Editor's note: "A Balancing Act" is the fifth in a series for Food Dive, where experts examine trends uncovered in earnings reports and discuss strategies that impact the balance sheet. You can read the first piece here, the second here, the third here, and the fourth here.
Food and beverage mergers and acquisitions activity has been sleepy at best in 2016. Unlike 2015, this year has had few "mega deals" that push the needle on M&A deal value, save the recently announced Danone-WhiteWave tie-up.
But instead of the industry being in turmoil over what could be a lack of buyers, sellers or available cash, none of the doomsday scenarios are actually playing out. That's despite quarterly dips in deal value as high as almost 94% year over year.
Analysts believe that last year was a tough year to match, much less beat. But several macro trends are also at work that might better explain why 2016's M&A activity has slowed — and why this doesn’t signal a downturn in food and beverage M&A overall.
2016 M&A by the numbers
Based on deal value statistics, M&A in the food and beverage industry has declined significantly year to date. In Q1 2016, food deal values were down a whopping 93.9% from Q1 2015 at only $4.1 billion, the lowest value for this sector since Q1 2009, according to Mergermarket's Consumer Trend Report for the quarter.
That deal decline wasn't exclusive to food. Global consumer M&A saw 449 deals worth $45.9 billion in Q1 2016, compared to 523 deals worth $137 billion in Q1 2015. The U.S. posted the steepest decline by deal value, with an 82.3% drop year over year and an 84.1% decline from Q4 2015.
That trend continued into the second quarter, according to Mergermarket’s H1 2016 report. Comparing H1 2016 to H1 2015, the food sector saw a 75.3% decline, with an M&A deal value total of $20.1 billion for the first half of this year.
But again, that decline was almost across the board: For H1 2016, global consumer M&A reported a 51.4% drop compared to H1 2015. In the U.S., consumer M&A deal values fell 64.4% and deal count dropped 14.1% year over year.
"I think everyone was surprised at the general slowdown globally as well as in North America," Anthony Valentino, deputy editor at Mergermarket, told Food Dive. "If you had told somebody last year that food, out of consumer, would be the slowest sector or would take that big of a drop, I don't think anyone would have really believed you. … It was actually quite surprising because food M&A has been really active."
How can 2016 compare to a year of mega deals?
What skews these numbers considerably is the fact that 2015 saw a handful of mega deals valued at over $10 billion. Those massive deals led to a record M&A deal value of $516.5 billion in the consumer sector for the year, a 54.7% increase over 2014.
In the food sub-sector, which jumped 57.8% year over year to total $120.8 billion in 2015, that was the Kraft-Heinz merger. The tie-up created North America’s third-largest food and beverage company and the world’s fifth-largest.
"There was no way, and there is definitely no way it’s going to happen now, that we’re going to see the same very heightened deal values from last year, like Kraft-Heinz," said Valentino. "You could fill a couple hundred transactions just to get to the level of one Kraft-Heinz transaction."
Under Mergermarket’s "other" sub-sector, which includes beverages and other consumer goods categories, there was also the Anheuser-Busch InBev takeover of SABMiller, which just received U.S. regulatory approval last week. That category also included a number of craft beer acquisitions, such as AB InBev’s handful of craft purchases at the tail end of 2015 and Constellation's acquisition of Ballast Point Brewing, the largest craft brewery acquisition to date at $1 billion.
While H1 2015 brought three mega deals, those mega deals had yet to be seen as of H1 2016. One mega deal almost tipped the scale on the very last day of H1 2016, when Mondelez put in a $23 billion takeover bid for Hershey, which Hershey quickly rejected. Had the two companies agreed to the deal on that day, the M&A deal value for H1 2016 would have looked very different.
One week later came the first food and beverage mega deal of 2016: Danone announced a deal to acquire WhiteWave Foods for $12.5 billion, including debt and other WhiteWave liabilities.
