2429 Food Insights 16pp - PwC...InsightsCorporate Finance Food Sector *connectedthinking 2006 pwc...

Corporate Finance

InsightsFood Sector

*connectedthinking

2006

pwc

Analysis & opinions on M&A activity across Europe from our network of local advisers*

2429 Food Insights 16pp.aw 2/5/06 12:03 pm Page 2

Welcome

Welcome to Food Insights, an annual review of M&A activityand key trends within the European food manufacturingsector by PricewaterhouseCoopers Corporate Finance. This year’s edition includes a special focus on ethicalsupply chain management, an issue of growing importancefor today’s food manufacturers.

After a relatively quiet year in 2004, M&A activity picked up in the food sector last year with deal volumes increasingby 11%. The combined value of these deals rose by 44%.Several of the largest transactions in the food industry last year were conducted by private equity houses, which show no signs yet of having sated their desire for food-related investments.

Levels of deal activity and a number of pending deals in thefirst quarter of 2006 indicate a positive outlook for deal flowin the food sector during 2006. Consolidation continues tobe driven by the intense margin pressures placed on foodmanufacturers by retailers, and from the increasing energycosts that they face. In addition, manufacturers now have to contend with a wave of new requirements andexpectations, particularly in terms of the nutritional value of food, its packaging, labelling and ethical sourcing.

To stay ahead of the game, companies often need toachieve economies of scale and to cut costs further, forexample through manufacturing in cheaper economies. At the same time, companies need to gain access

to consumers in these emerging markets – notably Central and Eastern Europe (CEE) and Asia-Pacific – to counteract stagnating consumer spending in western Europe.

With a team dedicated to the food sector,PricewaterhouseCoopers Corporate Finance is well-placedto identify industry trends such as these and to assistclients – particularly in the active middle market – inapplying the most effective corporate strategies; whetherthese are growth through acquisition, restructuring orrealising value in your business.

This edition of Food Insights presents just some of ourthoughts on this exciting industry and, as always, yourfeedback and responses are extremely valuable. We wouldwelcome the opportunity to hear your views and to discusshow the issues raised here might affect your business.

Neil Sutton Food Sector LeaderCorporate FinancePricewaterhouseCoopers LLP

[email protected]


1For more information visit our web sites at: www.pwc.com/foodinsights or www.pwc.com/r&c

The M&A arena heats up

Boosted by increased activity at the top end of the market, the totaldisclosed value of these deals was up 44% – following a 9% drop in 2004 – to 110.5bn from 17.3bn.

This vigorous appetite for significant corporate manoeuvres took theaggregate value of European food sector transactions ahead of thetrend for European M&A in general, where total disclosed deal valuesrose by 30% in 2005. Volume-wise, however, dealflow in the foodsector fell below the general industry-wide trend line with overallgrowth for European M&A up 19% last year.

M&A activity in the European food sector was back on full-powerlast year. Following a 13% drop in deal numbers in 2004, volumesrose by 11% in 2005 to 350 transactions from 315 the previous year.

Unless otherwise stated, the charts and analysis throughout this publication cover M&A transactions completed in 2005, where the target was European.

Pending Food M&ACompleted Food M&A Total Completed European M&A

2000 2001 2002 2003 2004 2005

400

350

300

250

200

150

100

50

0

14000

12000

10000

8000

6000

4000

2000

0

Num

ber

of E

urop

ean

Food

Dea

ls

Tota

l num

ber

of E

urop

ean

Dea

ls

Value < v500m Value > v500m Total European M&A

2000 2001 2002 2003 2004 2005

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0

1600

1400

1200

1000

800

600

400

200

0

Food

M&

A (v

bn)

Tota

l M&

A (v

bn)

European M&A activity by volume European M&A activity by value

Source: dealogic, M&A Global Source: dealogic, M&A GlobalCriteria: Deals with a disclosed value only


2

Last year, 21 deals valued at more than 1100m were completedcompared with 17 in 2004. The tally includes six 1500m-plusdeals, compared with three in 2004.

