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Food M&A Heats Up

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Over the past decade there has been a bifurcation of M&A activity in the food industry, as “better for you” health & wellness brands have attracted strong acquisition interest from both strategic and financial acquirers while more traditional steady, solid, profitable, but lower-growth food manufacturing businesses have not attracted as much attention. That is changing as food M&A heats up.

Food companies with brand messages focused on health & wellness attributes have been attractive to larger consumer packaged goods companies for a decade or more as these larger CPG conglomerates have, in a sense, de-risked their product pipelines by outsourcing new product development efforts to entrepreneurs. What’s more, these upstart brands bring a millennial marketing aura not available to their corporate parents: today’s consumers buy Bare Naked granola rather than Kellogg cereals, Annie’s Naturals rather than General Mills, Honest Tea rather than Coca Cola.

Once a startup brand achieves a certain revenue run rate accompanied by SPINS data showing consistent sell-through rates in the natural channel, larger brand marketers take notice. Five to ten years ago a “better for you” brand had to reach a $75 million revenue run rate to attract acquisition attention (the approximate revenue run rate at which General Mills’ Small Planet Foods acquired tortilla chip marketer Food Should Taste Good in 2012 and at which Pepsico/Frito Lay acquired Stacy’s Pita Chips in 2005). Today, competition for branded assets has lowered that revenue threshold to as little as $10 to $20 million.

“High-growth assets are getting very high premiums,” said Kainos Capital’s Jay Desai in an interview with Mergers & Acquisitions magazine, pointing to ConAgra’s recently-announced acquisition of snack marketer Thanasi Foods and also pointing to Hershey’s acquisition of Bark Thins and its $240 million purchase of Krave jerky. Desai also observed that CPG companies have become much more active in smaller-sized food deals as investors clamor for top line growth in a low growth sector. With inexpensive capital readily available, General Mills, Tyson, Campbells and others have delved into venture capital-type funding of growth equity investments to nurture growing brands, presumably as a precursor to eventual acquisitions.

Private equity interest in the food industry has also grown exponentially over the past decade. Ten years ago PE funds typically stayed away from food companies, thinking that the mature sector was unlikely to generate the outsized returns sought by fund managers. Then the high growth of wellness brands garnered private equity attention and a number of funds have profited handsomely on exits from their early acquisitions of food companies. Combining those visible successes with the macro excess of undeployed private equity capital, generalist PE funds have followed the sector specialists into food M&A transactions and larger PE funds have come down market in search of smaller transaction opportunities. As a result M&A activity is strong across all subsectors of the food industry, no longer just in health & wellness, as evidenced by private equity investments in protein (Wynnchurch Capital/Stampede Meats); ethnic foods (Palladium Equity Partners/Del Real Foods; Grey Mountain Partners/Kronos Brands); sauces and condiments (Advent International/Rao’s Specialty Foods; Glencoe Capital Management/Robert Rothschild Farm); and snacks (Benford Capital Partners/Saco Foods). Private equity’s focus on the food sector extends to suppliers to the industry as well. Warburg Pincus has recently agreed to acquire food processing equipment maker Duravant, and the food packaging sector has seen a number of private equity acquisitions closed in the past few months.

As a result of this widespread interest, today there are multiple strategic and private equity bidders for most every food company brought to market. We’ll be writing more on this subject in coming months, and meanwhile we welcome a conversation if you are contemplating an M&A transaction as either a seller or an acquirer of a food manufacturer, marketer, or supplier.