Food & Beverage M&A Pulse

Author: Sarina Gill

The M&A landscape in the food and beverage industry witnessed shifts and challenges throughout 2023, driven by macroeconomic conditions, consumer preferences, and industry disruptions. These factors influenced investor sentiment and activity, with strategic buyers demonstrating more resilience in comparison to their financial counterparts. In response to changing consumer preferences and market dynamics, companies adjusted their strategies, focusing on high-growth, high-margin categories, and utilizing M&A to reshape their portfolios.

Looking ahead to 2024, M&A activity is expected to be driven by strategic buyers focused on premium and high-growth categories. Partnership agreements and technological advancements will play a crucial role in enhancing operational efficiency and addressing industry pain points. As inflation levels decline and interest rates are potentially cut, a surge in M&A activity in the food and beverage category is forecasted for the latter half of the year.

Lastly, key considerations for food and beverage companies contemplating M&A include assessing its financial stability, cost structure, and synergies with potential parties. Understanding these factors will be essential for companies to capitalize on M&A opportunities and secure favorable valuations in a rapidly evolving market landscape.

M&A Activity – A Year In Review:

2023 U.S. food and beverage transaction volumes were in line with pre-COVID, solidifying the sectors’ position as a strong subcategory within the wider consumer industry landscape. However, the total value of closed deals experienced a decline from 2022. Specifically, deal values within the U.S. food and beverage sector dropped from $11.5B in the H2 2022 to $3.1B in H2 2023, representing a 73% decrease. H2 2023 marked the lowest semi-annual period in the past 5 years in terms of total closed deal value. Middle-market food and beverage M&A transactions mirrored the trends observed in the broader M&A market, with the category benefiting from several high-profile mega-deals that contributed to industry’s’ overall deal value.

Reflecting the broader market trends, M&A activity in the global food and beverage industry in 2023 was impacted by challenging macroeconomic conditions, including heightened inflation, rising interest rates, cautious investor sentiment, and general market uncertainties. Notably, interest rates rose significantly over the past year, from 4.25% in December 2022 to 5.0% in December 2023. This rise, coupled with a scarcity of affordable debt, led to a stagnation in financial buyer activity within the food and beverage sector. Average extended holding periods for portfolio companies were extended as the exit environment, from an M&A and IPO perspective, remained unattractive. On the strategic front, the rising costs of raw materials remained a primary concern for food and beverage companies, prompting many to implement hedging strategies to mitigate the price volatility of raw materials.

Following the various rate hikes, both financial and strategic buyers favored acquisition targets with consistent, stable cash flows and disciplined capital allocation, prioritizing sustainable growth and profitability over aggressive expansion. Louis Biscotti, head of the food and beverage group at Marcum, noted there is a growing hesitancy among consumer-packaged goods (CPG) companies towards bold acquisitions, indicating a preference for purchases in categories such as snacking, frozen foods, and healthier options. Ultimately, companies with strong financial metrics, promising growth prospects, effective management teams, and unique offerings stand to achieve favorable outcomes in the current market. Leveraging technology, including B2B digital tools and digitized supply chains, could assist in further enhancing operational efficiency and commercial growth for food and beverage companies.

Additionally, businesses, particularly in the food and beverage subsegment, have adjusted their product portfolios and reallocated resources towards high-growth, high-margin sectors and utilized SKU optimization. Pursuing M&A has aided in reshaping portfolios towards premium or growing categories, addressing portfolio gaps, while divestitures have been utilized to streamline focus on core categories. For example, established companies in the industry, such as Mondelez, have pursued M&A to transition their portfolios away from lower growth sectors, resulting in the sale of its chewing gum business to Perfetti Van Melle for $1.4B in October 2023. Similarly, private label giant TreeHouse Foods restructured its portfolio, divesting its snack bars business to John B. Sanfilippo & Son in September 2023 for $63M, while simultaneously acquiring pickle brands from Smucker in October 2023 for $20M.

Notable Acquisitions in 2023:

Packaged foods, alcoholic and non-alcoholic beverages, and food and beverage distributors accounted for the majority of North American food and beverage M&A activity.

The slow pace of innovation at certain enterprises is resulting in a lag in product development, prompting them to resort to M&A as a strategy to address deficiencies in their portfolios. Specifically, the snack category is experiencing rapid growth, leading manufacturers to adapt their products to align with evolving consumer preferences.

  • J.M. Smucker invested close to $6.0B, representing a 17.2x adjusted EBITDA multiple, to acquire Hostess Brands, the owner of renowned sweet snack brand Twinkies. The move aimed to enhance its position in indulgence categories and cater to consumer needs centered around convenience and snacking. Additionally, Smucker partially offset its expenditure by divesting its Sahale Snacks business to Second Nature Brands, a U.S.-based producer of high-quality, nutritious, and health-conscious snacks, for $34.0M.
  • Campbell Soup, which already owns Prego, announced plans in August to buy Sovos Brands, the owner of premium pasta sauce brand Rao’s, for $2.7B. Campbell CEO Mark Clouse stated, “this acquisition fits perfectly with and accelerates our strategy of focusing on one geography, two divisions and select key categories that we know well.”
  • Unilever, the leading global ice cream manufacturer, expanded its range of frozen treats by acquiring the US-based frozen Greek yogurt brand Yasso.