Source: dealogic, M&A GlobalCriteria: Deals with a disclosed value only, acquired stake greater than 20%

Big spenders

The two largest transactions were both Private Equity (PE) backed: the 1975m IPO of Doughty Hanson’s bakery and grocery productscompany, RHM, on the London stock market and the acquisition of Panrico, the Spanish bread and pastry producer, in a 1900m LBO led by Apax Partners.

Largest disclosed deals in the European food sector in 2005

Completion Deal % Target Target Target Bidder BidderDate Value (vm) Acquired Nationality Description Nationality

27-Jul-05 975 70 RHM plc UK Branded bakery and grocery Various investors Not applicableproducts company

01-Nov-05 900 100 Panrico Spain Bread and pastry producer Apax Partners UK& Co

20-Apr-05 706 80 Geest plc UK Chilled convenience Bäkkavor Group Icelandfood manufacturer

16-Aug-05 702 100 HP Foods UK HP, Lea & Perrins and Amoy brands HJ Heinz US

25-Apr-05 639 100 Panzani France Branded pasta and pasta Ebro Puleva Spainsauces company

28-Feb-05 568 41 Snack Belgium Snack food manufacturer PepsiCo USVentures Europe


3

The mid-market (deals valued at 150m – 1500m) was buoyantlast year; 30 deals were completed in the European food sectorwith disclosed values totalling 14.7bn.

Middle-market picnic

In 2004 there were 24 disclosed deals in this segment worth a combined13.5bn.

Relatively few UK bidders made major commitments in the sub-1500mrange last year, with only Premier Foods’ 1255m purchase of MarlowFoods and Cranswick’s acquisition of Brookfields and Studleigh Royd,appearing in the top ten compared to three UK-originated acquisitions in 2004.

For more information visit our web sites at: www.pwc.com/foodinsights or www.pwc.com/r&c

†Newco created by United International Enterprises A/S and Melker Schörling ABSource: dealogic, M&A GlobalCriteria: Deals with a disclosed value only, acquired stake greater than 20%

Top ten deals under 1500m in the European food sector in 2005

Completion Deal % Target Target Target Bidder BidderDate Value (vm) Acquired Nationality Description Nationality

23-Jun-05 400 100 Mellin Italy Baby food company Koninklijke NetherlandsNumico

01-Apr-05 360 100 Cesare Italy Sausage company Vestar Capital USFiorucci Partners

28-Sep-05 324 100 Aarhus Denmark Producer of soybean oil, BNS Industrier† SwedenUnited palm oil and other edible oils

04-Mar-05 320 77 Chips Finland Manufacturer of fish products Orkla Norway and snack foods

28-Sep-05 315 100 Karlshamns Sweden Producer of vegetable oils and fats BNS Industrier† Sweden

06-Jun-05 255 100 Marlow UK Manufacturer of ‘Quorn’ products Premier Foods UKFoods

01-Jul-05 198 100 DSM Bakery Netherlands Manufacturer of bread and Gilde Investment Netherlands Ingredients pastry ingredients Management

08-Aug-05 175 100 Noon Group UK Producer of chilled and frozen Kerry Group IrelandAsian recipe dishes

14-Oct-05 160 56 Icelandic Iceland Processor and distributor Investor Group IcelandGroup of seafood products

06-Jan-05 118 100 Brookfields / UK Providers of cooked meats Cranswick plc UKStudleigh and poultryRoyd


4

2003 2004 2005

UK CEE FranceSpain Germany OthersBeneluxScandinavia Italy

80

70

60

50

40

30

20

10

0

Num

ber

of d

eals

Food deals by selected European locations

Source: dealogic, M&A Global(CEE is defined as: Albania, Bosnia Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary,Latvia, Lithuania, Macedonia, Poland, Romania, Serbia and Montenegro, Slovakia, Slovenia)

Scandinavia stepped up to the plate last year with BNSIndustrier AB, a Swedish Newco formed by investment firmsUnited International Enterprises Limited and Melker SchörlingAB, merging the business of Aarhus United, the Danish edibleoil company, with that of Karlshamns AB, the Swedishvegetable oil and fat manufacturer.

A taste for local cuisine

The merger took the form of two separate acquisitions valued at 1324mand 1315m, respectively.

