Following a period of consolidation during the initial months of the COVID-19 pandemic, in which food companies largely turned their focus inward to their existing portfolios and supply chains, food M&A is booming once again.
With many food companies having generated huge sales as people were forced to stay at home during the pandemic, and many being backed by cash-rich private equity firms, revenues in the sector have pushed dealmaking to levels not seen for years. In the UK, Grant Thornton calculated that there had been 63 transactions in the UK food sector in the first quarter of 2021 alone, the highest volume since 2017.
One of the major trends driving this is health foods. Increasingly, buyers – be they food industry giants or private equity firms with portfolios of food companies – are turning to health food brands as they seek to diversify their offerings and tap into shifting consumer tastes.
As a result, many health food brands are finding themselves acquisition targets and, as M&A news has demonstrated over recent months, UK health food companies are proving extremely attractive to both domestic and international buyers.
Health food M&A has established itself as one of the key dealmaking trends of 2021 and, in an industry so governed by consumer tastes and in which innovative, disruptive brands are constantly appearing, this looks set to continue.
Why are health food brands proving so attractive?
Consumer tastes have been changing for years as people become more concerned about what they eat and where it comes from. Increasing veganism, vegetarianism, flexitarianism and pescetarianism, as well as growing concern over the ecological impact of the food industry, have all fed into the growth of health foods and smaller brands.
Increasingly, customers are looking for food that is nutritious, fresh, cruelty-free and produced with a more eco-friendly supply chain. This has also coincided, and been fuelled by, a growing desire to shop with smaller firms, which are often perceived as more ethical.
Healthy foods have also become more mainstream over recent years, with supermarkets more likely to stock wide ranges of products such as meat alternatives, plant-based drinks and cereal bars.
While lockdown has undoubtedly seen an increase in comfort eating and “unhealthy” foods, with people more likely to indulge while at home, it has also accelerated the growth of healthy foods as people become more concerned about their diet and lifestyle.
All this has fed into a situation where healthy food brands, many of them from small to medium-sized companies, are more broadly available and popular than ever. Naturally, as sales surge, bigger parties will be keen to tap into this growing revenue stream, supply chains and customer base.
Why is this driving M&A?
To tap into this growing market, bigger food companies naturally need to diversify their offerings to include more healthy food products. For companies with the cash to spend, acquiring existing healthy food brands is the best way to do this.
By buying an existing company, firms are acquiring the product range, management and workforce that have helped the business succeed. Perhaps equally, though, they are acquiring the firm’s brand recognition and the small business ethos that attracts many customers. Often the acquirer will seek to keep these elements intact, while scaling the target company’s operations up massively.
Buying an existing company can often be a more cost and time efficient way for big food firms to tap into the healthy food market than developing their own ranges. Not infrequently, attempts by well-known food brands to release healthier products are met with limited success. Take, for example, the case of Coca Cola’s sugar-free Life drink, which was introduced in 2013 and discontinued in 2019 following years of poor sales.
McDonald’s has been particularly slow off the mark to serve vegetarian options. Up until recently the company has cited a lack of consumer demand in response to requests for vegetarian and/or healthy options. In reality, demand was always there; they simply struggle to realign their image of a purveyor of unhealthy, processed and sugary fast food, especially amongst millennials.
For the companies being acquired, on the other hand, while being taken over by a bigger firm may somewhat harm their credentials as a smaller, more sustainable business, such concerns will be far outweighed by the opportunity presented for them to either take the cash, or to scale up their operations and tap far more deeply into demand for their products.
Dave Bunch, President of acquisitive US food company Growve, explained why big firms like his target smaller, growing companies, and why those companies are so open to being acquired:
“We’re looking for brands that are doing well, up and coming and growing, but maybe have reached that point where they can’t do a lot more on their own. Once they bring on additional capital and build out their team by partnering with someone like Growve, that can really help them. They might have great ideas, but they just need some additional help.”
This appetite for deals on both sides, combined with the fact that the health food sector in the UK is a highly-fragmented market largely populated by small to medium-sized firms is directly feeding into increased M&A activity.
In late 2020, confectionery giant Ferrero completed the acquisition of UK cereal bar firm Eat Natural for an undisclosed fee. As with many acquisitions of health food companies by bigger firms, the deal saw Eat Natural’s structure largely retained, with Ferrero acquiring its production facility and pledging to retain its management and staff.
Ferrero said it would look to build of Eat Natural’s “strong brand authenticity” while supporting it to expand into new markets. The acquisition forms part of Ferrero’s attempts to grow and diversify its portfolio of brands into the healthy snacking sector.
Commenting on the acquisition, Ferrero Group CEO Lapo Civiletti said: “We are bringing a much-loved, authentic product portfolio into our business, with a very strong market position in the healthier snacks segment.”
“This will allow us to be present in this relevant market segment, fulfilling the evolving needs and trends of consumers. We very much look forward to working with the Eat Natural team as we build our journey of growth together.”
Will food sector M&A continue?
It seems unlikely that health food will prove a short-lived M&A fad for numerous reasons. Mainly, consumer tastes look set for a lasting change towards healthier, more sustainable food, driven by increased awareness and concern for things such as nutrition, ethics and eco-sustainability.
