UPDATE: Food M&A Roars Ahead, Bucking Broader Deal Timidity

28th Jul 2010 16:32

(Adds comment.) By Jessica Hodgson and Marietta Cauchi Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Against a backdrop of tepid M&A activity, deal-making in the European food sector over the past two quarters has been piping hot. Deals in the food sector were responsible for almost three-quarters of all consumer M&A activity, globally, in the second quarter of 2010, according to a survey by Ernst & Young, published this week. Experts who specialize in the space said they believe that a unique set of factors is combining to make food companies willing deal-makers and attractive targets, and that there will be more deals to come. "The food industry is showing early confidence in the recovery," said David Murray, transactions leader for global consumer products at Ernst & Young. "There's plenty more food deals in the pipeline." In the past 10 days alone, three midsize European food businesses have been sold, culminating in the announcement Wednesday that MW Brands, the canned seafood business that makes the John West tuna brand, is being sold to Thai Union Frozen Products (TUF.TH) for EUR680 million. Last week, buyout firm Permira agreed to buy the Italian frozen foods business of Unilever PLC (UL), Findus Italy, for EUR805 million. More recently, Lion Capital agreed to pay EUR1.5 billion for French frozen food retailer Picard Surgeles, a deal clinched rapidly after a pre-emptive bid. In all three cases, bidders were attracted to companies in part because of their strong brands. Unilever in Italy owns the rights to produce typical household-name Findus frozen foods, alongside frozen versions of high-quality Italian meals, while Picard Surgeles makes upscale frozen foods which it retails in its own-branded chains. But Murray cited a broader underlying backdrop making consolidation attractive: The food industry finds itself increasingly squeezed as retailers look to source their products on a global basis, pushing manufacturers to standardize product pricing around the world and to shoulder more of the marketing and packaging costs. This means that squeezing profitability and growth out of businesses is harder and harder, making the economies of scale that come from consolidation more attractive. With businesses in all sectors beginning to emerge from recession and access to finance growing easier, now is also a natural time for M&A to recover. While corporates across other sectors have been timid about placing big strategic bets, food makers have unique reasons why now may be a good time to capitalize on improving fundamentals, experts said. They pointed to the fact that a number of major European private equity houses such as Permira and Lion Capital, having acquired stakes in food businesses between three and five years ago and restructured them, are now looking to exit these investments. "We are at a point in the economic cycle where sellers have seen stock market valuations improve and they are uncertain about the future," James Amoroso, a food industry consultant said. "The buyers have been there for some time waiting for the sellers and are now able to do those deals." Finally, food is a uniquely defensive business sector. "People will always need to eat," Ernst & Young's Murray said. "Economic confidence is coming back at different speeds in different sectors. But it's natural that a relatively defensive industry should feel the confidence early in the recovery." Jens Welter, European co-head of consumer and retail at Credit Suisse Group (CS), agreed with this analysis. He pointed out that consumer M&A more broadly, and food M&A in particular, tends to hold up relatively well in down cycles and doesn't reach the same peaks of activity in up cycles as some other sectors. Consumer deals tend to be among the first to come back after recessions, he says. The current interest shown in the food sector was typified by the stampede of bidders, both strategic and private equity buyers, when Kraft Foods Inc. (KFT) auctioned the Polish and Romanian confectionery businesses it inherited on its takeover of Cadbury in February but was forced to sell as part of the European Commission's approval of the deal. The signs point to more activity in the coming months. In particular, the private equity owners of United Biscuits--the Hayes, England-based maker of Jaffa Cakes and Hula Hoops--Blackstone Group L.P.(BX) and PAI Partners are assessing whether to progress with a sale, people familiar with the matter said. The auction of the business, which isn't expected to commence formally for a few more months, could generate around GBP2 billion, according to one report. Other food and food-related sales likely to hit the market later this year include PAI Partners' 50% stake in French dairy products company Yoplait, and CVC Capital Partners Ltd. is looking to sell Spanish company Mivisa, Europe's third-largest maker of cans for food products. Further out, Premier Foods PLC (PFD.LN), the U.K.'s largest food producer, which owns enviable household-name brands including Mr Kipling cakes, Branston pickle and Hovis bread, is a possible target, although analysts caution that issues, including high debt levels and significant pension liabilities, would make a takeover challenging. Warburg Pincus has a 10% stake in the company and an option to buy more. The company's share price has roughly halved over the past year. -By Jessica Hodgson and Marietta Cauchi; Dow Jones Newswires; +44207 8429373; [email protected]. (END) Dow Jones Newswires July 28, 2010 11:32 ET (15:32 GMT)