A Balancing Act: What M&A activity is on the food industry's horizon for the rest of 2017?
Food and beverage companies are changing the way they do business, and analysts see more consolidation and venture capital funding coming in the near future
Editor's note: This "A Balancing Act" story is the 16th in a series for Food Dive, where experts examine trends uncovered in earnings reports and discuss strategies that impact the balance sheet. Previous articles in this series can be found here.
Traditionally, big food and beverage companies have conducted their business in the same way that battleships sail, according to Lou Biscotti, a partner and the global food and beverage leader at financial firm Mazars USA.
Battleships are strong, steady and don’t change course often. Every move deviating from the set course comes after an in-depth evaluation. What will this move mean for the big picture — and is it too risky?
But as the seas get stormier, with small startups stealing market share and deals in adjacent industries — like Amazon’s planned takeover of Whole Foods — sending shockwaves through the food business, big food companies are changing their strategies.
“There is such tremendous competition going on right now,” Biscotti told Food Dive. “I think the disruption will be very significant this year. … All of these companies, it’s amazing to talk about when companies don’t stay on the curve and they don’t watch what’s going on with technology and newest trends — and all of the sudden, they could be out of business very quickly. And that never happened in the past.”
Biscotti said that Big Food is still reeling from the disruption that started a few years ago and has not yet figured out how to compete in today's market.
“We’re entering a really interesting time,” Bahige El-Rayes, a principal in the retail practice of consulting firm A.T. Kearney, told Food Dive. “A lot of the food companies over the last four to five years have been … really implementing cost-cutting like zero-based budget and other bottom-line-driven activities. But the question is when will that be not enough? When will there be no more opportunity to cut costs? When will they actually fundamentally have to rethink about growth and the growth agenda?”
"The question is, when will that be not enough? When will there be no more opportunity to cut costs? When will they actually fundamentally have to rethink about growth and the growth agenda?”
Principal in retail practice, A.T. Kearney
Growth is top of mind for many decision makers at Big Food companies. Practically every large company has a venture capital arm, and many of them are purchasing stakes in trendy up-and-coming companies. Analysts say that considering current trends and available capital, 2017 will be one the biggest years for mergers and acquisitions in the food and beverage world. And much action is yet to come in the latter half of the year.
“With the economy and the food business, the past 18 months … has probably been the most tumultuous I’ve seen in decades,” Brian Todd, president and CEO of The Food Institute, told Food Dive. The Food Institute tracks deal making in the food business and Todd has been a close observer for nearly four decades. “It will be interesting to see what will happen.”
What kinds of deals are on the horizon?
El-Rayes, the co-author of a recent report looking at the landscape for food and beverage deals, wouldn’t speculate on specific companies because he works with many of them, but he freely spoke about the trends that are currently playing out, including the likelihood of “megadeals” worth more than $1 billion.
“We have a strong pipeline of about $200 billion in acquisitions that have not closed yet and we see in the first half of the year a lot of big companies … trying to make another big acquisition,” said El-Rayes, the co-author of a recent report looking at the landscape for food and beverage deals. “Definitely 3G is somewhere on the horizon.”
With the news that Unilever rejected Kraft Heinz’s $143 billion takeover bid starting off 2017, it would only be fitting for 3G Capital — the equity firm behind the mega-company — to add to its storyline to a successful takeover in the last half of the year. But which company might it take on? The rumor mill has suggested that it’s looking at Colgate-Palmolive or PepsiCo — which CEO Indra Nooyi has said is looking to make acquisitions of its own to diversify its portfolio.
Last month, Kraft Heinz CEO Bernardo Hees told The Wall Street Journal that the company is looking for an acquisition of the type of enterprise with “brands that cannot only be in a specific market, but can be traveling and can be creative platforms.”
Biscotti sees Kraft Heinz continuing to be active in many different areas. The company has not been afraid to go outside of its comfort zone — which it certainly would have done had it acquired Unilever, a company that has a wealth of personal care brands as well as a footprint in the food business. Companies following this plan are just scratching the surface of how they can use M&A to broaden and differentiate their reach.
Aside from Kraft Heinz, other large companies are working through their own acquisitions. The $12.5 billion merger between Danone and WhiteWave, which created DanoneWave, was completed in April. In April, Tyson announced it was acquiring AdvancePierre for $4.2 billion.
Others yet are on the lookout to score a deal. Hormel has announced its intentions for a multi-billion dollar deal in the future. B&G Foods and Snyder’s-Lance said in their latest earnings reports that they’re on the prowl for acquisitions.
Companies looking to grow through acquisitions seem to be concentrating on a few trendy areas. Todd said that he’s seen a lot of action in healthy foods and beverages.
“The shift in consumer behavior with millennials and others watching more carefully, particularly in the snack business [is driving deals],” he said.
“The shift in consumer behavior with millennials and others watching more carefully, particularly in the snack business [is driving deals].”
President and CEO, The Food Institute
El-Rayes sees consumer interest in healthy and functional foods driving M&A. Personalized nutrition, protein-rich foods and free-from products are also bolstering activity.
