What’s behind the rising appetite for Food and Drink M&A in the coming year?
What’s behind the rising appetite for Food and Drink M&A in the coming year?
Food and Drink sector deal volumes fell by 30% in the opening half of 2023, compared to 2022 H2. Rising inflation and interest rates, coupled with geopolitical uncertainty, worked to erode confidence, damping down the M&A activity that had gripped the UK market post COVID-19. Notably, UK food and drink inflation increased at its fastest pace for over 40 years to reach an eye-watering 19.1% in the 12 months to March 2023.
Yet according to our recent survey of 101 Food and Drink company directors, for many, recovery from the economic ‘perfect storm’ may be on the horizon, as the CPI predicts continuing falls in inflation. The market seems to be gearing up for growth, with 81% of respondents expressing optimism for the prospect of increasing profitability, product launches, capital expenditure and new orders. There is a sense that the next 6–12 months will be a time for building revenue and margins.
Our survey also reveals that appetite for M&A is high, which could herald a release of pent-up demand for investment and exits. 24% of Food and Drink manufacturers are looking to make an acquisition in the next year, and 25% said they could be seeking buyers, with 35% considering the option of a sale in the next 3-5 years.
Private equity remains an important ingredient in M&A with 18% of survey respondents already involved with private equity. Whilst 2023 has seen a swing towards trade acquirers who represent 82% of all deals so far this year, 12% of those surveyed are seeking private equity (PE) investment in the next 12 months, with an additional 14% looking to do so in the next three to five years. Capital from private equity and trade buyers continues to be employed for assets in growing markets, especially alcoholic beverages, health foods, plant-based/free-from, pet and animal food, as well as core categories such as meat and fish.
Our survey found the key drivers for those interested in M&A were to enhance their ESG proposition, to access new products, new customers, scale up operations and expand geographic coverage.
Drivers for M&A in Food and Drink.
| Enhance their Environmental, Social and Governance ("ESG") proposition | 39% |
| Access new products | 38% |
| Access new customers | 38% |
| Scale up operations | 34% |
| Expand geographic coverage | 27% |
1. The ESG proposition
The need for more emphasis on social and environment considerations across all stakeholders has put ESG-related targets at the top of the investment roadmap.
Reduction in carbon emissions and investment in the circular economy was a top priority for 25% of all our respondents, explaining the hunt for ESG-related targets. This focus is not only using business as a ‘force for good’, but also increasing staff engagement and providing an edge for recruiting younger employees and gaining clients. An example of ESG driven investment was the £20m investment led by Highland Europe and including A-list celebrities in Huel, the meal replacement retailer focused on supporting healthy, low-carbon footprint diets, as well as agricultural development in Sierra Leone.
2. Access to new products
Our survey found 39% of those looking to acquire to boost their product portfolios were on the hunt for free-from, convenience and grab-and-go options along with ‘low and no’ fats and sugars. Meat-free and plant-based products were also being sought.
Free-from and ‘low and no’ categories have steered through several challenges in the sector including reduced profitability from a lack of optimisation and recipe budgeting, along with health questions raised against certain products. Consequently, recent M&A activity in this sub-sector has in fact been lower.
The focus has switched to solutions in food technology, as reformulation and testing new and existing ingredients becomes paramount. This is demonstrated by Lightjump Acquisition Corp’s merger with Moolec Science, a food tech company which genetically modifies plants to produce animal proteins. This transaction values Moolec at £422m and will make them the first molecular farming food-tech company to trade in public markets.
3. Access to new customers
Where consumer spending has been squeezed by cost-of-living pressures, businesses will be seeking new customers to drive growth in sales. However, as margins have been affected by higher imported food prices it has been more important than ever to increase volume of sales to just ‘stand-still’ in the current challenging market.
Many corporates are combating these effects through continued diversification, such as Cranswick’s £32.2m acquisition of Grove Pet Products. The CEO of Cranswick plc commented: “The move into pet food is an exciting one as the category continues to grow and consumers are increasingly looking to premiumise the diet of their pets.”
4. Scale up operations
As the UK is heavily reliant on food imports, and the price of imported food materials has been rising at twice the rate of domestic food materials, there is an impetus to scale operations nationally and benefit from the increase of ‘home grown’ and ‘Made in Great Britain’ demand.
In addition, Diageo’s ‘branded’ shopping spree of 21Seeds, Balcones Whisky, Mr Black Spirits, East African Breweries and Don Papa Rum, all in line with their “strategy to acquire high growth brands with attractive margins” as reported by their European President, also demonstrates the impetus to bolster operations while maintaining margins.
5. Expand geographic coverage
BDO recently advised The Turmeric Co. on its Series A fundraise. The capital invested will go towards further developing the brand’s retail proposition and investing into marketing, as well as exploding global expansion.
Geographic expansion not only seeks to gain new customers in new regions, but also broadens the skill pool and accessibility to talent. According to our survey, 50% of respondents are struggling to find workers. The biggest requirement is for engineers, with 35% of those citing hiring issues on the hunt for this role. This is followed by production-related technical skills and project management both at 31%.
Will these M&A drivers energise the market?
Deal volume for Q3 2023 is slightly up on Q2 but remains below the “boom” levels seen post-pandemic. Yet despite headwinds in the economy, the Food and Drink industry has remained resilient. Greater economic stability will mean more investment opportunities as companies intending to come to market complete a period of innovation, profitable customer and contract rationalisation, and operational optimisation to strengthen performance and growth opportunities.
The pent-up demand set against current low deal levels implies upcoming deal activity for large corporate and institutional investors who have cash pots to invest in strongly performing businesses. Those following an ESG path will most likely pique the interest of both a corporate and institutional investor, whereas businesses with synergistic offerings will appeal to corporates seeking to gain market share externally.
If you have any queries or would like further information, please contact Eleanor Fearne.
