Food and Beverage Industry

Transcription

1 Investment Banking for the Middle-Market Food and Beverage Industry Merger & Acquisition Update Summer 2015

2 Food and Beverage M&A Market the market is crazy hot crazy, said the President of a well-known, publicly traded specialty food and confection business. M&A activity in the United States has continued to escalate in The number of acquisiitons announced in the 12 months ended June of this year increased by 11.4% compared to the prior year. Billow Butler & Company ( BBC ) views this surge in M&A activity to be the result of a number of factors. Excessive cash balances for strategic corporates, a favorable debt financing market and industry-specific consolidation trends have been key in supporting lofty valuations and high levels of deal flow. Further bolstering market demand, private equity funds continue to be flush with capital and have continued their aggressive pursuit of acquisitions, completing 1,509 buyouts (895 in the middle market) during the first half of The food and beverage industry in particular has seen some remarkably high valuation multiples. BBC estimates that the average Enterprise Value ( EV ) to Earnings Before Interest, Taxes, Depreciation and Amortization ( EBITDA ) multiple for domestic acquisituons closed in the last 12 months was over 10x. That said, there have been several recently closed transactions in the industry priced at considerably higher multiples. While many sellers are attracting double digit multiples of EBITDA, in some instances, notably high multiples of revenues are also being reported. BBC has observed that the greatest multiples in 2015 have been earned by companies that tend to be well-diversified, have very strong brands or are producers of on-trend foods, e.g. gluten-free, organic, all-natural or non-gmo. The latter set of business targets appears best suited to lift sales for the growing number of traditional consumer packaged goods (CPG) companies whose brands have tired among millennials and other connected shoppers and opinion elites. The food and beverage industry as a whole is expected to grow at a modest 4.1% in 2015 (compared to 4.4% in 2014), so strategic buyers have been willing to pay a premium to achieve higher growth targets. Notable M&A Transactions There have been several recent transactions in the food and beverage industry that are representative of the overall market. Perhaps the most notable transaction of 2015 thus far has been the merger of Kraft Foods Group and H.J. Heinz Holding Corporation, which involved Brazilian private equity firm 3G Capital and Berkshire Hathaway. This is to date the largest food transaction ever, creating the fifth largest food producer in the world. While size matters in deal pricing, the merger was valued at $55.0 billion with an implied EV / EBITDA multiple of 22.3x. Heinz shareholders retained a 51.0% stake in the merged conglomerate, while Kraft shareholders received a 49.0% stake in addition to a $16.50 per share cash dividend. This transaction is a perfect example of the food and beverage industry s current trend of consolidation as a means to protect margins: the management of these two companies expects to realize $1.5 billion in annual cost synergies by the end of

3 Just a day after the Kraft/Heinz merger became public, Hormel Foods Corporation announced the purchase of Applegate Farms, which produces natural and organic meat products, in an acquisition valued at $775.0 million. This transaction highlights larger food conglomerates transition to healthier food offerings, which has been accelerated of late due to the rapid shift in consumer dietary preferences. According to Nielsen s 2015 Global Health & Wellness Survey, 88% of consumers polled stated that they would be willing to pay a premium for healthier foods. The gluten-free market alone is expected to grow domestically from $8.8 billion in 2014 to $10.6 billion this year. Market research firm Euromonitor expects global sales of healthy food products to reach $1.0 trillion by Other recent notable large food company transactions include the purchase of Annie s by General Mills ($823.0 million, 38.6x EV / EBITDA, 3.9x EV / Revenue), Campbell Soup s acquisition of Garden Fresh Salsa Company through its Bolthouse Farms unit ($231.0 million, 2.1x EV / Revenue) and McCormick & Company s deals with Brand Aromatics ($63.0 million, 10.0x EV / EBITDA, 2.3x EV / Revenue) and Stubb s Legendary Kitchen ($100.0 million). Notable Deals of 2015 Announced Closed Target Acquirer Transaction Size (mm) May Applegate Farms LLC Hormel Foods Corporation $ Mar Kraft Foods Group, Inc. H.J. Heinz Holding Corporation 55,032.0 Jan Jan Krave Pure Foods, Inc. The Hershey Company Jan May MOM Brands Company Post Holdings, Inc. 1,151.7 Nov Nov Garden Protein International, Inc. Pinnacle Foods, Inc Notable Healthy Foods Deals of 2014 and 2015 Announced Closed Target Target Description Acquirer May May Blake's All Natural Food Dec Dec Lucini Italia Company, LLC Oct Oct Oregon Ice Cream, LLC Jul Jul Dec Jul Blu-Dot Beverage Company, Inc. Pacific Northwest Kale Chips Company Natural, organic and gluten-free food products Natural and organic homemade Italian gourmet products Organic, non-dairy and gluten-free sorbets, frozen yogurts and ice creams Natural, organic tea Natural, organic kale chips 3 ConAgra Foods, Inc. California Olive Ranch, Inc. Branch Brook Holdings, LLC Niagara Ventures Corporation Made In Nature, Inc.