With all those areas of interest, Biscotti thinks that Hain-Celestial is an attractive takeover target. For more than a year, analysts have been speculating about who might buy the organic and natural foods company — despite deep financial issues and an investigation by the Security and Exchanges Commission. The company released earnings for the prior three quarters last week, an attempt to put its financial issues in the rearview mirror.
“Not only has it hurt them financially, but it has taken them away from their momentum and it’s taken them a step backwards,” Biscotti said. "And I would think that because of those reasons, they’ll be a very likely candidate for an acquisition. I’d be surprised if they’re not acquired soon.”
Biscotti thinks an acquirer would most likely be a Big Food company that needs a better, more nimble foothold in the organic and natural realm.
However, Hain-Celestial isn’t the only player in the space that’s ripe for acquisition. Biscotti said that quick changes in the market make most companies in the natural and organic realm likely targets. He noted that once upon a time, Big Food wouldn’t even consider an acquisition of a company that was worth less than $100 million. Nowadays, they are looking at companies less than half of that size.
“They’re looking for any way to capitalize on these,” he said.
To venture or not to venture?
Many large food and beverage companies have started up venture capital arms in recent years. These business segments invest in up-and-coming brands, help them scale up, and offer assistance in areas ranging from marketing to distribution.
Sometimes, venture capital partnerships can lead to an outright acquisition of the smaller brand. Even if it does not, it's a relationship that allows the major manufacturer to benefit from having the smaller brand under its umbrella — and vice versa. These kinds of partnerships led to Dr Pepper Snapple’s $1.7 billion acquisition of Bai Brands, a leading player in the enhanced water category. Not coincidentally, Bai Brands has been a bright spot in the soda and juice company’s recent earnings reports.
Late last year, Tyson launched a VC arm that focuses on alternative proteins, broadening the reach of the meat company. Alternative proteins have become popular as consumers are looking for ways to eat a healthier diet. Tyson had already started investing in this area after it acquired a 5% stake in meat alternative company Beyond Meat.
El-Rayes said that venture capital firms are one way that food companies are trying to get around their own lack of nimble innovation in new, better-for-you areas. However, he said that venture capital arms are not the silver bullet to Big Food's growth problems.
“What food companies really need to do is revisit their innovation agenda,” he said. “If you’re a big food company and you’ve had a history of managing billion-dollar brands, it’s really hard to drive it from within. But if that’s what it takes, doing VC investments is a tool. But there’s much more needed than just investing in venture capital.”
“What food companies really need to do is revisit their innovation agenda. ... If you’re a big food company and you’ve had a history of managing billion-dollar brands, it’s really hard to drive it from within."
Principal in the retail practice of A.T. Kearney
Venture capital and incubator arms aren’t going anywhere anytime soon. In fact, Nestle just launched one last week. However, El-Rayes said that slow acquisitions through partnerships and VC tend to have less of an impact on share prices in earnings reports than companies and brands that are bought more rapidly. This is mostly because of the more gradual transition into more process-heavy Big Food companies, he said.
The Amazon (or Whole Foods) effect
While grocery deals don’t always directly impact food and beverage companies, CPG stock prices have dropped since Amazon announced its takeover of Whole Foods. Analysts told Fortune they believe it’s because the online behemoth has transformed the way people buy a lot of things. A partnership with a leading brick-and-mortar organic and natural store may skew disruption of the food business toward “healthier” options — not exactly what most Big Food companies are known for.
Biscotti sees disruption in the area of private label brands. While private label has been an increased area of focus for food retailers and manufacturers in the recent past, Amazon and Whole Foods are likely to accelerate the trend. Both the e-commerce retailer and the natural and organic food store chain have aggressively pushed their own private label products.
Add to that the $3.4 billion expansion of private label-centric Aldi and the U.S. opening of private-label heavy Lidl. Biscotti said he sees private label as the next big realm for M&A activity in the rest of the year.
“I think that there’s a good chance that some of these private label brands will be integrated into some of the larger retail markets,” he said. "It’s very important to have the consumer experience be something where you can create loyalty. Otherwise, you’re just not going to attract those consumers.”
El-Rayes said the Amazon-Whole Foods deal is something else that will force Big Food to think differently about what it offers consumers. Instead of tried-and-true name brands being their mainstay, large companies should take a hard look at figuring out what the future of brands will be.
Regardless of what specific future deals are stoked by the Amazon-Whole Foods merger, more change is on the horizon for food and beverage companies. Despite what has come before and what analysts and executives are expecting, Biscotti said it will continue to have a ripple effect on the industry.
“While people talk about mergers, it seems like every year, there’s a mega-massive-merger or acquisition of billions of dollars,” Biscotti said. “It just continues and I think it shocks the marketplace. … These are huge, huge deals that have major implications in the market. And it’s interesting — that term disruption — I think that’s what the last 10 years have been. It’s been a completely disruptive marketplace in food and beverage. … I think it will continue at a more rapid pace than we’ve seen.”
The "A Balancing Act" series is brought to you by BMO Harris Bank, a leader in commercial banking. To learn more about their Food & Beverage expertise, visit their website here. BMO Harris Bank has no influence over Food Dive's coverage.
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