Food & Beverage Industry Mergers & Acquisitions Q2 2016

Corporate activity in the food and beverage industry  accelerated in the second quarter of 2016 with thirteen acquisitions announced. Transactions spread across multiple sectors with the seafood and packaged foods sectors reporting the highest levels of activity. Transactions in the packaged food sector included leading brands such as Maggie Beer, Patties Foods and Gourmet Garden.

Capital raisings in the public and private markets also increased sharply with businesses seeking additional funds to capitalise on domestic and international growth opportunities.

A growing investment theme is the increasing value placed on a diversified customer base. As a result, initiatives to develop distribution outside the corporate supermarket retailers and gain access to other channels, including foodservice and industrial, is a growing strategic priority.

The fragmented nature of the foodservice market makes entering this channel a challenge. The spread of customers in foodservice provides a diversification benefit to suppliers. We expect this channel diversification strategy to extend across all the sectors in the food and beverage industry. We have also witnessed a growing number of distribution joint ventures with manufacturing businesses seeking access to new markets including export.

 SEAFOOD

Seafood was an active sector in Quarter 2, with two transactions announced. The largest transaction was the acquisition of a 90% shareholding in Perth based seafood processor, Kailis Brothers, by Legend Holdings. Legend Holdings is a Hong Kong listed Chinese conglomerate with interests across the agriculture and food industries.

The proposed acquisition of a controlling stake in Mareterram by Sea Harvest is another notable transaction in the sector. Sea Harvest was a 19.9% shareholder in Mareterram when the company listed on the ASX in January 2016. Sea Harvest recently extended an offer to acquire 50% of the shares held by remaining Mareterram shareholders. The offer is conditional on Sea Harvest achieving a 50.1% shareholding in Mareterram. The offer from Sea Harvest closes on 8 July 2016. The two deals are further evidence of the interest of foreign investors in the seafood sector.

Prospects of soaring international seafood consumption bodes well for businesses in the seafood sector. The limited entry points into the sector is a hurdle for investors seeking exposure to the sector. We expect more corporate activity in the sector as investors continue to pursue protein based food businesses.

PACKAGED FOODS

The packaged food sector saw three notable transactions in Quarter 2. US food giant, McCormick & Co, acquired Botanical Food Company  from Advent Private Capital. Botanical Food Company manufactures and sells the Gourmet Garden brand of packaged herbs and spices. McCormick paid $150 million for the business and plans to further expand the Gourmet Garden brand through McCormick’s global distribution network. McCormick acquired the business on a 2.1 times revenue multiple.

Primary Opinion entered into an agreement to acquire 48% of Maggie Beer Products for a consideration of $15 million. The offer from Primary Opinion values Maggie Beer Products at an annualised revenue multiple of 1.5 times and a 12.3 times EBITDA multiple. The acquisition of a significant shareholding interest in Maggie Beer Products represents a shift in focus for Primary Opinion to the food and beverage industry.

Primary Opinion has signalled future investment in the industry and foresees a shift to health and premium foods as incomes rise and consumer preferences shift. Primary Opinion, together with Tasfoods and Beston Global Foods are examples of ASX listed companies that focus on investing in premium food and beverage assets.

The proposed acquisition of Patties Foods by Pacific Equity Partners is another standout transaction in the sector. The Patties share price fell sharply in February 2015 after the company recalled its frozen berry range. Since exiting the frozen berry business, Patties has focused on its core capability in the frozen savoury category. Patties will be a welcome addition to the Pacific Equity Partners portfolio which includes food assets such as Manuka Health and Pinnacle Bakery supplies.

DAIRY

One transaction was announced in the dairy processing sector during the quarter. Chinese dairy farming company, Inner Mongolia Fuyuan Farming, acquired a 79% shareholding in Burra Foods. Although the terms of the transaction were not disclosed, the Burra Foods deal is likely to be the largest deal in the food and beverage industry in Quarter 2, with reports of a $300 million transaction value.

Despite the Burra Foods acquisition, we note the substantial drop-off in the number of dairy processing transactions compared to 2015. With no reported transactions in Quarter 1, the first half of 2016 has reported significantly less than the 10 transactions in the sector during 2015. There is still strong demand for dairy products, however investors may prefer to wait until the current supply situation stabilises before acting on acquisition opportunities in the sector.

OTHER SECTORS

The acquisition of Allclypt by Superior Food Services is a transaction of interest in the food services sector. Superior Food Services was acquired by Quadrant Private Equity in 2015. Allclypt is a bolt-on acquisition for Superior Food Services, as it expands its distribution footprint to South Australia. The fragmented nature of the food services distribution sector has attracted attention from parties looking to improve their position through consolidation initiatives.

CAPITAL MARKETS TRANSACTIONS

Listings on the ASX

Three food and beverage companies listed on the ASX during Quarter 2 2016. Tegel Group was the largest food and beverage listing on the ASX and is also dual listed on the New Zealand Stock Exchange. The growth of global chicken consumption continues to accelerate, with Tegel seeking to expand production capacity to support future growth. Affinity Equity Partners retained a 45% interest in Tegel after the listing.

Capital raised by ASX listed companies

 Four ASX listed companies raised additional equity capital during Quarter 2. Yowie Group is the marketer of a character-moulded, children’s chocolate product. With Kinder Surprise being locked out of the lucrative USA market (authorities have deemed its small toy as a choking hazard), Yowie has the only patent approved by the US FDA for a chocolate encased toy. The proceeds from the $32 million capital raise will be used to fund the rollout of Yowie’s products in the USA, with a particular focus on Walmart.

The proceeds from both the Capilano Honey and WCB capital raises will be used to fund expansion. SeaFarms Group raised $10 million to fund the completion of a feasibility study into prawn farming in the Northern Territory.

Capital raised by unlisted companies

Two companies not listed on the ASX raised capital from private sources during Quarter 2. PERKii is a probiotic drink that was developed in conjunction with scientists at the University of Queensland. The capital raised by PERKii will be used to fund the rollout and commercialisation of the product as it seeks to establish a presence in the functional drinks market.

Businesses currently pursuing capital raises include meal delivery business, My Food Bag, and IRexchange (Independent Retailers Exchange), a digital marketplace for independent retailers and suppliers.

BUSINESSES PLACED UNDER ADMINISTRATION

 A number of food and beverage businesses were placed under administration during the quarter. Gourmet retailer, Jones the Grocer, went into voluntary administration for the second time in almost two years.

For some retailers the gourmet retail sector has proved challenging as evidenced by Woolworth’s shrinking of the Thomas Dux chain.