The UK’s food and beverage sector saw a rise in mergers and acquisition deals during the first four months of 2023, with an increase of 17.9% compared to the same period last year, bringing the volume of deals to 33. However, deal values remain low due to persistent macroeconomic headwinds, according to Mark Lynch, partner at advisory group Oghma Partners. These headwinds include inflation, the cost-of-living crisis, and geopolitical tensions combining to have a negative impact.
The year’s M&A activity so far has proven to be somewhat of a mixed bag. In January, Finsbury Food Group Plc acquired manufacturer Lees Foods, and in March, Leprino Foods Company acquired Glanbia Cheese for a deal worth at least €178.9m. The period also saw a particular focus on sustainable packaging, with The Copper Crew and Bottleshot Brew being acquired by canned wine and coffee producers, respectively. Further deals in the snacking sector took place, including the acquisition of high protein snack brand Cheesies by The Curators, and Europe Snacks acquiring premium snack brand Burts.
Interestingly, there were fewer deals in the lifestyle/healthy eating space compared to last year, and more acquisitions of indulgent producers/suppliers. Contrary to this, Lynch claims that the current year’s opening Tertial has highlighted the resilient and defensive characteristics of the food and beverage M&A sector, with T1 deal volume at its highest level since 2017 despite the challenges faced.
While the high value of the Glanbia Cheese transaction meant deal value increased by 60.3%, excluding this transaction actually saw deal value decline. Over 80% of the deals had an estimated value of £10m (€11.62m) or less, with a “significant” absence of middle to higher market deals. Just 6% of transactions were above £50m, well below the five-year historic average of 12.5%.
Lynch points to persistent macroeconomic headwinds as the major culprit for this. Inflation remains high, forcing further interest rate hikes and increasing the cost of debt, while the cost-of-living crisis has reduced consumer spending. Geopolitical tensions have increased market uncertainty, and supply chain issues have piled more pressure on the industry. As a result, 81.8% of deals had an estimated enterprise value of less than £10m.
However, it should be noted that this combination of increased deal volume but low deal value can also be explained by a surge in distressed activity, with 12.1% of T1 deals being acquisitions out of administration. Lynch claims that the amalgamation of a challenging macroeconomic climate and a COVID hangover has resulted in food manufacturing insolvencies “rocketing” by 250%. This has led to acquirers snapping up distressed assets at lower, dislocated prices.
Oghma Partners is optimistic that the market can expect to see a sustained recovery in deal volume. Among future divestment options, it is forecast that “carve-outs”, or partial divestitures of a business unit, will become increasingly common as larger corporations look to sell underperforming or non-core assets amidst economic uncertainty. Despite the turbulent market conditions, strategic acquisitions remain a high priority, and potential future greater transparency surrounding genuine financial performance, as earnings are no longer distorted by COVID-19, may also lead to greater M&A activity.