While UK bidders kept their hands out of the cookie jar as far as sizeablemid-market deals were concerned, the number of UK deals in theEuropean food sector as a whole increased slightly last year – to 59 from 56 in 2004. But it was Scandinavia that had the most conspicuousincrease in consumption. It piled on 23 more food sector deals in 2005than in 2004 with a run of deals in the fish and seafood sector, which is rapidly consolidating.



Food industry deals in CEE increased from 43 in 2004to 59 last year.

CEE earns its place at the table

This was due largely to 15 taking place in Serbia and Montenegro,where none was recorded in 2004.

This activity illustrates the growing stability of these less developedareas of the CEE region alongside the quest by western companiesfor cheaper sources of labour near the large EU market.


6

At the other end of the production line, PE firms exited from 25 foodcompanies last year (2004 – 27). Realisations of particular interestincluded the IPO of RHM, Montagu Private Equity’s sale of MarlowFoods and the divestment of the Noon Group by Bridgepoint Capital.

PE investors continued their appreciation of the European foodsector last year, bagging 68 companies in deals worth a totalof 12.0bn. This compares with 57, totalling 12.6bn, in 2004.

PE houses queue for second helpings

2000 2001 2002 2003 2004 2005

80

70

60

50

40

30

20

10

0

Acquisitions Exits

Num

ber

of d

eals

37

1925

41

5457

68

252724

18

11

Food deals involving PE investment

Source: dealogic, M&A Global



While the European food sector generally remains attractive to PE houses, thevolume of unquoted equity investment in the UK by PE firms declined last yearto seven deals from 11 in 2004. This was not due to a reduced appetite butrather to a resurgence in the importance of corporate buyers in the sector: theauction of HP Foods attracted a broad spread of well-qualified trade interest.

Acquisitions Exits

UKCEE FranceSpain GermanyBenelux Scandinavia Italy Others

Num

ber

of d

eals

0

2

4

6

8

15

4

9

3

98

5

7

56

45

1 1

3

8 10

12

14

16

18

Food deals involving PE investment by location in 2005



8

Confidence in UK deal activity continues to be affected by pensions-related issues and there have been a number of high profile cases. Last year the PE-backed bid to take Uniq, the UK-based chilled foodgroup, private proved unsuccessful when agreement could not bereached over the company’s £102m pension deficit. Meanwhile, somePE buyers are feeling the effects of fiercer competition and falling sales;PE-backed Golden Wonder Crisps was placed in administration inJanuary this year.

Given its maturity and competitiveness, the UK food market is clearlyno guaranteed gold-mine. Having said this, PE companies continue tobe motivated by the chilled food sector as well as iconic brands andsecure niches such as “functional”, “organic”, or “healthy eating”.

The organic food market in particular is continuing to experience highlevels of market growth. Increasing numbers of consumers are willingto pay a premium for the perceived trade-up in taste and quality, and the confidence gained from greater transparency over where their food is sourced and how it is produced.

The Mediterranean diet is finding most favour among PE houses with Spain the hot target destination. No fewer than 15 Spanish foodbusinesses were bought last year by PE houses (2004 – nine). Beneluxalso remained active with nine PE-related deals (2004 – 11), bolsteredby the acquisition by NPM Capital in the Netherlands of Premier Foods’Dutch canned vegetable business Jonker Fris and Premier Foods BVas well as Heinz’s Hak brand of preserved vegetables.


PE-backed deals over 1100 million in the European food sector in 2005

Completion Deal Target Target Target Bidder Bidder DivestingDate Value (vm) Nationality Description Nationality Company

01-Nov-05 900 Panrico Spain Bread and Apax Partners UK Caja de Ahorros ypastry producer Pensiones de Barcelona

- La Caixa/Banco Sabadell (35%)

01-Apr-05 360 Cesare Italy Sausage company Vestar Capital Partners US Not applicableFiorucci

01-Jul-05 198 DSM Bakery Netherlands Manufacturer of Gilde Investment Netherlands DSMIngredients bread and pastry Management

ingredients

14-Oct-05 160 Icelandic Iceland Processor and Investor Group Iceland Straumur-Burdaras Group (56%) distributor of Investment Bank &

seafood products Landsbanki Islands hf and other divestors



With seven deals valued at more than 1100m awaiting completion at the close of 2005 – notably Nestlé’s 1240m takeover of Delta IceCream in Greece and the 1220m MBO of Nutrition & Santé, the Frenchmanufacturer of dietary and functional foods, backed by ABN AmroCapital France – corporate activity in the European food arena looks set to increase its momentum in 2006.

