Dive Brief:
- Large CPG companies have been trimming expenses and boosting cash flow by putting some of their well-known food brands on the chopping block. Smaller firms stand to benefit if they can snatch up these brands for the right price and turn them around to be more successful in their portfolios, according to The Wall Street Journal.
- But deals can be hard to find since the average multiple in the food and beverage industry this year is 16.4, according to Dealogic data cited by The Wall Street Journal — the highest since 2007. Yet some have gone even higher, like when Reckitt Benckiser sold its food division to McCormick last year for $4.2 billion, or about 20 times earnings before interest, taxes, depreciation and amortization.
- The Wall Street Journal also noted that there have been M&A bargains recently, including Sazerac's purchase of 19 Diageo liquor brands for $550 million, or 5.5 times EBITDA. Smaller companies may be better able to focus attention and R&D investment on these brands in order to enhance marketing, distribution and demand.
Dive Insight:
Big Food is trying hard to find profit in order to stabilize operations, keep up with competitors and satisfy shareholders. One increasingly common method is to jettison underperforming brands — making them ripe for pickup by other companies. This can spell success for some firms — for example, the French's mustard and Frank's RedHot brands, which came with the Reckitt Benckiser deal, have boosted McCormick's growth — but there are also risks.
Consumers may no longer care for the brands if changing hands means their ingredients or positioning changes. Investors are liable to take a dim view if their return on investment doesn't come out as advertised by company executives. Activists may also push brands that have potential for quicker divestment and operational changes, such as what Daniel Loeb and his Third Point hedge fund have done with Nestlé and Campbell Soup.
Private equity involvement in the food industry has increased as investors look for ways to enhance their profits and buy into companies looking to improve products and draw consumers. This can mean more opportunities for startups and smaller firms, but it also means more astute deals.
"Most people start a business in this industry because their dream is to get acquired by a big food and beverage company," Greg Wank, leader of the food and beverage industry practice at the Anchin accounting firm, told Food Dive this spring. "What we've been saying a lot to our clients is, 'Yes, there are more investors in the space than before, but investors are smarter than they've ever been before. Nothing catches anybody by surprise.' "
No doubt companies are watching to see what happens to brands currently on the sale block, such as Campbell's international and fresh divisions, and Kellogg's cookie and fruit snacks business — which counts Keebler and Famous Amos in its portfolio. Both CPG firms have been going through restructuring lately and are likely to benefit by spinning off these underperforming units to buyers who might be willing to focus more resources on them. But it's not always easy to find a buyer. The New York Post indicated Campbell's is having difficulty finding a purchaser for Bolthouse Farms.
Some brands can be tough to enhance if their category has seen its heyday and is now on the downward slide — or if consumer trends are simply going in another direction. Unilever needed to trim down after its rejection of Kraft Heinz' 2017 takeover bid and found an opportunity selling its margarine and spreads business — including I Can't Believe It's Not Butter and Country Crock — to private equity firm KKR & Co. for $8 billion. However, as some consumers turn back to dairy butter, for KKR's gamble to work out, it will either have to bring margarine and spreads back into fashion or cut expenses and flip the business to another buyer.
In the M&A landscape, it seems to be all about balance. Buyers and sellers are continually scanning the market for just the right deal at the right price — or at least a deal that can sweeten their bottom line with a reasonable amount of additional investment and not constitute too large a gamble.