Europe: Ingredients M&A deal activity overview

Oghma Partners’ Mark Lynch talks to NutritionInvestor about the European food ingredients market, the growing segments and how changes in consumer behaviour drive M&A activity in the sector

By Murielle Gonzalez

The global food ingredients market has been growing rapidly over the past decade, particularly in developing countries. Estimates for the size of the global food ingredients market vary depending on the definition, but if we consider the broadest range of food ingredients in the market, this sector is worth up to $350 billion, according to corporate finance advisor Oghma Partners.

Based on data compiled by the London-based firm, the market is estimated to grow by 13.8% in volume by 2023. The majority of the volume is made up of low margin commodity products, such as flour and sugar. Rising global incomes result in increased consumption in emerging markets, and Asia Pacific, Middle East, and Africa are leading growth.

“Ingredients companies have shown more resilience during the Covid-19 pandemic,” says Mark Lynch, partner at Oghma. He notes ingredients have continued to trade well despite the decline in foodservice thanks to sales in retail and grocery stores because people cook more at home.

Lynch also notes that ingredients companies are high-value businesses, and as such, they tend to have high margins. “As little as 1% volume growth can drop cash down to the bottom line quite effectively,” he says.

Ingredients segments

The ingredients market is structured based on value-added. Raw materials such as cocoa powder, oils and fat sit in the low value-added segment, and the medium value-added ingredients segment comprises colours, flavours and flavour enhancers, minerals, vitamins and derivatives.

There are 13 ingredients in the high value-added segment, including acidulants, botanicals, carotenoids, enzyme stabilisers, and proteins – these are the top five ingredients with the highest growth expected by 2023. The growth of these ingredients reflects the increasing consumer interest in better-for-you food and drink products.

Source: Euromonitor 2018, data shows expected growth between 2018 and 2023.
Graphic by Oghma Partners

Lynch notes there’s a difference between the valuations of ingredients companies and food processors. For example, enzymes giant Chr. Hansen is trading on 2021 EBITDA of 27.6x whereas food manufacturers such as Nestle, Unilever and Danone trade on 17.8x, 12.7x, and 11.4x EBITDA, respectively.

“Companies in the ingredients sector with high valuations tend to be quite global in scope,” says Lynch, noting that current innovation in the market triggers new dynamics, allowing high-value ingredients to escape commoditisation.

The increasing interest in clean label products and the continued growth of plant-based meat and other animal protein substitutes demand constant innovation, which the ingredients companies are helping to drive.

For Lynch, innovation in those markets allows ingredients companies to reset their price points. “There’s been quite a lot of corporate M&A activity in the sector, and that consolidation helps drive value as well,” he adds.

Consumer considerations

The ingredients market is driven by the demand for tasty and natural products with health benefits. The consumer is focused on value without sacrificing quality, hence long shelf life solutions for processed foods are paramount to reduce waste and cost to the consumer.

Clean label foods are in high demand due to the increasing consumer health awareness. The demand is for foods with reduced fat and cholesterol, high protein content and fibre, and low in sugar.

Lynch notes there’s also a drive for better taste, flavour and appearance – and here’s where demand for a wide variety of ethnic ingredients begins to pick up. “Local tastes are becoming increasingly important, as well as improved food safety regulatory requirements,” says Lynch.

The health awareness of consumers drives changes in marketing. Brands now highlight key ingredients in front-of-pack to capture consumer attention. Lynch notes there are at least 220 EU-authorised health claims from 44,000 submitted applications last year.

Consumers seek tasty, natural products, ideally with health benefits.
Graphic by Oghma Partners

Traceability is also a top-of-mind concern for the consumer. For companies, a shorter, more simplified food chain is important to maximise efficiency.

Europe: Ingredients M&A activity

Oghma Partners looked at the deal activity in Europe in the decade to 2020 and estimated the total food ingredients M&A market to be valued at around £49.9 billion – Oghma recorded 331 transactions in this period.

“We looked at a full range of transaction values from upwards of £1 million to £10 billion-plus. The most active years were 2011 and 2017 with 40 and 49 completed transactions, respectively,” says Lynch. He notes deal value in this period remained in the range of £1,000 million to £6,000 million, except the £21.8 billion merger between International Flavors & Fragrance (IFF) and Dupont’s Nutrition & Biosciences business in 2019.

The additives category registered the most M&A activity in the period, accounting for 13.3% of total deal volume. Still, Lynch notes high deal volume is partially a function of the broad definition of the category.

Additives include any ingredients with functional properties that do not fall under any other more specific categories, such as flavours and fragrance, starch, and yeast. Particularly active product areas in the additives category were botanical extracts, as well as proteins.

