The European food industry is the very archetype of a mature sector. Yet a US investment house has just spent £642m buying the maker of Britain’s most popular breakfast cereal. Chris Lyddon asked analysts whether now is really the time to be putting money into European food companies.
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On 18 November 2003 the boards of Weetabix Limited and Latimer Acquisitions Limited, a company formed by US private equity group Hicks Muse Tate and Furst, announced the takeover. “We are delighted with the opportunity to acquire Weetabix,” said Latimer.
Hicks Muse has made a success of “themed” investment in the food sector. Another company active in the sector is venture capital specialist 3i. In December 2003 3i backed the acquisition by Associated British Foods of G Costa, a UK producer and importer of oriental and speciality food brands. 3i describes itself as the leading provider of private equity and venture capital to food and drink companies in Europe.
3i points out that private equity investment in the industry jumped last year, despite a fall in overall investment volumes.
Steffen Andersen of KPMG advises against seeing Hicks Muse as American. “They’re not really a US investor. They’re very big in Eastern Europe,” he told just-food.com. “Fund managers allocate their money around the world.”
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By GlobalDataTrade buyers have strategic priorities
It was important to distinguish between types of buyout. “There are two things that happen,” Andersen said “Food companies buying food companies and private equity companies buying food companies. The two are very different.”
Food companies used mergers and acquisitions as a strategy to align their businesses with their corporate strategies. It worked both ways; – Andersen cites Unilever as one company which has made disposals to reshape itself.
There were also companies which used mergers and acquisition to buy technology or brands. “Among the larger quoted companies there is an increased focus on the strategy and direction of the company,” he said. “It’s very much about having a vision of what you’re about.”
The large conglomerates of a few years ago had gone, although there were companies, like Northern Foods in the UK, which were interested in building a national conglomerate. “The big multinational or pan-European food companies tend to be quite focused on the sector they’re in,” he said. “They tend to make acquisitions in that sector, or dispose of businesses that don’t fit.”
Private equity totally different
The private equity sector behaved totally differently. “Some of them like the food sector,” he said. Even though private investors tended to like growth sectors, food was still attractive. “It’s a business you can understand,” he said. “You get good solid cash flow and a stable business. And it’s going through a process of consolidation.” Consolidation means opportunities for private equity investors to make money.
One example was the private label juice company Refresco, which was a management buyout in 1999 and then consolidated in its sector with a change of private equity ownership. “You see that a lot,” he said.
“Generally it’s a lot about having a platform for building a company,” he said. “It’s a way of taking a solid lead in consolidation of the sector they’re in.” But once a private equity company bought a food company as a platform on which to build it became a private buyer.
Big is not always beautiful
There are potential pitfalls. Some private equity investors had ended up creating companies that dominated their sector, proving too big to find buyers. “There are a number of examples out there of private equity companies that are stuck, because there’s no natural buyer for them,” he said. RHM, for example, had looked at a float and pulled back.
According to David Hughes, Emeritus Professor of Agribusiness and Food Marketing at University College London, the food industry remains attractive for investors. “It’s low margin but it’s steady,” he told just-food.com. “To a degree it’s recession proof. It just plods along.”
Brands rule
The important thing in the investment decision was the brand. “Returns for branded products are substantially higher than for own label,” he said. “Branded margins are going up. Non branded margins are going down. The real squeeze is on own label.”
The future development of the food industry was all about brands, and the important question was who would own the brands; the retailers, the manufacturers or the foodservice companies.
“If you haven’t got something proprietary like life science or shopping information (from loyalty cards), you’re going to get squeezed,” he said. “One way of getting it is getting a brand. Brands have been delivering the goods as they always have and the unbranded are under pressure.”
New brands are notoriously difficult to introduce. “65 of the top 100 food and beverage brands were launched 30 years ago or more,” he pointed out. “Nine out of ten new products fail. The guys that do it best are all the big FMCG guys.”
It was easier to buy a brand than invent one. “If I’m going to pick up a brand, why not one where someone has done the hard work. The risk is removed in terms of brand development,” he said.
Now was a good time to buy brands. “Companies like ABF are looking around and wondering which non-core brands are being spun off because they don’t fit the portfolios of the larger firms like Unilever or Danone,” he said.
The big companies wanted to put more resources behind fewer brands. “In each important food category there are a maximum of three global players,” he explained. “One makes a pot full. Number two does alright. And number three struggles. The Unilevers of this world are trying to be in the core categories where they can be number one or two.”
Food industry remains attractive to investors
Sean Rickard, Senior Lecturer in Business Economics at Cranfield University, agreed that although the food industry is mature, it remains attractive for investors. “People will always eat food,” he told just-food.com.
But there is a revolution coming and it makes buying food companies potentially very attractive. “We can’t be many years from the approval of genetically modified foods,” he said. “If we look a few years ahead GM technology will revitalise the opportunities for the food industry. There’s a very profitable revolution around the corner.”
“If one wants to look for growth in the food market it means new products with new taste experiences,” he said “If we could crack the neutraceutical markets for food so it benefits health there’s a huge market out there.” It would be worth a private investor’s while getting in position to reap the benefits. “I don’t think it’s all that far away. The Internet turned up in 1993. It’s changed our lives in ten years,” Rickard said.
