When executives from DuPont's nutrition business and International Flavors & Fragrances came together Monday to announce their merger that would create a $45 billion giant, the mega-deal was less about squeezing out synergies. Its focus was creating a flavor juggernaut that could more nimbly respond to rapidly changing consumer trends.
"This is truly a powerful combination. Consumer demands are shifting towards natural health and wellness products, and the combination of IFF and (DuPont's nutrition business) will be among the only industry players able to lead and accelerate these trends," Andreas Fibig, IFF's CEO, told analysts. "This is not about scale, this is about first mover advantage to redefine our industry and deliver what our customers demand."
IFF's $26.2 billion purchase of DuPont's flavors business will create an ingredients and flavor behemoth that will serve 40,000 customers worldwide and have top market positions in taste, texture, nutrition, enzymes, cultures, soy proteins and probiotics, executives said. The new company will be better positioned to tap into the expertise amassed by each. DuPont is strong in soy protein and binders for plant-based meat production, while IFF is a major player in colors and flavors.
"This is not about scale, this is about first mover advantage to redefine our industry and deliver what our customers demand."
CEO, International Flavors & Fragrances
Ed Breen, the chairman of DuPont, told CNBC the new company will have double the research and development capabilities of any of its rivals. Separately, Fibig said on the analyst call that while its competitors have a strong position in one category or a select few, the new company will "have depth, breadth and strengths of capabilities across categories, which will give us an exceptional competitive advantage," creating a company that is "an invaluable partner of choice for our customers."
Analysts who follow the flavor and ingredients space said there are a host of reasons the segment has seen so many deals and why the pace of acquisitions is unlikely to abate anytime soon.
“Behind all of the changes that are occurring with respect to consumer demand, you got to be able to serve the needs and the demand for food that has the right functional and nutritional profile that consumers are demanding," Jeff Cleveland, managing director of investment banking at D.A. Davidson, told Food Dive. "You can look at the importance of clean label. You can look at the importance of plant-based foods. Those are all driving activity in the space. If you are a large food company, ingredients or otherwise, M&A almost has to be a priority for you.”
Other market factors are providing incentives for deals. Low interest rates make it more enticing for companies to buy. If rates increase, the cost to borrow money for the deal becomes more expensive, reducing the likelihood that a transaction takes place. And private equity firms currently have plenty of capital to deploy, with ingredients companies being one of their targets.
Acquirers are looking to expand research and development operations that often are very technical, time consuming and expensive. In many cases, it's faster and more economical to go out and buy another business than spend the time and money to develop the other firm's expertise in-house — something many companies cannot afford to do in a rapidly changing environment.
A wider swath of products — similar to what IFF and DuPont noted as part of the rationale for their deal — also makes an ingredients supplier more attractive to food companies because it can respond to a greater variety of consumer needs, effectively making a single ingredients company more of a one-stop shop.
“It’s one thing to gain new customers, but you can gain more market share with existing customers," Howard Dorman, partner and practice leader for the food and beverage sector at Mazars, told Food Dive. "That’s got to be part of their market-facing process that maybe organic growth sometimes is not as easy to achieve (with) new customers, then let’s grow our existing customers by providing more products and services to them.”
Many companies have an expertise in one or more areas, such as colors, flavors, sweeteners, certain ingredients or working with specific items like vegetables, fruits or even flowers. With the pace of innovation in the food space accelerating, ingredients suppliers are under pressure to provide new and transformative products to CPG companies who are producing foods and beverages to better respond to the consumer. This is especially prevalent as food makers rush to reformulate existing products with a cleaner label and shorter ingredients list.
CPG food and beverage companies prefer to stick with the same ingredients manufacturers. These suppliers often have proprietary knowledge for the ingredients they make. There also is a risk that by changing suppliers, the taste profile, mouthfeel or overall quality of the ingredients is altered, potentially impacting the integrity of the final product with which consumers are familiar.
The pace of acquisitions in flavors and ingredients has intensified in recent years, with several multi-billion dollar deals and scores of smaller, less publicized transactions. Last year, Givaudan spent $1.6 billion to acquire flavor-maker Naturex, a reflection of consumers shunning artificial colors and flavors while embracing natural and organic items. Bloomberg noted when the deal was announced that the purchase, Givaudan’s largest in a decade, allowed it to add to its portfolio extracts from green tea to the recently discovered superfood derived from the leaves of the moringa tree.
Just a few months later, serial acquirer IFF purchased Frutarom Industries for $6.4 billion, giving the flavor giant a meaningful foothold in natural foods as well as private-label products, which comprised 70% of Frutarom's sales.
"You can look at the importance of clean label. You can look at the importance of plant-based foods. Those are all driving activity in the space. If you are a large food company, ingredients or otherwise, M&A almost has to be a priority for you.”
Managing director of investment banking, D.A. Davidson
The pace of M&A hasn't slowed down in 2019, and private equity is targeting the sector, too. Innophos, a New Jersey-based maker of specialty ingredients for baked goods, sports drinks and cheeses, announced in October a deal to sell the company to private equity firm One Rock Capital Partners for $932 million.
It's no wonder there is so much interest in the space. According to Allied Market Research, the global flavors market for food and beverages was worth $12.4 billion in 2016 and is projected to hit $18.1 billion by 2023.
Randy Burt, a managing director at AlixPartners, said some trends such as functional foods or personalized nutrition are in the earlier stages of development. These areas, coupled with shopper demand for attributes like new flavors or cleaner labels, will spur more deals.
"It's going to be just like it's been in large CPGs," Burt said. "It's going to be a situation where (large ingredients companies) are buying them earlier and earlier to get the advantage."
The combination of IFF and DuPont's ingredients could prompt other companies to engage in their own round of deal making in order to keep pace with the ingredient heavyweight. After losing out on DuPont's nutrition business to IFF, flavor and sweetener maker Kerry could look elsewhere for deals — an important part of its effort to expand globally and squeeze out efficiencies from its business, its CEO said last month.
Kerry is no stranger to the acquisition frenzy. In 2017, the Ireland-based company purchased Ganeden, a developer and manufacturer of probiotics, for an undisclosed sum. A year later, Kerry bought clean-label taste maker Ariake USA and Southeastern Mills' North American coating and seasonings business for about $367 million.
With consumer demand for functional and plant-based foods, as well as ingredients and flavors made from natural sources unlikely to diminish anytime soon, companies in the space will have no choice but to find ways to retool and improve their operations. M&A will likely remain a go-to source for companies of all sizes, analysts said.
"I don't see any real meaningful slowdown in that sort of behavior and activity in the market,” Cleveland said. "The food ingredient market has been very, very active for the last several years and we would expect that to continue going forward.”