Will Bain, managing director at global investment bank Harris Williams, shines a light on trends shaping the M&A landscape in the food and drink space

By Murielle Gonzalez

Concept photo of investor appetite

The food and drink space has been a safe place for investors to play for decades due to its strong resilience. Whatever the economic climate or circumstances, people still need to eat. The Covid-19 pandemic, however, has accelerated a wave of changes in consumer behaviour and investment strategies, which Will Bain, managing director at investment bank Harris Williams, says are likely to become long-standing trends.

Strategic buyers have always been a mainstay of M&A activity in food and drink: big food corporations capitalising on the market traction – and innovation – of small companies by bringing them into the fold.

Slimfast, for example. The maker of weight management and meal replacement products, and a portfolio company of Kainos Capital, was acquired by nutrition giant Glanbia in October 2018 for $350 million.

On the private equity front before Covid-19, numerous investors the world over have made good investments across the food and drink space – including brands, food manufacturing, and private label.

Bain says that traditional private equity investors continue to focus hard on this sector but in recent years, we’ve seen significant tweaks to that model.

“The past five or so years have seen a significant uptick in interest from a new investor type, which we call ‘patient capital’,” says Bain. “These investors are generally high-net-worth family offices operating a model designed for the much longer-term.”

Bain argues that patient capital seeks a longer-term investment horizon, typically in the 10-year-plus range as opposed to the four-to-five year cycle of traditional private equity.

“The patient capital investor is really looking for something very steady, and food businesses fit that model incredibly well,” says Bain. He notes that some businesses that Harris Williams has sold in the past two-to-three years have gone to long-term investors.

Portrait photo of Will Bain, managing director, Harris Williams
Will Bain, managing director, Harris Williams

One such example is the deal the financial advisor helped close in February for Kronos Foods, the provider of on-trend protein, bakery and sauce products. A portfolio company of Grey Mountain Partners, Kronos was sold to Entrepreneurial Equity Partners for an undisclosed sum.

“As we continue through Covid-19 (and hopefully exit this period), the food and drink space will likely become more competitive,” says Bain.

“Covid-19 has focused investors’ minds on businesses that are incredibly resilient, and food and drink has generally performed very well – this should lead to continued investment appetite across the whole food and drink spectrum from all three types of investors: strategic, private equity and patient capital.”

Bain has been one of the senior members of Harris Williams’ consumer group since 2016 and focuses a large amount of his time on the food and drink subsector. Harris Williams’ consumer expertise spans services, food and beverage, consumer products, and the retail/restaurant subsectors. The team works from five offices across the US and Europe.

Operating from the firm’s London office, Bain has more than 16 years of experience advising public and private companies on M&A and capital raises.

Strategic buyers and private equity

The investment landscape is changing, and Bain says there is very strong interest, across the board, for the best food and drink assets. He notes that over the past three months, in particular, the team at Harris Williams has spent significant time with private equity firms, previously unfamiliar with investing in this space, that have increased their focus on food and drink.

“Five-to-ten years ago, there were a small number of private equity firms investing in the space who really specialised and understood the space,” says Bain. “What Covid-19 has driven is a far broader interest from private equity, and therefore private equity generalists are increasingly looking at food and drink as a good place to invest.”

Bain notes that some newcomers have less experience with the dynamics of the sector.

“Strategic buyers operate day-in and day-out in this space, and they know it very well. However, there is a good number of private equity firms that have never invested in food before, but they are becoming sector experts very rapidly,” says Bain. “They’re bringing in senior executives to help them go through their investment strategy.”

Pull and push factors

For Bain, there are pull and push factors driving the interest of private equity firms. Among the push factors is the economic disaster that Covid-19 brought to consumer businesses as sales plummeted overnight.

Concept photo of investors merging two pieces of a puzzle

“Funds that were investing in travel, health and fitness services, restaurants and retail, for example, have turned to food and drink,” says Bain.

The pull factor has been how well many food and drink brands and manufacturers have coped with Covid-19. Bain explains: “A lot of the big strategic investors, which are publicly traded companies, are seeing their share price back to where they were pre-Covid-19, so it is a very attractive space to play.”

Category and channel focus

Not all food and drink businesses are gaining the same level of attention. Bain says that investors are more interested in brands within the most resilient categories, including pet food, ingredients, health and wellness, and better-for-you – low sugar, low fat, immune-boosting products, and healthy snacks, for example.

“In response to Covid-19, Boris Johnson and other leaders around the world have identified the need for the population to get fitter. The health and nutrition space is very much in vogue,” says Bain.

