“M&A activity in the food and drink sector was extremely depressed in 2009 both in terms of volume and value,” says Phil Jackson, head of food sector at Grant Thornton. “Compared to the buoyant market conditions in 2007, deal volumes were down by 47% and over half of the transactions completed related to acquisitions from insolvent companies or businesses in distress.”
Excluding the sale of alcohol brands Tennent’s Lager and Tia Maria for £180m and €125m respectively, there were no other reported deals in excess of £70m, and in most cases values were not reported.
Underlying a growing optimism, share prices for UK food companies have rallied through 2009 and on average have recovered half of their losses incurred since the end of 2007.
“Many food businesses are reporting significantly improved profits in 2009 as the impact of food price inflation has reduced and the benefits of cost and efficiency savings have come through,” says Jackson. “The increase in share prices of the quoted companies reflects this. The recovery in profitability is bringing buyers back and encouraging potential sellers to test the market.”
The ongoing takeover battle for Cadbury and the anticipated sales of Gu and Kettle Chips reinforce this view.
Another factor influencing privately owned businesses to consider selling is the concern that the rate of Capital Gains Tax may be aligned to income tax. While valuation multiples will be lower than 2007, the prospect of returns being decimated by up to 50% tax instead of the current 18% is a major driver for a sale.
“As M&A levels pick up, it’s likely that consolidation in private-label, dominant categories such as bakery, fresh produce and dairy will predominate,” says Jackson. “Highly leveraged groups may also gauge that the timing is now right to sell some assets to reduce debt. In addition, foreign buyers will be attracted by the relative weakness of sterling.”
Source: Grant Thornton
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