Shazia Singh, a counsel at international law firm Nixon Peabody who works extensively on M&A, said the food and beverage industry is likely to see a “significant increase” in M&A activity over the next 16 to 24 months, with more acquirers and changes to come.
In this episode of FoodNavigator-USA's Soup-To-Nuts podcast, Singh sheds light on the evolving M&A landscape in 2024, the factors influencing it, who's active (including a prediction for when private equity will re-enter the picture), and his advice for both buyers and sellers looking to get the best deal.
[Editor’s Note: Never miss an episode of FoodNavigator-USA’s Soup-To-Nuts podcast – subscribe​ today.]​
Why has trading slowed and when will it pick up again?
Singh described the past two years as “tough” for M&A and is cautiously optimistic about next year, while acknowledging that insiders over the past few quarters have been premature in predicting a resurgence in food and beverage dealmaking.
“We had been hearing rumors for a while that deal activity would pick up in 2023, but as M&A lawyers, we hadn't really seen that, so we were a little worried going into the first quarter,” Singh said. “But things are looking up again and deal flow is up substantially.”
Still, she noted, many of the challenges that slowed capital flows in 2023 remain in place. These include high inflation and interest rates, which Singh said should subside over the next six months. And many of the challenges that arose during the pandemic remain, including workforce issues, high operating costs and supply chain problems.
The election cycle could also influence M&A activity, although Singh predicts that this election may not have as dramatic an impact as in previous years, given that both President Joe Biden and former President Donald Trump are high-profile figures.
Is private equity ready to get back in the game?
Another factor that contributed to the economic slowdown but could reverse is the degree of private equity's willingness to invest in food and beverage. Singh said that while many private equity firms have exited in 2023, her sources said they may be ready to get back in. However, the strategy may be different this time.
“Generally, when they do deals, it's taking them so long to close,” said Singh, because they're so focused on financial due diligence. He said that during the pandemic, a private equity fund might close five or six deals, but now they're lucky to do one a year.
She also noted that private equity investors are more interested now than they were during the pandemic in making sure companies are the right fit and have post-acquisition integration plans in place, explaining that many of the deals that were closed during the pandemic didn't give enough thought to post-acquisition, and now many of the acquired companies are struggling.
While private equity has stayed on the sidelines, strategic investment firms, including large CPG companies, have been actively restructuring their portfolios through mergers and acquisitions, Singh said.
“Strategic acquirers are still interested in a lot of M&A, but they are offloading a lot of non-core brands that had very high multiples in order to refocus on portfolio assets,” she explained.
Premium health and weight management products are piquing buyers' interest​
According to Sain, strategic and private equity investors active or re-entering the investment space are interested in brands and companies that meet consumer demand for healthful or premium products and weight management solutions.
She explained that investors want the same things as consumers, and that includes healthy products that support wellness, such as foods and beverages with functional benefits that improve immunity, digestive health and mental wellbeing.
The rise in consumer use of weight loss drugs is also driving demand for healthier options, particularly products that are high in protein, high in fiber and low in sugar.
“Another area that investors are really looking at is premium,” Singh added, which is a growing trend among consumers looking for special experiences and exclusivity.
On the other hand, there are some areas investors are shying away from, such as baked goods, snacks, dairy and meat products, Singh said.
Tips for closing the deal
Startups and smaller companies looking to cash in amid renewed investor interest will need to be patient and differentiated as acquisition hurdles become higher and buyers become more demanding, Singh said.
She suggested companies differentiate by investing in digital enhancements that can drive consumer engagement and capitalize on increased spending.
She also warned that the days of startups strategically selling after two or three years are over, with startups generally expecting an exit by year five at the earliest.
As for advice to buyers, Singh urges strategic and private equity investors to think carefully about what happens post-acquisition and how best to manage and integrate the brands and businesses they acquire.