In 2023, there was notable activity within the fresh foods sector, particularly observed in private equity, where investors identified opportunities for acquisition and expansion. Additionally, consumers displayed a willingness to explore a wider range of products, expanding their culinary preferences:

  • In July 2023, Mars purchased Kevin’s Natural Foods for $800M, a private equity-backed company, aiming to establish a foothold in the better-for-you foods and the refrigerated grocery segment.
  • In June 2023, HighPost Capital spearheaded an $85M investment in Magic Spoon, a celebrity-endorsed cereal brand focused on better-for-you products.
  • In December 2023, Bain Capital struck a deal to acquire a significant stake in 1440 Foods, the parent company of Pure Protein, Met-Rx, and Body Fortress, specializing in healthy bars, snacks, and protein powders.
  • In the beverage sector, prominent companies such as Anheuser-Busch, Constellation Brands, and Molson Coors, among others, executed strategic divestments to restructure their portfolios. Additionally, premiumization emerged as a significant trend, with consumers favoring higher end brands despite a persistent decline in purchasing power throughout 2023.
  • In August 2023, Tilray Brands, a prominent global company specializing in cannabis-lifestyle products and CPG, announced its acquisition of the remaining 57.5% equity stake in Truss Beverage Co., a non-alcoholic beverage company infused with cannabis, from Molson Coors Canada. This acquisition not only bolstered Tilray’s portfolio of high-growth brands but also solidified its status in the Canadian cannabis market and positioned the company as a leader in the adult-use beverage sector. Additionally, Tilray widened its presence in the craft beer sector by finalizing the acquisition of 8 beer brands from Anheuser-Busch in October 2023.

Finally, an area that demonstrated resilience throughout the year was food distribution, encompassing both broadline and specialty sectors. Key players in the space have actively pursued acquisitions to augment their service offerings or enhance their capabilities.

In October, Sysco acquired Edward Don, a top foodservice equipment distributor with an annual revenue of approximately $1.3B. This acquisition opens up new revenue streams for Sysco by allowing it to offer equipment and supplies to its extensive customer network.

Trends To Keep an Eye Out For in 2024:

  1. In 2024, dealmaking for smaller to mid-sized companies is expected to focus on acquisitions aimed at restructuring portfolios towards premium or high-growth categories, niche segments, or new geographic markets. These “bolt-on” transactions allow companies to strengthen their presence in specific sectors without burdening themselves with excessive debt, a particularly attractive strategy amid a high-interest rate environment.
  2. Strategic buyers are expected to continue to be the most active in 2024. CPG companies like Campbell Soup, Kraft Heinz, General Mills, Kellogg, and Hershey successfully reduced their debt levels in 2023 compared to the pre-pandemic, thus enhancing their financial positions. These companies are in a strong position with ample risk capacity and appetite to pursue significant acquisitions.
  3. Partnership agreements are likely to become more common, particularly those involving substantial transactions. For instance, in July 2023, Keurig Dr Pepper and La Colombe unveiled a strategic alliance. This partnership encompassed a long-term sales and distribution agreement for La Colombe’s ready-to-drink coffee, as well as a licensing, manufacturing, and distribution arrangement for La Colombe-branded K-Cup coffee pods. Additionally, Keurig Dr Pepper made a $300M equity investment in La Colombe.
  4. As the food and beverage industry grapples with escalating costs, technology is becoming increasingly paramount for operators aiming to enhance profit margins and streamline operations. Advanced technologies like artificial intelligence (AI), machine learning, and robotics are being harnessed to optimize various production processes, ranging from demand prediction to order fulfillment and distribution. Furthermore, AI and the Internet of Things (IoT) are being employed to achieve Environmental, Social, and Governance (ESG) objectives.
  5. With significant declines in inflation levels observed in both Canada and the U.S., we predict that anticipated interest rate reductions in 2024 may stimulate a surge in M&A activity within the food and beverage industry in H2.

To Conclude – Key M&A Considerations for Food and Beverage Companies:

As M&A activity is projected to rebound in 2024, numerous food and beverage companies may be contemplating whether they are adequately prepared for such transactions. Whether you’re considering a buy-side or sell-side transaction, it’s crucial to evaluate the following characteristics to determine if your company is well positioned to capitalize on such opportunities and achieve a favorable valuation:

  1. Financial Stability: There has been a notable change in the fundraising landscape since the COVID-19 era, with a considerable decrease in venture capital funding for food and beverage companies. There are plenty of factors that are to blame — rising interest rates and input costs, a stalled IPO pipeline, and lengthened diligence. In the first quarter of 2023, there were 1,030 transactions that raised approximately $1.0B, contrasting with 1,349 deals totaling $1.3B in the same period of 2022 – with some of the decline due to heightened valuations in 2022. This shift underscores the importance of maintaining a robust balance sheet with strong earnings and minimal debt, as it enhances the desirability of your firm to potential buyers in the current macroeconomic climate.
  2. Clear Cost Structure: Numerous businesses are contending with challenges such as escalating wages, labor shortages, supply chain disruptions, and inflationary pressures, all of which contribute to rising costs. Businesses that can boost margins, for instance, through the implementation of infrastructure like IT, and improved human resources, and logistics, frequently possess increased negotiating power during discussions.
  3. Strategic Rationale: Each M&A transaction ought to be in line with your company’s long-term strategic objectives. Whether it involves entering a new market, acquiring additional capabilities, or realizing cost synergies, there must be a clear rationale behind the decision. A well-articulated strategy offers a roadmap for the merger or acquisition, ensuring that the transaction is logical in the present and promises value in the future.
  4. Creative Deal Structuring: Lastly, M&A transactions can assume various transaction structures that can be tailored to meet the goals of both buyers and sellers. Acquirers in the food and beverage industry have encountered challenges, including assessing valuations, amid intermittent lockdowns and supply chain disruptions, compounded by escalating interest rates and shifts in consumer behavior. To address and mitigate valuation disparities, many acquirers have employed innovative deal structures, such as incorporating contingent considerations.