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| 2 minutes read

A growing appetite for private equity food platforms

There has been a battle raging for the most attractive FMCG companies in recent months, frequently leaving private equity at the back of the queue.

Despite the impact of the COVID-19 pandemic, major global food companies have been snapping up smaller branded food businesses, with Sonae acquiring Gosh!, Ferrero acquiring both Burtons and Fox’s and Mondelēz acquiring Grenade.

By targeting smaller, more innovative acquisitions, larger FMCG companies are combating slower organic growth in mature markets and avoiding the risks of failure from large scale M&A. This also has the added advantage of shifting their portfolios towards higher growth, purposeful products and brands, which is a broader strategic objective. In addition, larger FMCG companies can scale these companies through the use of their extensive New Product Development (NPD) capabilities, expand product reach across channel and geography, and also deliver operational synergies in sourcing, manufacturing and the supply chain.

Despite significant dry powder to deploy, the aggressive M&A activity by FMCG companies has made it increasingly difficult for private equity to compete for the most attractive companies, leaving them frustrated in regularly being outbid for the most sought-after assets.

Putting buy-and-build on the menu

In response, private equity are adapting their strategy towards platform investments, also known as ‘buy-and-builds’. These private equity food platforms enable private equity to act as a “quasi-trade party” and pay higher multiples as they can benefit from scale, synergies and shared NPD which in turn drive growth and profitability. Recent examples in the UK include Bain’s proposed acquisition of Valeo (itself a successful buy-and-build), PAI Partners’ simultaneous acquisition of Winterbotham Darby and Addo Food Group, and Exponent’s buy-and-build in the South Asian food sector.

Given the prevalence of these buy-and-build strategies, and as part of the preparation for sale, business owners should identify, design and plan for value enhancements in the plan to maximise value and hit the ground running post-deal, including:

  • Revenue synergy opportunities: particularly cross-selling opportunities, brand expansion and new product development
  • Cost synergy opportunities: key areas such as packaging, ingredients, procurement, logistics, the manufacturing footprint and SG&A
  • Cultural preservation: ensuring the culture of success is preserved by maintaining values, processes and talent in the go-forward structure
  • Further M&A: acquiring complementary brands and products to enhance the value proposition of the larger business

However, for acquirors, buy-and-build strategies are not straightforward to pull off as this requires targets to be available for sale and then successfully integrated. In addition, achieving synergies from several small bolt-on acquisitions can also be challenging due to operational, cultural, and geographical fragmentation.

Evolving consumer priorities

AlixPartners’ recent global Changing Consumer Priorities study has also highlighted how environmental concerns have grown substantially through the pandemic and are changing consumers’ buying decisions. This will continue to fuel the growth in “free-from”, with certain categories including free-from meat, free-from dairy milk and free-from gluten breakfast cereals expected to grow at high single digits per year over the next five years in the UK according to Euromonitor.

We expect significant M&A appetite from larger FMCG companies and the sizeable private equity dry powder to continue to drive M&A activity going forward in “free-from” food segments, including through the use of private equity buy-and-build investments. For sellers of businesses, thorough planning pre-deal is essential to maximise disposal value and ensure a smooth integration post-deal.

Despite significant dry powder to deploy, the aggressive M&A activity by FMCG companies has made it increasingly difficult for PE to compete for the most attractive companies, leaving them frustrated in regularly being outbid for the most sought-after assets.

Tags

private equity, fmcg, m&a, consumer priorities

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