From the increasing impacts of climate change to geopolitical unrest, the food and drink industry across Europe has come under significant pressure in recent years. However, a recent report by Oghma Partners looking at mergers and acquisitions (M&A) in the UK food and drink industry shows that deal activity is increasing and confidence in the market and the overall economy is returning.
“The increased activity we're seeing in the food and beverage sector is mirrored in other sectors,” Mark Lynch, partner at corporate financial advisory firm Ogma Partners, told Food Navigator. “Global deal value was reported to have increased by 38% in the first quarter, with Europe increasing by 58%. We believe this reflects a more stable interest and economic environment. ”
What does M&A activity tell us about the F&B sector?
The first four months of 2024 have been busy and profitable for M&A in the food and beverage industry. Compared to the same period in 2023, trading volumes have increased noticeably. In fact, trading volumes in this sector reached their highest since the same period in 2016.
Transaction values have also increased, although confusingly, initial numbers suggest otherwise. Let me explain…
At first glance, overall transaction value decreased by 31.7% in the first four months of 2024. However, this figure is skewed by one deal, the Glanbia Cheese deal in early 2023, which was completed for a whopping £304.6m. Excluding this trade, we can see that the overall trade value actually increased by 107.6%. This is great news for the food and drink industry, but what does it mean in the long term and how confident can the industry be about its financial future?
The confectionery industry continues to see strong M&A trends, accounting for the majority of deal activity alongside beverages and groceries. Getty Images/Andy Roberts
What can we learn from M&A transactions in the food and beverage industry?
The rise in mergers and acquisitions in the food and beverage industry is certainly a reason for optimism, but as with everything else, cautious optimism is also needed.
Although transaction value has started to increase, it remains below historical averages. So what is the reason?
Despite recent easing market conditions, economic, environmental and geopolitical challenges continue to strain the food and drink industry, which is thought to be inhibiting larger scale deals, with just 4.7% of transactions in this first third sector (T1) category having an enterprise value of over £50 million and none above £100 million.
Italian food group Newrat recently called off talks to buy Princess, citing “difficult market conditions” in the UK.
Indeed, activity from international buyers has fallen to 11.6% of deal volumes, again believed to be due to geopolitical and economic uncertainty, leading acquirers to focus on their domestic market. By comparison, M&A activity among UK acquirers has increased significantly, reaffirming that M&A remains a priority for companies.
Inflation and high interest rates have made the trading and financing environment particularly difficult for small and medium-sized businesses, with out-of-control acquisitions accounting for 14% of deals.
One of the most notable trends has been the decline in private equity deals, which accounted for just 9.3% of deal volume, but as the economy improves, this decline is not expected to last long.
“We expect private equity transactions to pick up once financial conditions ease,” Lynch explains. “There is currently significant pent-up demand from financial buyers, with global investment capacity reaching a record $2.59 trillion.
The alcoholic beverage industry also saw a large share of distressed M&A activity, with alcoholic beverage companies accounting for 33.3% of bankruptcy exit deals. Getty Images/Nicholas Mikolani
What does T1 2024 M&A tell us about food and beverage trends?
Both the beverages & food and confectionery sectors continued the active trend set in 2023, accounting for the majority of trading activity. This shows great interest in these sectors and it will be interesting to see if this trend continues into the second half of 2024.
The beverage alcohol sector in particular continued to be active, with nearly all of the beverage transactions involving the acquisition of craft breweries and branded spirits distilleries. Unfortunately, like the T1 sector, this sector also accounted for the majority of distressed M&A activity, accounting for 33.3% of transactions in which beverage alcohol manufacturers emerged from bankruptcy proceedings.
The trend of increased M&A activity in the food and beverage industry is expected to continue this year.
“Going forward, we expect trading volumes to remain strong and transaction values to gradually increase as market conditions improve,” Lynch said. “At the beginning of 2024, the UK economy will emerge from the recession it entered in late 2023, and consumer confidence and business confidence have risen significantly since last year.”
Furthermore, transaction values are expected to increase, albeit gradually.
“In March, inflation fell to its lowest level since September 2023, and food price inflation matched this pattern, easing interest rates for the 12th straight month,” Lynch said. “The Bank of England has kept interest rates on hold at 5.25% since September 2023, with a rate cut expected in the second half of 2024. The combination of these factors means that the outlook for M&A activity in the UK food and drink sector is Things are looking brighter, but it may take some time for trading volumes to recover to pre-pandemic levels.”
However, if the property is acquired by an overseas buyer, it may take some time to be returned.
“This year's global conflicts, supply chain issues, and global elections will continue to create geopolitical and economic uncertainty,” Lynch said.
