
REPRINT | FW March 2010 | www.financierworldwide.com
INdepth