Several major divestments were announced at the turn of this year with Unilever and Heinz intending to sell their European frozen andchilled operations, and Cadbury Schweppes plc exiting from theEuropean beverages market. Heinz is also divesting other non-corebusinesses such as its European seafood business, to a PE unit of Lehman Brothers.

On the PE exit front, 2006 has already seen the sale by BC Partners of Egidio Galbani, Italy’s largest cheese maker, to the French dairygroup Lactalis and EQT’s divestment of Findus to CapVest. Meanwhile the market awaits the outcome of United Biscuits’ strategic review process.

Market simmers gently

Consolidation is expected within the following fragmented food sub-sectors: freshly prepared fruit, salads and vegetables; poultry,particularly as a result of price reductions caused by the threat of Avianinfluenza; cakes and desserts; sugar and chocolate confectionary;frozen food; bottled water; fruit juices; and tea and coffee as a result of:

• Continuing retailer pressure;

• Rising energy and raw material costs;

• Onerous regulatory and consumer demands; and

• Cheaper imported goods.

Companies are continuing to look further afield in a bid to achieveeconomies of scale and to ensure that they are well-positioned tooptimise access to rapidly emerging consumer markets – notably Asia-Pacific and CEE.

The restructuring and refocusing recipe


10

Ethical supply chain management –the responsible way forward

These chains tend to be controlled by the demands of key ‘downstream’multiples and major producers who, helped by consolidation within the food industry, now have immense bargaining power. ‘Upstream’suppliers must offer rapid delivery times, order flexibility and low prices.

Consumers, meanwhile, continue to nurture tastes for exotic goods towhich the food sector must respond by expanding its product ranges.The parallel trend for luxury brands (often tied in with an “ethical”component to the brand, such as organic or Fairtrade ingredients) andhealthy options makes quality, freshness, safety and nutritional content a top priority. Fairtrade Labelling Organisations International (FLO)records that between 2003 and 2004, Fairtrade labelled sales across the world grew by 56% to over 125,000 tonnes and sales haveconsistently grown year on year since 1997.

Emerging markets in China and India are growing in terms of populationand disposable income and embracing the convenience, choice andhygiene of supermarkets. This represents a huge business opportunityfor manufacturers able to adapt their products to suit local tastes and sensitivities, and their business models to operate in new andsometimes challenging environments.

Modern supply chains are increasingly extending to developingcountries where production costs are cheaper, levels of compliance with local labour and environmental law may be low and standards of performance not in accordance with international good practice.

This can leave buyers with unprecedented levels of corporate, social,ethical and environmental risk in their supply chains which they musttake steps to manage. How many large companies can say that theyfully understand the environmental and human resourcing practices of their upstream suppliers, tier one and beyond? Companies and theirbrands can be damaged easily through high profile ‘exposés’ relating to Corporate Responsibility issues such as environmental damage,animal welfare or human rights.

As food companies increasingly choose to outsource and/or relocatemanufacturing and services overseas, they commonly find themselvesoperating as part of complex international supply chains.


Labour conditionsCost pressures placed on producers can lead to increased working hoursand lower health and safety standards. The 2004 incident in MorecambeBay, UK, where 23 Chinese immigrant workers drowned whilst harvestingcockles led to the creation in 2005 of the “Gangmasters LicensingAuthority” to operate a licensing scheme, set licensing conditions andmaintain a register of licensed gangmasters.

AffordabilityAccording to the World Business Council for Sustainable Development,over 740m people in developing nations are deficient in iodine. The serious health problems it causes include goitres, mental retardation,brain damage, congenital defects and stillbirths. UN research suggests that30% of children under five in Africa suffer from iodine deficiency disorders.Unilever worked with local businesses in Ghana to outsource the production ofiodised salt to make it cost-competitive with raw non iodised salt. Unilever alsoworked with schools to drive an education programme about the need for iodine in the diet.