Distribution channels have also become the make-or-break deal for food and drink investors. Bain explains: “In the old days, everyone sold products through a retailer and the retailer to consumer. What has happened quite rapidly over the past five years is the growth in the direct-to-consumer channel, which Covid-19 accelerated even further.”

For Bain, the direct-to-consumer channel has enabled companies to grow incredibly quickly because they control the whole value chain. “Basically, they are in charge of their own destiny,” he says.

Bain notes that Unilever’s acquisition of Graze in February 2019 is one such example. A portfolio company of Carlyle Europe Technology Partners, Graze was one of the UK’s largest healthy snacking brands and among the pioneers in the direct-to-consumer model at the time of the acquisition.

“We were fortunate to be involved in the Graze-Unilever deal,” says Bain. According to Bain, Unilever identified that it wanted to expand into health, better-for-you snacking and saw that Graze understood the direct-to-consumer business model, and the benefit it could bring to the broad organisation. “Businesses like Graze are in the centre of the dartboard of big food companies. A lot of strategic investors are thinking about where to put their money,” says Bain.

For Bain, the move towards direct-to-consumer is one of the biggest shifts accelerated by Covid-19 that is likely to stay. “We’ve seen, above all else, the advancement in the pace of growth in the online channel, across the grocer-dot-com [Tesco and Ocado, for example] and Amazon,” says Bain, adding that in some categories the channel is providing companies with double-digit growth.

“The focus of investors now has come down to which channel the products are going, which was never the case before,” says Bain.

Love for private label

The looming recession triggered by the economic impact of the Covid-19 lockdown around the world cast a shadow over the investment landscape as much as its effect on consumer’s purchase decisions.

“The big impact of a recession period on the general consumer is on the tier of brands they are looking to buy,” explains Bain, noting that the brand architecture is made of premium, mid-tier product, and value or private label.

“Generally, what we’ve seen in previous recessions is that premium brands are very resilient – products are seen as an affordable treat,” says Bain. He notes that premium products have premium quality with high consumer loyalty.

“Mid-tier brands tend to be more impacted by recession and people may trade down into a value offer or private label,” he adds. “The pressure comes to the mid-tier because it is the largest area in the market, where there are more operators and businesses are more receptive to macroeconomics.”

Bain says that based on prior recessions, private labels are likely to benefit from the looming recession as consumers have turned to these products when budgets are tight.

“We think about investor themes in food and drink, and at the moment the focus is on premium, and value and private label,” says Bain. “Much of the conversation in the marketplace is around the private label,” he adds.

The TruFood-Simply Natural Foods deal announced last week confirms the trend. The private label manufacturer of better-for-you snack bars was acquired by US-based contract manufacturer TruFood, backed by AUA Private Equity Partners.

For Bain, the shift towards private label is yet another sign of a new investment landscape. He says that 10 years ago, private equity companies were interested in brands rather than manufacturing companies, hence private label businesses were unloved.

“Today, private equity appreciates that private label is varied and fair, and it’s incredibly steady,” says Bain. “And, if you’re investing in manufacturing facilities rather than brands, it can also be the case that it’s easier to buy-and-build and grow through acquisitions.”

Bain explains that the investor thesis has been quite aggressive about buying other manufacturers and bolting them together. “You can drive economies of scale, run the factories and buy your supplies more efficiently,” he says, noting that such a lean approach is easier to have because there isn’t one consistent brand to focus on.

“In this space, valuation, product and customer diversity is incredibly important,” he adds.

The bolt-on investment thesis builds on the acquisition of several factories manufacturing for many brands to serve different retailers. “This model attracts more resilient businesses,” says Bain. “Look at all the big corporations and you’ll see that’s what they have done. Unilever has 20-30 brands, maybe more. And has become very diverse across products and markets.”

The picture is clear. M&A activity begins to resume after the summer driven by investors’ appetite for food and drink businesses that have been resilient during Covid-19, tapping into the growing direct-to-consumer channel with products aligned with the consumers’ shift towards better-for-you options.

Bain suggests investors should pay more attention to investment opportunities available in the coming months as there are very good quality assets in the market attracting a quite broad range of investors. “Look at channel and category carefully and see what impact there has been during Covid-19. Some of these changes are going to be long term,” he says.

Bain says that now is the time for companies to review the whole business, from supply chain resilience to brand, marketing and channel mix. “Operators should stand back and have a good look at the business in a way perhaps they never did before,” says Bain. “Diversity of channel or market mix is key to their resilience,” he concludes.

Date published: 27 August 2020

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