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Here’s an expert’s view on the 2022 business climate in the food industry, and the potential for mergers and acquisitions. An interview with Farzad Mukhi…

What’s the outlook for the food industry in the months ahead? Any thoughts on inflation, the supply chain and merger/acquisition activity?

The operational and macroeconomic/industry challenges of the past two years have unfortunately continued into 2022. Geopolitical risk has amped up, posing further challenges to supply chains and inflation. These issues will likely continue for several months at the least.

Despite these headwinds, there remains a significant amount of liquidity in the market that will drive consumer demand and M&A activity. With regards to M&A, buyers are holding a significant amount of dry powder that can be deployed in acquisitions.

For example, according to Capital IQ, the strategic buyers that make up the S&P 500 added a total of $900 billion in cash to their balance sheets in 2021. In addition, private equity funds around the world are holding $1.4 trillion in capital raised that needs to be deployed for acquisitions.

M&A activity will likely be impacted if companies are unable to pass along additional price increases to retailers or consumers.

The challenging operating environment has led many business owners to seek liquidity events. This dynamic is likely to persist in the coming months. They will, however, come at a cost in terms of lower valuations, longer transaction timelines and changes in transaction structures.

What about commodity shortfalls?

Many commodities have already seen supply tightening due to the war in Ukraine. Russia and Ukraine combine to produce crops that account for more than 10% of global calories.

This will continue to limit commodity availability and increase prices and may be exacerbated by additional COVID-19-related disruptions, such as the current lockdown in China.

Many businesses have already dealt with increased cost of goods and have made buyers comfortable with this dynamic. M&A activity will likely be impacted if companies are unable to pass along additional price increases to retailers or consumers.

Let’s say my key competitor has been acquired. What do I need to keep in mind?

Acquired companies typically share five-year forecasts with prospective buyers that often assume aggressive revenue growth and margin improvement. Buyers intend to execute on these forecasts after the transaction is completed. Typically, these five-year forecasts do not assume that share is “bought” through lower prices — this would result in lower profitability, which would have an impact on valuation.

Privately-held and owner/operated businesses usually see a change in management once a transaction is completed. This is because many sales are driven by the desire of owner/operators to retire. This change in management typically results in a short period of disruption.

The majority of ‘better-for-you’ categories have the opportunity to increase household penetration in new consumer segments, such as lower income and rural households.

We also see that management teams are often overwhelmed following a transaction due to ownership transitions, 100-day plans and executing all of the initiatives which were presented in their five-year forecasts. These disruptions may provide competitors with an opportunity to gain market share and strengthen their brands.

In the year ahead, what types of companies will be most attractive to buyers?

As we enter a period of increased uncertainty and possibly a recession, we may look to the Great Recession for guidance on how consumers and businesses will be impacted.

Food, beverage and nutrition deal volume in the United States declined by 7% to around 240 transactions in 2008, according to data from Capital IQ. Deal volume declined by another 23% to 183 transactions in 2009. However, M&A activity in the category rebounded significantly in 2010, increasing by more than 37% to 250 transactions. This is a testament to how attractive the food category is to buyers during periods of disruption.

During the Great Recession, buyers were attracted to two types of situations:

—Companies in fast-growing categories such as frozen, bakery, private label and premium products. Consumers increased their spending in these segments as they either traded down to more affordable, convenient meal solutions or traded up to recreate the quality of restaurant meals at home.

—Companies in flat or shrinking categories provide opportunities to acquire businesses at lower valuations.

This buyer behavior is expected to re-occur over the coming months.

Is “better-for-you” becoming more, or less, attractive to potential buyers?

There has been a significant amount of innovation in “better-for-you” categories, and they are all in different stages of their lifecycles. For example, Annie’s launched its organic mac-and-cheese in 1989, but Birchbenders only launched its frozen protein waffles in 2018.

The majority of “better-for-you” categories have the opportunity to increase household penetration in new consumer segments, such as lower income and rural households.

During the Great Recession, we saw that U.S. consumers fell primarily into two segments: (1.) those who traded down to lower cost products and (2.) those who traded up to premium products in lieu of dining out. This bifurcation is likely to re-occur in a future recession as economic changes tend to not affect all consumers equally.

Any changes expected this year with strategic acquisitions or private equity transactions?

Over the past few years, strategic buyers (seeking growth in their core businesses) in the food space have become more cautious about their brand and category strategies. This is due to how consumers have changed their buying habits and categories of interest following the pandemic.

As a result, many strategics are shedding non-core assets and looking for new acquisitions that are more aligned with their categories of focus. This is a departure from five to 10 years ago, when many strategics expanded categories through M&A but have, in some instances, sold off these acquisitions already. Private equity buyers have become more aggressive as a result of less competition from strategics for food acquisitions.

While IPO and SPAC (special purpose acquisition company, created to acquire or merge with an existing firm) activity was elevated in the past two years, it is now being challenged as the U.S. equity markets have declined and many new public companies are down even further. The S&P 500 is down approximately 10% year-to-date through April 21. These struggles will likely motivate larger private companies to seek M&A instead of IPOs.

Farzad Mukhi

Farzad Mukhi, CFA, is a managing director at New York-based Kroll and leads the firm’s Food & Beverage M&A practice. Farzad has 17+ years of experience advising business owners and corporations through M&A deals including business sale transactions and capital raises.

Interview by Warren Thayer, editor emeritus,

Warren Thayer

Warren Thayer

Warren is the Editor Emeritus, Managing Partner for Frozen & Refrigerated Buyer.

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