FOOD BEVERAGE Q2 2015 - Capstone Partners | Beverage...FOOD BEVERAGE Q2 2015 CONTACTS ... MERGER...

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Transcript of FOOD BEVERAGE Q2 2015 - Capstone Partners | Beverage...FOOD BEVERAGE Q2 2015 CONTACTS ... MERGER...

  • BOSTON

    CHICAGO

    LONDON

    LOS ANGELES

    PHILADELPHIA

    SAN DIEGO

    SILICON VALLEY

    TAMPA

    Q2 2015 FOOD & BEVERAGE

    CONTACTS Thomas Elliott Managing Director (813) 251-7285 telliott@capstonellc.com Shawn Keenan Vice President (813) 251-7299 skeenan@capstonellc.com Daniel Schultz Director of Business Development (617) 619-3368 dschultz@capstonellc.com

    MERGER & ACQUISITION ACTIVITY

    2014 proved to be one of the strongest years on record for mergers and acquisitions in the food

    & beverage industry. Reflective of economic conditions, the industry witnessed increasing

    activity almost every year since the recession. The one exception was 2013, during which the

    number of transactions declined, a result of the capital gains tax increase in January of that year.

    Activity rebounded in 2014, posting a 14% increase to 305 transactions. This activity reflects the

    strong interest in food & beverage businesses, making them attractive acquisition targets with

    the ability to draw healthy valuations.

    2015 OUTLOOK

    M&A activity in the food & beverage industry is off to a strong start in 2015, with 94 transactions

    reported midway through Q2. The industry has consistently grown year over year, even during

    challenging economic times, and as a result buyers and investors are attracted to the resiliency of

    the sector.

    Capstone expects robust activity in the industry to persist in the near-term, with middle market

    deals driven by eager, well-capitalized buyers backed by a growing economy. We expect that

    2015 will yield strong opportunities for privately held middle market companies. In fact, the

    M&A cycle appears to be entering its boom phase, during which activity and valuation

    premiums typically rise sharply, resulting in a very attractive sellers market.

    223

    267

    309

    260

    210

    261 283

    300

    268

    305

    94

    0

    50

    100

    150

    200

    250

    300

    350

    2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Q2 2015

    Food & Beverage Transactions

    Source: Capital IQ Transactions in the U.S. or Canada

  • With limited organic

    growth opportunities,

    companies in the industry

    are actively looking to

    acquire other providers in

    an effort to boost sales

    and profits.

    Capstone Partners LLC 2

    Food & Beverage Q2 2015

    M&A TRENDS & DRIVERS

    M&A activity in the food & beverage industry is expected to continue to be robust in

    2015, supported by strong industry and market fundamentals. Several themes are

    contributing to the high level of M&A activity in the industry, including the following.

    Industry Size and Consistent Growth On the one hand, investors are attracted to

    the food & beverage industry by its huge size and consistent growth. The industry is

    large, with sales divided evenly between retail and foodservice. Although economic

    slumps do have an adverse impact on the industrys sales, the sector is relatively

    insulated compared to other industries, as food & beverage products continue to be

    essential to consumers in spite of changes in the economy. On the other hand,

    industry growth is stagnating, and is projected to rise only at about the same rate as

    the population, 1%, providing little year-over-year revenue growth. With limited

    organic growth opportunities, companies in the industry are actively looking to

    acquire others in an effort to boost sales and profits.

    A Bifurcated Market The food & beverage industry is undergoing substantial

    change, and the market has become bifurcated due to divergent consumer

    preferences. On one end of the spectrum are the consumers who are willing to pay

    more for higher-quality items, especially those emphasizing health benefits, natural

    ingredients and convenience. On the other end are consumers who are still

    recovering from the recent economic downturn and who continue to seek out

    products that offer the best value, including private label items. Overall, consumer

    preferences in the U.S. and other developed markets are shifting toward high quality,

    nutritional products including pre-packaged and home-cooked food. As a result of

    the markets bifurcation, industry participants are expected to focus on product

    differentiation to increase their market share. Catering to the needs of increasingly

    divergent consumer groups has added to the complexity of the market, resulting in a

    focused M&A strategy for industry participants.