Responsible marketingIn 2002 Sainsbury’s committed to source all its wild fish sold from sustainable sources (Marine Stewardship Council (MSC) certified fisheries) by 2010. 14 MSC lines are nowavailable in Sainsbury’s stores in the UK. Sainsbury’s is running a proactive awareness raisingcampaign to inform customers about sustainable fishing issues. Marketing of food with poornutritional content to children remains a tough issue as evidenced by the recent withdrawal of certain soft drink brands from school canteens in the UK.

Fair price to producersTaking coffee as an example, since 1960, retail prices for coffee have remained stable despiteproducer prices dropping by more than two thirds. Roughly half the world’s coffee supplycomes from small farms with fewer than five hectares under production. Low coffee prices are driving poverty amongst producers, with a growing number increasing diversification into prohibited crops such as coca or illegal logging. Fairtrade brands guarantee producers a market premium price for their goods. In 2002 Co-op announced a switch of all its ownbrand chocolate bars to Fairtrade in its 2,400 UK stores. In October 2005, Nescafé launchedPartners Blend Fairtrade coffee.

Nutrition and obesityWHO estimates that there are over 1bn overweight and obese people in the world. This isgreater than the number that are underweight. Obesity leads to increased risk of diabetes,heart disease and cancer. As public concern grows, consumers are moving towards healthierand fresher foods, demanding choice and information in relation to salt, fat and sugar.Companies unable to innovate new product ranges that are convenient, cost effective andhealthy risk losing out. Marks & Spencer has responded with its current “behind the label”campaign; Walkers crisps (Lays) has introduced a new line crisp low in saturated fat.


Animalwelfare

Chemicals /GM

Organic /env.

standards

Fair price to

producers

Nutrition /obesity

PackagingResonsiblemarketing

Productsafety

Affordability

Labourconditions

Food miles

Issues

Burning issues in 2006


12

Establish internal leadership and commitment

Map supply chain and assess product and country risk

Develop a strong supplier code aligned to internal policies

Develop a risk-based implementation strategy

Commence supplier compliance and monitoring

Develop mechanisms to support ongoing supplier rectification and long-term capacity building

• Performance measurements

• Continuous improvement mechanisms

• Strong internal and supplier reportingand communications

Key steps in an effective supply chain risk management corporateresponse include:

• Integration of ethical sourcing considerations within the context of broader supply chain issues such as brand impact, quality and product safety.

• Integration of ethical supply chain management objectives withinwider business objectives and planning. In particular, integration with buyers’ performance metrics and targets.

• Training of global procurement teams and local buying agents to be conversant in ethical sourcing issues.

• Ethical standards should be translated into local information and reinforced through planned communication, as part of thecompany’s supplier development programme.

What should companies do?



Increasingly companies are successfully coordinating their efforts totackle ethical sourcing issues at an industry level in order to protectand enhance the reputation of a product in which they have collectiveinterests. Examples in the food sector include the Ethical TeaPartnership (ETP), the MSC, the Roundtable on Sustainable Palm Oiland the Common Code for the Coffee Community to name but a few.This approach has the key benefits of an inclusive approach, a widepool of available resources to draw on and, critically, avoidance ofduplication of effort.

Industry initiatives

This industry partnership sources tea from over 1,200 tea estatesglobally, accounting for over 70% of the UK’s annual tea import. Its members have undertaken a shared responsibility to work withoverseas tea growers and manufacturers to develop a clear factualunderstanding of the current situation and to improve social conditionson tea estates. PricewaterhouseCoopers was engaged to providecredible, independent monitoring of current standards against locallabour law and collective bargaining agreements for approximately 300 tea producers annually. This service forms the long-term basis for encouraging continuous improvements in social conditions.

Ethical Tea Partnership

• Companies develop a clear understanding of their supply chain – and the risks it represents. This helps them to take steps to manage risk and protect their reputation.

• The integration of responsible supply chain management within a wider operational framework helps to improve supply chainmanagement processes, streamlining the agenda and reducinginefficiencies and silo effects.

• Companies develop a robust and credible action plan. If challenged, or if problems do occur, they can demonstrate that they arecollaborating with suppliers and taking proactive steps to improve social, ethical and environmental performance in their supply chain.

