PErspective in Manufacturing - Summer 2015

August 2015

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Worldwide, the food manufacturing sector has seen high levels of deal-making during the first half of this year, as firms look to cut costs and scale up in what has become a low-growth industry, the Financial Times reports.

Several mega-deals have captured national attention this year, including the recent Kraft-Heinz merger, which could push other large food manufacturing and distribution companies to seek consolidation in order to remain competitive, according to the Wall Street Journal.

“In the 2015 RiskFactor Report for Manufacturing, 96 percent of manufacturers mention competition and consolidation, up from 94 percent last year,” said Howard Sosoff, Assurance Partner and national Manufacturing practice leader. “This increase could likely be attributed to the number of strategic acquisitions food manufacturers continue to make in order to enter new markets or expand their existing portfolios.”

Brazilian PE firm 3G, together with Berkshire Hathaway, purchased Heinz in 2013 as part of a series of big acquisitions over the last five years that included Burger King and Tim Hortons. 3G cut costs so successfully at Heinz with its “zero-based budgeting” approach that other firms in the industry, such as Kellogg, Mondelez and Kraft, have been trying to emulate it, The Wall Street Journal’s MoneyBeat blog reports. More takeovers could be on the horizon for 3G, although it could take some time – the Kraft deal was two years in the making.

The U.K. saw generally subdued deal-making during the run up to its general election in April – especially in the middle market. But there were a couple of large, one-off transactions, including PE firm Nomad’s April acquisition of frozen foods maker Iglo in a deal valued at EUR 2.6 billion. This is the first in a series of deals as Nomad looks to build a global consumer brands business, according to the Financial Times. The PE firm is currently in talks to acquire the continental European business of frozen foods maker Findus.

Large food manufacturing companies (Mondelez International, Hain Celestial Group, J.M. Smucker, Hershey, Campbell Soup, Kellogg and General Mills) are increasingly targeting smaller “healthy” brands with labels such as “all natural,” “organic” or “gluten-free”, to take advantage of evolving eating trends, according to The Deal. Firms are prepared to pay huge multiples to win auctions – Hershey paid nine times revenues for the all-natural gourmet meat snack brand Krave Pure Foods earlier this year, The Deal reports.

Food tech – using technology to disrupt the food industry – is another hot sector, in both Silicon Valley and India. VC funding is flowing to the space: Maple, Munchery and Blue Apron have raised hundreds of millions of dollars in recent months. In India, food tech M&A activity is up, as food startups look to scale up operations, according to the Economic Times.

Global PE firms are also increasingly interested in Indian food distribution and agri-logistics companies. For example, according to Reuters, after bidding against other firms including Blackstone, Carlyle Group and Bain Capital, Canadian fund Fairfax India Holdings is set to take a minority stake in Indian firm National Collateral Management Services, which designs and implements risk management solutions for clients at commodity multi-link points and factory locations. PE firms are drawn to the scalability the sector potentially offers – 45 percent of farm produce currently gets wasted due to inefficiencies in the existing food distribution infrastructure, the Economic Times reports.

With deal-making activity high, there are opportunities for PE firms of all sizes – be they giants like 3G, or smaller players looking to pick up a portfolio of smaller, (domestic or global) food tech, health brand or food distribution assets.

For more information on BDO USA's service offerings to this industry, please contact one of the following practice leaders:
 

Lee Duran
San Diego

 

Fred Campos
Miami


 
Scott Hendon
Dallas
  Jerry Dentinger
Chicago

 
Kevin Kaden 
New York
  Joe Gordian
Dallas

 

Ryan Gurthrie 
Costa Mesa

 

Tuan Hoang
Los Angeles


 

Dan Shea
Los Angeles

 

Todd Kinney 
New York


 

Joe Burke 
McLean, VA

 

Matt Segal 
Chicago