    Sources: Bloomberg, Food Institute Report, Organic Trade Association, Marketline

    Food & Beverage Sales

    $669.6 $673.3 $711.0 $748.3 $772.2 $792.3

    $646.1 $649.1 $680.5 $700.7 $711.4 $734.2

    $312.4 $320.6 $327.3 $334.6

    $341.5 $348.8

    $0.0

    $200.0

    $400.0

    $600.0

    $800.0

    $1,000.0

    $1,200.0

    $1,400.0

    $1,600.0

    $1,800.0

    $2,000.0

    2009 2010 2011 2012 2013 2014

    $ B

    illio

    ns

    Retail Food Sales Foodservice Sales Beverage Sales

  • Many of the sectors

    strategic transactions are

    driven by the goal of

    creating synergies that

    reduce costs, and gaining

    access to higher growth

    segments, both important

    strategies in a challenging

    environment.

    Capstone Partners LLC 3

    Food & Beverage Q2 2015

    M&A TRENDS & DRIVERS (Continued)

    Buyers Target Hot Product Categories With new product development and

    introductions critical to success in the industry, companies that have distinguished

    themselves in the market with popular brands and products are highly sought-after

    acquisition targets by buyers looking to enhance their product portfolios. Examples

    of popular food & beverage product categories include specialty, healthy/functional,

    ethnic, non-GMO products, sports and nutrition products, protein-based snacks,

    convenience foods, and private labels. With some of these categories expanding at

    double-digit rates, they have become attractive targets in an otherwise slow-growth

    industry.

    Popularity of Healthy Foods & Beverages Valuation multiples are elevated for

    health and nutrition companies, reflecting consumers' insatiable demand for good-

    for-you and healthier foods & beverage. The tastes of upscale buyers are changing,

    calling for alternatives they consider "less processed," with simpler ingredients,

    health oriented branding, convenience, and sustainability. Also prominent are

    products marketed as allergen-free or gluten-free, no additives or preservatives, or

    containing antioxidants. And because this trend is being embraced by millennials, it

    is only expected to be more pronounced in the coming years. Factors such as the

    aging population, heightened allergen awareness, and growing concern about GMOs

    and food additives are also credited with boosting this segment. In order to fully

    participate in this sectors growth, companies are looking to make acquisitions in the

    healthy products segment. As a result, there have been several recent examples of

    mainstream food & beverage companies acquiring health & nutrition targets.

    New Focus on Smaller Brands The competitive landscape of the food & beverage

    industry has changed dramatically, in that small niche brands are readily accepted by

    large retailers and mass merchandisers, where they are competing effectively against

    the leading brands of established food giants. Where once bigger is better was the

    preferred food & beverage strategy, today companies are looking for niche brands

    that cater to specific consumer preferences, and they are making acquisitions to add

    such brands to their portfolios.

    Synergies Drive Transactions & Valuations M&A transactions in the food &

    beverage industry are very targeted and highly strategic. Common strategies

    employed by buyers include acquiring a business that sells a product or brand related

    to one of the buyers own, expansion into a new geographic market (including U.S.

    companies looking to expand into emerging markets), international players wishing

    to move into the U.S., consolidation to take advantage of economies of scale and

    increased clout with large food retailers, and larger companies purchasing smaller

    enterprises with innovative products or advanced capabilities and systems. Many of

    the sectors strategic transactions are driven by the goals of creating synergies that

    reduce costs and gaining access to higher growth segments, both important

    strategies in a challenging environment.

  • M&A TRENDS & DRIVERS (Continued)

    Market Supports Both Mega Deals and Middle-Market Transactions A wide range

    of acquisitions are occurring in the industry, with buyers targeting everything from

    small, single-product companies to large corporations with a full stable of product

    categories and brand names. Acquisitions of all sizes provide a way for buyers to gain

    market share and bolster growth. While large targets enjoy advantages in economies

    of scale and strong brand recognition, smaller targets can provide buyers with

    specialized or unique product