Food and beverage insights Q2 2021

There's lots to say about the food and beverage M&A landscape in Q2, and it's important to look beyond the severe drop off in deal volume: a 47% decline on Q1.

The first quarter of the year was supercharged by external factors and, importantly, in Q2, deal value remained stable. International interest in the UK and Ireland continued to increase, reflecting continued overseas interest after Brexit.

Deal volumes – anomaly or trend?

Announced quarterly M&A activity in food and beverage

Deal volumes¹ almost halved in Q2, compared to the previous quarter (33 vs 63). This might not be as shocking as it first appears, and there are reasons to believe that it's not indicative of a new trend towards declining deal volumes.

M&A activity in Q1 was supercharged by two exceptional factors: the thawing of deal flow frozen by COVID-19, plus concerns about changes to capital gains tax in the March Budget.

These factors go some way to explaining why the traditionally busy months of April, May, and June actually experienced a drop-off in comparison to the previous quarter. Another contributing factor may have been that businesses hit by coronavirus decided to shift their focus to operational strategy instead of exits.

Anecdotally, throughout Q2, we have witnessed a strong appetite for deals from our clients and are confident that volumes will rebound again.

No dip in deal value

In contrast to the decline in the volume of deals, the value² remained robust.

In Q2 2021 the total value for the 16 disclosed deals was £3.7 billion, compared to £1.3 billion for disclosed deals in Q1. The substantially higher value of disclosed deals for this quarter was largely accounted for by Bain Capital’s acquisition of Valeo Foods Group from CapVest.

I've also identified some significant investment trends in the quarter's largest deals.

A focus on core business

Kerry Group’s bid to strengthen its taste & nutrition business was responsible for two deals. In a clear out of non-core operations, the Irish company divested its meats and meals business to US poultry producer Pilgrim’s Pride for £704 million. Meanwhile, it acquired global food technology firm Niacet from SK Capital for £735 million to further strengthen its ingredients business.

Buy and build (B&B)

CapVest oversaw an aggressive acquisition campaign at Valeo Foods Group, which saw its portfolio grow to include names such as Kettle, Jacobs, Rowse and Balconi. We expect to see new owners Bain continue the B&B strategy, potentially acquiring larger businesses.

Post-Brexit interest in the UK

Buyers from Europe and North America continue to snap up UK firms to establish a post-Brexit foothold.

Private Equity down to a third of deal volume

Private equity (PE) activity also dipped in Q2. PE activity only accounted for a third of the 33 deals announced in Q2, compared to 54% in Q1. Total PE deal value for Q2 was £2.0 billion, up from £552 million in Q1, but, like total deal value, this figure was inflated by the £1.5 billion Bain Capital/Valeo Foods Group deal.

Despite consumer health trends and government anti-junk food measures, two notable Q2 deals revealed that PE still has a sweet tooth.

Ferrero vehicle CTH Invest acquired Jammie Dodgers' maker Burton’s Biscuits for £300 million. The move makes sense in a pressurised, yet still enormous market, where larger players have an advantage.

At the premium end of the 'sweet treats' market, Exponent Private Equity acquired gourmet dessert brand Gü Puds from Noble Desserts Holdings for £150 million. The deal recognises that consumers are willing to splurge on at-home indulgences, a trend that was accelerated by multiple lockdowns and consumers trading up instead of eating out.

Insolvencies

Q2 2021 was was an unremarkable period for insolvencies, with just three companies suffering: two restaurant businesses and one supplier to the energy, food, and farming sectors.

As we noted in our previous quarterly, the UK economy is still supported by government furlough measures. It will be interesting to see what happens in late September, when these are due to end.

Subsector spotlight

Alcohol, plant-based products, and functional foods show no signs of losing their allure for investors.

Looking forward: what will happen in Q3?

In the coming months, three external forces are likely to put pressure on food and beverage suppliers.

Hospitality industry failures

The government furlough scheme that has kept the UK hospitality industry afloat is set to end in September 2021, while many restaurants and bars face a recruitment crisis.

These recruitment problems, including servers leaving mid-shift because they have been offered better pay elsewhere, are well documented. Affected venues face three ‘choices’: don’t open at all, accept fewer bookings, or open with a skeleton staff and risk customer dissatisfaction.

Sadly, the fallout from this convergence is likely to impact suppliers. 

Retail price wars

In July, the Morrisons board accepted a £6.3-billion takeover offer by a consortium of funds led by PE firm Fortress. It follows ASDA’s £6.8-billion sale to Issa brothers and TDR Capital last year. 