This is borne out by the strength of M&A activity and investor interest in the health food sector. The influence of private equity firms, such as New Enterprise Associates, in deals for healthy food brands show how appealing they are to investors. This is similarly demonstrated by strong IPOs of health food companies - such as plant-based meat firm Beyond Meat and oat milk maker Oatly.
According to Andreas Kulcsar of DC Advisory, another key sign that health food M&A will be a lasting trend is growth in adjacent products, such as seafood and vitamin supplements, which indicate a long-term shift in consumer behaviour towards healthier products.
Discussing supplements, Kulcsar commented: “These have traded very well and that shows that consumers are extra concerned for their health, and one way to do it is by eating healthier. That can be pricey, but an easier and consistent way to do it is by taking supplements.”
Regarding seafood, Kulcsar added: “There are a very interesting development in that space because consumers are looking for tasty, healthy alternatives to meat proteins that they consume.”
Overall, as with Ferrero’s acquisition of Eat Natural, health food takeovers seem to be driven by long-term strategies to diversify product offerings to include healthier foods, something that they may have resisted or sidelined for years. This can also be seen in confectionery giant Mondelez’s recent acquisition of UK protein bar maker Grenade.
Earlier this year, Mondelez – perhaps best known in the UK as the owner of chocolate brand Cadbury – made a significant investment to acquire protein snack bar brand Grenade. The £200 million deal for the rapidly growing firm – a 4x multiple of its turnover and 40x its profits – showed the massive value that has developed in the healthy snacking market.
As with the Ferrero/Eat Natural acquisition, this is a health food acquisition in which the buyer will take a hands-off approach and allow the target firm to operate as they previously have done. The deal is also an example of a brand better known for its traditional confectionery offering making a concerted push into healthy foods. For Mondelez, the Grenade acquisition followed similar takeovers of American healthy snack brands including Perfect Snacks and Hu.
Following the announcement of the deal, Mondelez Northern Europe President Clive Jones commented: “Performance nutrition and low sugar options are becoming mainstream. This reflects the intention of Mondelez to build a broader portfolio to stretch across snacking and particularly move into high-growth wellbeing segments.”
Given the current environment in the food sector, with a steady stream of innovative small businesses in need of investment to scale up, and a range of big companies and private equity firms with the cash and motivation to buy into the sector, it seems likely that health food M&A will continue to grow during 2021.
Another potential driver of M&A in the health food sector is the fact that booming sales and growing appetite for healthy food brands are pushing valuations to new levels. For companies that bought into the sector years ago, the current climate offers a great opportunity to generate massive returns on their original investments.
In April of this year, Real Good Food cashed in on its vegan cereal bar brand Brighter Foods, selling the firm to The Hut Group for £43m, more than a 12x multiple of its post-tax profits. Perhaps more eye-catchingly, however, the figure represented around a 4.7x return on RGF’s initial £9 million investment made in 2017.
Mike Holt, Executive Chairman of RGF, commented: “We are very pleased with the disposal which crystallises substantial value for the Group and enables us to halve our debt burden at a stroke, whilst materially improving the funding of the pension scheme.”
What is the flipside? – Will there be an increase in companies disposing of “non-healthy” assets?
The trend towards healthy food has one more facet that may directly feed into increased M&A activity. As a growing number of food companies and private equity firms with food portfolios seek to reposition themselves as healthier companies, some will make disposals as well as acquisitions.
In their efforts to pivot to healthier products and improve their standing and market share among more health-conscious consumers, companies may decide that it makes financial and strategic sense to offset assets, divisions or whole companies that may be considered “unhealthy”.
Such assets will still be highly valuable and, as such, will have no lack of interested suitors. Therefore, sellers could still command a high price and then use the proceeds to fund their further expansion into healthy foods.
Tate & Lyle, one of the biggest firms in the world of sugar and sweetener, is synonymous with sweet goods. However, as the company looked to move towards healthier food products it began exploring a sale of its sweeteners division.
To put into perspective the magnitude of this decision and how it highlights Tate & Lyle’s commitment to repositioning as a healthier brand, the sweetener business is thought to generate around £1.8bn of the company’s £2.9bn revenue.
Of course, while losing this source of revenue may sound illogical, it is likely that the division, which sells artificial sweeteners to soft drink makers and for industrial starches, would command a very high price at auction.
The company confirmed in a statement that it was “in the process of exploring the potential to separate its food and beverage solutions and primary products businesses through a sale of a controlling stake in its primary products business to a new long-term financial partner."
"Tate & Lyle continues to successfully execute its strategy and remains confident in the future growth prospects of the company. However, the board believes that if a transaction of this nature was completed it would enable Tate & Lyle and the new business to focus their respective strategies and capital allocation priorities and create the opportunity for enhanced shareholder value."
With consumers increasingly concerned about their own health (not to mention the health of mankind and the planet as a whole), the M&A trend towards healthy foods looks set to be another case of an existing trend that has been rapidly accelerated by COVID-19.
The pandemic has helped to create a scenario in which healthy food brands are more successful than ever, while simultaneously helping bigger companies and private equity firms store up the funds necessary to embark on acquisition sprees as the pandemic begins to recede.
The scale of M&A and investor activity in the health food sector, as well as the ripe opportunities for consolidation, point to health food being one of the defining dealmaking trends, not just of 2021, but perhaps of the whole post-COVID era.
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