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Headwinds Slow M&A Market for Food, Beverage Products

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Small companies seeking an investment or sale to a buyer face a challenging environment, according to a recent Food Institute webinar on mergers and acquisitions in the food industry.

“2023 had its fair share of headwinds in the M&A market,” said John Carey Siegler, managing director and head of food, consumer, and retail middle market M&A at BMO Capital Markets.

High capital costs and a demand for returns on their investments have created an environment in which investors have become much more cautious about making deals, he said. Investors have increasingly restructured their transactions after digging into a target company’s financial performance, and they have been conducting more due diligence than ever to ensure that their investments are solid.

“These are smart investors out there, and they are looking for problems to be able to reprice,” said Siegler.

BMO’s research found that M&A deal activity in the food and beverage space was down 13 percent in the past year, with 39 fewer transactions than the previous year.

Still, Siegler projected that M&A activity could pick up in the second half of 2024, as private equity companies, which have largely remained on the sidelines, could become more active. These companies have nearly $1 trillion to invest, he said, and some have formed theses about their investment strategies in the industry. Private-equity companies are likely to focus on roll-up opportunities in key, high-growth subsectors, Siegler said. 

Attractive Categories 

Among the sectors of the food and beverage industry that remain attractive are better-for-you products, beverages (including certain alcoholic beverages), frozen foods, and bakery products, confectionary/snacks, and ingredients suppliers.

“If one has a well-run company in those business, we believe they have the ability to raise money or sell the business,” Siegler said. 

In addition, investors have been more cautious about investing in brands—the CPG market is overcrowded, he said—and investors are looking more closely instead at private labels and co-manufacturing, co-packing, and co-distribution opportunities.

“Some people are nervous about investing in brands, because of the capital requirements and the competition out there,” he said.

In the current challenging M&A market, companies seeking investment or a buyout need to have strong financial performance and should be able to show that they have the discipline to drive a profit, even it comes at the expense of sales, Siegler said. In addition, having strong management is critical, he said.

“Most people are starving for talent, and companies are willing to pay for that,” he said. “As long as they have strong management and have shown that they can scale, there is tremendous opportunity to attract investment or to become a partner in a strategic acquisition.” 

Among other topics Siegler discussed:

• Although inflation remains a headwind, low unemployment levels mean consumers are still spending, although many are trading down when they shop, Siegler said. 

• However, despite concerns about inflation, consumer interest in premium, artisanal foods has remained strong, he said.

• Weight-loss drugs such as Ozempic do not appear to be having a significant impact on food sales, despite initial fears that the popular appetite suppressants would reduce sales of certain items, such as snack foods.

• While attributes such as functional, healthy, environmental benefits, and sustainability, are all important, especially for Gen Z consumers, taste and price remain the most important characteristics for food and beverage product success, Siegler said.