While both investments show strong appetite for a presence in the food retail sector, it's likely that these businesses will continue to try to reduce costs, which will concern suppliers. Sainsbury’s announcement that it will invest £50 million into lowering prices will increase pressure industry wide.

UK National Food Strategy

On 15 July  the government published its National Food Strategy report, led by Henry Dimbleby, the founder of casual dining chain Leon. Headline recommendations included the introduction of salt and sugar taxes, and cutting the nation's meat intake by a third (though it stopped short of a meat tax).

In response, the environment secretary has promised a white paper within six months. This advice creates uncertainty for food and drink suppliers and prudent players will be keeping a careful eye on developments.

In spite of all these challenges, Q3 can bring great opportunities for firms that can strengthen their position. It is a prime time for investors to seek consolidation, and target companies that can resist price pressure with a unique offering.

By its (literally) vital nature, the food and beverage industry will always remain resilient. What will change, however, is the distribution of winners and losers.

_Footnotes

_{1 All deal activity is based on the announced date of the deal and includes deals where there has  been UK or Irish involvement (target or acquirer). Administrations, liquidations, and receiverships are collated, but not counted as M&A unless they have subsequently been acquired}

_{2 Deal values are primarily sourced from corporate websites. However, if no press release is available, they are sourced from deal databases, including BvD Zephyr, CapitalIQ and Mergermarket or from press commentary released at the time of the deal. Deal values may subsequently be amended pending earn-outs or other financial arrangements and/or as further detail is released by the acquirer.}

Around the end of May this year, JBS S.A, the world's largest meat supplier, suffered a catastrophic cyber attack. The business supplies around one-fifth of global meat production, and this cyber attack was the largest and most high profile data security breach on a food production business.

Before that, at least 40 major incidents on food producers occurred in the preceding 12-month period. The entire sector needs to be prepared for similar incidents. 

The JBS S.A attack was thought to involve an infamous Russian-speaking ransomware-as-a-service (RaaS) gang: REvil. To regain control of their businesses and data, JBS S.A was compelled to pay the hackers £8 million.

Our team has also flown to Ukraine to help one of the largest dairy manufacturers rebuild its computer systems after another cyber attack. While its computers were offline, its milk was curdling in silos.

What's the downside of data?

Integrated production and customer management systems can bring unique opportunities for efficiency and 'just in time' manufacturing and cost optimisation, which are critical to modern F&B businesses. The problem is that the biggest risk factor for a data security incident is...data.

There's an optimal level of data to hold, or 'sweet spot,' but many businesses exceed it, becoming 'data hoarders'. Collecting data that you don't actually need risks unnecessarily exposing you to cybersecurity attacks, and the costs can be astronomical.

Our Cyber Defence Centre is currently working with a production company that lost records for up to one billion data subjects in a cyber attack. That’s approximately one-seventh of the global population. The advent of GDPR laws and other global data protection regulations means that businesses need to ask if they actually need all of the data they are collecting.

The average combined cost of fines and business impact for losing a single data subject's personal information is more than £100. Imagine one billion £100 fines. Or one million. Or even one hundred thousand. Globally, the average cost of fixing the fallout from a cyber attack is around £3 million.

This is why you need to think about the amount of data you hold and look for opportunities to reduce it. I strongly advise: if you don’t need the data, don’t keep it! And if you do need the data, keep it safe.

Mitigating the supply chain cyber risk

One notable pattern in cyber attacks on the food and beverage industry in 2021 is that on top of exploiting vulnerabilities in their target's own business, they also infiltrated them through their suppliers, distributors, and other third parties. 

Supply chain risks have rapidly demonstrated that even if you are the world’s largest drinks manufacturer with unlimited budgets to secure your IT systems, your logistics company may not be equally equipped.

Your packaging manufacturer, your sugar supply company and your nitrogen gas vendor each may be more focused on what they do well, and that will almost certainly not be IT and cybersecurity. A vulnerability in their business may become a vulnerability in your business.

Hackers are opportunistic and will find a weakness in the 'attack surface' wherever they can find it.

So, how can you avoid cyber attacks?

Hackers aren't going away. We all use computers, and we all generate and hold data. As long as cyber criminals can use it, they will find a way to make financial gain through your pain.

Fortunately, several relatively low cost or free cyber hygienes can dramatically improve your data security management. 'Multi-factor authentication', good password policies and password audits, and the use of secure data channels (VPNs), especially for remote working, can significantly reduce your cybersecurity risk.

For a no-cost consultation and access to a 60-day free trial of our solutions, get in touch with our Vijay Rathour.