Ethical supply chain management is becoming the focus for responsiblefood manufacturers and retailers. As consumer demand for ethicallysourced products continues to rise, PricewaterhouseCoopers expectsM&A interest in this area to increase significantly, evidenced by theacquisition of the Green & Black’s chocolate brand by CadburySchweppes plc.

Benefits


For further information, except for US residents, please contact:

Asia Pacific

China John Layburn +86 1065 337009 [email protected] Benjamin Kan +65 6236 3998 [email protected]

Europe

Belgium Jean-Yves De Vel +32 2 710 4093 [email protected] & Slovak Republics Geoff Upton +42 0 5115 1225 [email protected] Denmark Michael Eriksen +45 3945 9271 [email protected] Noël Albertus +33 1 56 57 8507 [email protected] Werner Suhl +49 69 9585 5650 [email protected] Emil Yiannopoulos +30 210 687 4640 [email protected] Margaret Dezse +36 1 461 92 20 [email protected] Aidan Walsh +353 1 662 6255 [email protected] Marco Tanzi Marlotti +39 02 80 646 330 [email protected] Menno van der Meer +31 20 568 5268 [email protected] Olga Grygier +48 22 523 4422 [email protected] Steven Berger +7495 967 6325 [email protected] Julian Brown +34 91 568 4723 [email protected] Heinz Hartmann +41 5 8792 1544 [email protected] Kingdom Neil Sutton +44 207 213 1075 [email protected]

North America

Canada Keith Mosley +1 416 941 8307 [email protected]

For US residents requiring information on corporate finance related services, please contact our registered NASD BrokerDealer within the US, PricewaterhouseCoopers Corporate Advisory & Restructuring LLC, which can be contacted directly at:

USA Rakesh Kotecha +1 312 298 2895 [email protected]

For advice on European Private Equity deals, please contact:

United Kingdom Chris Hemmings +44 207 804 5703 [email protected]

For advice on Ethical supply chain management, please contact:

United Kingdom Teresa Fabian +44 207 213 8309 [email protected]

For more information visit our either of our web sites at:

www.pwc.com/foodinsights or www.pwc.com/r&c

This publication includes information obtained or derived from a variety of publicly available sources. PricewaterhouseCoopers has not sought to establish the reliability of these sources or verified such information.PricewaterhouseCoopers does not give any representation or warranty of any kind (whether express or implied) as to the accuracy or completeness of this publication. The publication is for general guidance only and does notconstitute investment or any other advice. Accordingly, it is not intended to form the basis of any investment decisions and does not absolve any third party from conducting its own due diligence in order to verify its contents.Before making any decision or taking any action, you should consult a professional advisor.

PricewaterhouseCoopers accepts no duty of care to any person for the preparation of this publication, nor will recipients of the publication be treated as clients of PricewaterhouseCoopers by virtue of their receiving thepublication. Accordingly, regardless of the form of action, whether in contract, tort or otherwise, and to the extent permitted by applicable law, PricewaterhouseCoopers accepts no liability of any kind and disclaims allresponsibility for the consequences of any person acting or refraining to act in reliance on this publication for any decisions made or not made which are based upon the publication.

The member firms of the PricewaterhouseCoopers network (www.pwc.com) provide industry focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than130,000 people in 148 countries across our network work collaboratively using Connected Thinking to develop fresh perspectives and practical advice.

Important notice for US residents: In the US, corporate finance services are provided by PricewaterhouseCoopers Corporate Advisory & Restructuring LLC. PricewaterhouseCoopers Corporate Advisory & Restructuring LLC isowned, indirectly, by PricewaterhouseCoopers LLP, a member firm of the PricewaterhouseCoopers Network, and is a member of the NASD and SIPC. PricewaterhouseCoopers Corporate Advisory & Restructuring LLC is notengaged in the practice of public accountancy.

PricewaterhouseCoopers may from time to time send you information about its products and services, events and newsletters that may be of interest to you. If you do not wish to receive this, please contact Gemma Wiggins at [email protected]

© 2006 PricewaterhouseCoopers. All rights reserved. "PricewaterhouseCoopers" refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.


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