Oils and fats are the second most active sector, making up 13% of total deal volume in the observed period. According to Lynch, the high levels of activity can be largely attributed to a select number of highly acquisitive players in the market. “For example, AAK, Bunge, Kernel, Avril SCA and Glencore all made multiple acquisitions over the period accounting for 40% of deal volume in the category,” he explains.

Deal activity up to April 2020. Graphic by Oghma Partners

Blends was another category that saw high levels of consolidation. Frutarom and Solina made up over 30% of the deals in this category.

Deal activity in the distribution space is characterised by several smaller deals from larger groups who aim to expand their geographical footprint and product offerings.

Lynch says the flavours and fragrance category is highly fragmented. “High deal volume over the period is predominately due to larger corporations acquiring smaller entities in a bid to strengthen their positions and add new capabilities to their portfolios”, he explains.

Dutch ingredients giant DSM has been particularly active. In March, the company acquired the flavour and fragrance business of Amyris, and on the back of the acquisition, it announced the launch of Hologram Sciences. The newcomer will create consumer-facing brands to tap into the personalised nutrition and health sectors powered by ingredients innovation.

Buyer focus

The majority of deals in the studied period were led by trade buyers looking at cross-border targets. For Lynch, the high level of cross-border deal activity is unsurprising given the truly global nature of some ingredients players.

For the financial advisor, many companies are highly acquisitive and aggressive in expanding into new geographies. However, in light of the recent Covid-19 outbreak, which has exposed the length and complexity of supply chains in many geographies, we now see companies seeking to shorten and simplify their supply chains, leading to an uptick in deals that are closer to home.

Oghma reported that France, the US, the Netherlands, Germany and the UK are the top five bidders in the ingredients market. On the other hand, the top target markets are the UK, the Netherlands, France, Italy, and Germany.

Lynch noted that trade buyers made up 90.9% of total deal volume in the 2010-2020 period, with financial buyers only accounting for 9.1%. However, there are multiple examples of private equity-owned ingredients businesses that are making a sequence of acquisitions.

Swedish private equity company Novax acquired UK clean label ingredients supplier Ulrich & Short in March, and this month, Ambienta brought UK flavour company TasteConnection into its fold. Charterhouse Capital and Ambienta are also private equity investors that have tapped into the ingredients market.

Market consolidation

The leading global ingredients players typically have niche focuses. Givaudan is centred on taste and scent, AAK is an oils and fats specialist, and Chr. Hansen focuses on cultures, enzymes and colours. This landscape change following IFF’s merger with DuPont’s Nutrition & Biosciences business this year and the acquisition of Frutarom in 2018. For Lynch, IFF is moving closer to becoming a truly global one-stop-shop ingredients group in multiple categories.

IFF has made two significant acquisitions in the ingredients market that tell the tale of consolidation in the sector. In February, the company closed its merger with DuPont’s Nutrition & Biosciences in a $26.2 billion deal. The move placed IFF in the high-growth segment of prebiotics, enzyme and food safety.

The deal came to fruition almost three years after IFF’s acquisition of Frutarom in a $7.1 billion deal, which the company secured in 2018.

“The Frutarom acquisition moved IFF from the fourth to second place in taste and scent, and the DuPont merger will transform the group into the number one and second-biggest player in taste, scent, nutrition, cultures, enzymes, probiotics, and soy proteins categories,” says Lynch.

Other key acquisitions by IFF include PowderPure for an undisclosed amount in 2017, flavour house David Michael & Co. in 2016, and Ottens Flavors in 2015.

Mark Lynch, Oghma Partners

Looking ahead

Lynch concludes that over the past 10 years, we have witnessed high levels of consolidation in most sectors of the European food ingredients market, but the market remains highly fragmented. “We, therefore, expect consolidation to continue with several key drivers supporting deal volume,” he says.

Lynch also expects commodity-focused ingredients players to continue expanding their product offerings into speciality ingredients to increase returns and reduce the impact of commodity price volatility.

Companies are likely to continue geographical expansion in a bid to reach new customers and broaden product portfolios. However, the Covid-19 outbreak has exposed some supply chain vulnerabilities, which therefore may prompt companies into M&A closer to home.

Lynch notes that many innovative, smaller players offer unique product lines and customised formulations. “Their ability to be more nimble and to react to customer needs presents a highly attractive proposition for many of the larger, highly acquisitive, ingredients players,” he says.

The financial advisor observes that valuation multiples are likely to remain at pre-Covid-19 levels. Lynch explains that transaction multiples for ingredients companies have increased significantly over the years, largely driven by strategic buyer demand, low interest rates and the availability of private equity capital.

Lynch notes that as the ingredients companies continue to trade on high EV/EBITDA multiples, they can still pay high valuations without diluting their earnings-per-share, allowing them to continue their acquisition paths.