A Mondelez-Hershey deal may not be off the table yet either. Analysts note that the Pennsylvania attorney general's current investigation into the Hershey Trust Company, which commands 81% of voting rights over the chocolate giant, could leave Hershey more vulnerable if Mondelez returns with a higher offer.
What the numbers don’t reveal, experts say
Despite what the numbers may say, experts don’t believe the food and beverage industry is in any sort of M&A crisis.
"We don't really feel a downturn per se," Greg Pearlman, managing director and head of the food and consumer group at BMO Capital Markets, told Food Dive. "In some respects, the deal business is always fickle, and there are a couple different ways to count, obviously, how active things are."
"These things go in waves, and we may be watching a wave where there's less deal activity," Pearlman continued. "They may have been measured by relevant number of deals, but by no means is there a downturn in my sights."
"From everyone I’ve spoken with, there is still a ton of interest and deal volume in general," said Valentino. "While the M&A activity has slowed, everyone I’ve talked to — private equity, bankers — they all have full pipelines. Things are just not closing for one reason or another. The outlook is still good."
"Everyone you talk to in the community (says) it’s not an issue of sourcing or lack of good quality companies out there," Valentino continued. "It’s that all the pipelines are full, or so they say."
"The atmosphere is highly attractive for M&A," said Pearlman. "We've got low interest rates, a stable economy, a domestic market, (and) low commodity prices. The business atmosphere is good, and the deal atmosphere is good."
So what’s the deal?
Analysts point to a few different reasons why food and beverage M&A seems to have slowed down so far in 2016.
After closing a mega deal or suite of smaller deals, not all companies are quick to race back into the M&A game.
"Some of them are not actively looking while they're digesting and it’s not the biggest priority,” said Valentino. “I think the indigestion from M&A meals last year probably, for some of these larger strategics, hasn’t particularly helped the situation."
"Strategic buyers have been pretty busy, and, not all of them, but many of them, are kind of filled up," said Pearlman.
Valuations have settled after soaring in recent years. That includes deals such as General Mills’ $820 million payout for Annie’s in 2014, which was 42 times Annie’s trailing enterprise value to EBITDA, according to Dealogic. It was the highest multiple for a food company since Unilever offered Ben & Jerry’s 50 times its TEV/EBITDA in 2000.
"You see a trickle-down effect there when valuations aren’t as strong," said Valentino. "If the company is still growing and there is not that emphasis, people are willing to sit on the businesses for a little while, too, which can also impact (M&A deals) a little bit."
"If you're a seller, you might say to yourself, 'This may not be a great time to sell my business because the guys who are going to pay me big dollars may be busy,'" said Pearlman. "This is a good time, in some respects, to kind of hold."
Highly competitive marketplace
The highly competitive nature of food and beverage M&A over the past few years led to those soaring valuations in the first place. Manufacturers have raced to compete not only against each other, but against private equity firms that have also been active in the space.
Larger food and beverage companies, however, can often offer competitive perks that private equity and other investment firms can’t, such as an existing distribution platform and relationships with retailers, suppliers and others in the industry.
Extended due diligence
With so many players on both sides of these M&A deals, due diligence can take longer for both buyers and sellers to ensure they’re gaining from the transaction.
"There are a lot of options right now and I think the due diligence on both ends is really extended at this point," said Valentino. "I do think the transactional period can last a bit longer now, which I think is part of the reason (for the M&A slowdown)."
While deal values may have fallen significantly compared to last year, the food and beverage industry has five more months for potential deal-making that could beef up the final M&A tally by the end of the year.
"The fact of the matter is the appetite is still there; the money is still there," said Valentino. "The need for growth, especially from the publicly traded guys, is absolutely there. They have to answer to shareholders. They need to go after the concepts that are growing much faster than their legacy brands are. And also, the potential for a few divestments coming out of some of these companies is definitely something that’s being talked about in the investment community."
"Whether we will get back to the amount of deals that happened last year remains to be seen," said Valentino. "The interest is certainly there."
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.