4 Healthy Food and its Implications Perhaps the greatest opportunity for the food and beverage industry s middle market participants (and a challenge for the segment s biggest players) has been the transition in consumer preference toward upstart healthy products. An analysis by Credit Suisse analyst Robert Moskow found that the top 25 American food and beverage companies have lost an equivalent of $18.0 billion in market share since 2009, with consumers increasingly preferring fresh and organic alternatives. Overall, there is little doubt that an increasing number of consumers have been looking to change their eating habits. As an example, a recent survey of consumers by asset management firm AllianceBernstein found 48% of survey respondents have been buying less soda in the past five years, with 41% reporting cutting back on sweet snacks over the same time period. Organic and gluten-free foods have been two of the largest beneficiaries of the healthy-foods movement, displaying annualized growth of 9.6% and 20.0%, respectively, between 2002 and Market research firm Mintel projects domestic sales of gluten-free products to increase from $8.8 billion in 2014 to over $14.0 billion by Meanwhile, the United States Organic Food Market Forecast & Opportunities, 2018 report predicts a compound annual growth rate of 14.0% for organic food sales between 2014 and Much of this increase is driven by free-from consumers, a growing portion of shoppers who consider themselves passionate about food and prefer to buy items free of such elements as gluten, GMOs, artificial preservatives and allergens. In this regard, we note the recent acquisition by Mondelez of Enjoy Life Foods. This acquisition is an indication of the importance of this free-form category and how the world s largest food companies are seeking to capitalize on these types of trends through the acquisition of middle-market innovators that have captured market share and that enjoy brand recogniztion in the space. The preponderance of news coverage, social media and food blogs has made consumers greatly more attentive to what they put in their bodies. Indeed, 23% of all adults identify as free-from consumers as of Millennial mothers in particular represent a large fraction of the new set of health-conscious, informationseeking buyers. This segment of the population spends twice as much time on the Internet as the average American, with 80% claiming to be active on social media. Millennial mothers have repeatedly demonstrated their ability to use social media to turn grassroots businesses into national sensations. The food and beverage industry s largest companies have responded to the health movement in two ways. First, they have sought to clean their own labels and add healthy buzzwords. Producers of foods such as popcorn, potato chips and yogurt, all of which are inherently gluten-free, have reported success in labelling their products as such. Large brands have put significant effort into marketing the healthy, clean aspects of their products. A prime example of this comes from a fast food chain that is normally thought of as an offender to healthy living: McDonald s. The company s Our Food, Your Questions. campaign attempted to clarify common questions regarding its ingredients and food preparation techniques. As earlier noted, big food s second response has been to increase its focus on acquisitions in the healthy food space. Companies such as ConAgra Foods and Hain Celestial have been buying smaller operations with restricted distribution channels, often banking on the acquirers abilities to leverage their massive marketing resources to drive sales growth. 4

5 Billow Butler & Company Recent Food M&A BBC has observed firsthand evidence of the robustness of the M&A market, certainly including the food and beverage industry. We have been actively advising business owners in the food and beverage space as they grow their companies and eventually accomplish a successful transaction through a comprehensive and competitive process. As is the case every year, representatives of BBC have been attentively following industry trends and deal news by attending food shows such as Expo West, NRA, Sweet & Snacks and, most recently, the Summer Fancy Food Show. Most notably, in the past couple of weeks, BBC successfully closed a transaction in the food and beverage space with the sale of Gold Pure Food Products Co. Inc. ( Gold s ) to Westminster Cracker Company, Inc., a portfolio holding of LaSalle Capital Group. Gold s is a 4th generation manufacturer of horseradish and other natural condiments, with an impressive customer base and strong market share in the grocery channel. The sale of mutli-generational businesses can be emotionally challenging for businesses owners. In the case of Gold s, BBC recognized the importance of producing an outcome that would preserve the Gold s brand and family legacy. We are proud of our successful market-clearing sale process, which attracted strong interest from several reputable buyer candidates. The favorable outcome left the company in very capable hands and has given the Gold family the opportunity to participate in the company s future upside by way of a retained minority interest. Another BBC client, a restaurant supplies distributor, is currently in the marketing stage and is expected to close by the end of the year on equally successful terms. Moreover, BBC is currently acting as advisor to multiple food companies in the healthy food space. Billow Butler is privileged to have the responsibility to advise and comprehensively and professionally market all of these family-owned companies for sale, and in doing so, to maximize the sales proceeds received for each company. BBC believes these transactions will command impressively high EBITDA multiples. We expect these companies to have a bidding process that generates a great deal of interest due to the trends that have been previously referenced. Given the strength of competition for acquisitions that we have been seeing, now is an ideal time for ownership to evaluate selling any company that is otherwise at the right stage for a transition. In the opinion of the experienced professionals at BBC, any owners desiring a transition who pass on the current seller-friendly market face the risk of waiting several years for the business cycle to return to similar levels and have no assurance that these pricing multiples will reach the heights being commanded by today s markets. For these reasons, this may be a window of opportunity that many owners simply cannot afford to risk losing. 5

6 Overview of Billow Butler & Company Billow Butler & Company is a leading middle market investment banking firm. Our global reach, extensive experience, knowledge of the food and beverage industry and middle market M&A deal making track record are unmatched. Our clients are typically individual owners or families that have guided the success, and nurtured and managed the growth, of their businesses and are ready for a transition in ownership. When we are privileged with a transaction assignment, we take the responsibility seriously. Our clients can rest assured that there is no other team better positioned, or more devoted, to achieve the optimal transaction outcome. Mergers & Acquisitions Leveraging comprehensive transaction experience and business acumen, BBC offers cradle to close mergers and acquisitions services to its private business owner and corporate clients, professionally managing the process to minimize business interruption. Senior-level professional review ensures that we understand, capture and effectively convey the strategic rationale of an investment to a prospective acquirer, developing a competitive field of suitors to enhance value for our client. More than just a finder, BBC employs proactive analysis and resolution of potential business issues and deal obstacles, ensuring that the parties to a transaction remain informed and focused on closing the deal. Our M&A focus includes: Private Company Sales Public Company Divestitures Buyer Representation Private Market Financing Transaction Values from $10 million to $250 million Management Buyouts Non-Distressed Transactions Whether to support the growth of a business or to enable ownership to take chips off the table, BBC professionals have successfully placed private issuances of debt and equity. A thorough understanding of business opportunities and value enhancement created by the funding enables us to tenaciously advocate on behalf of our client and to achieve the best financing terms and conditions. Our expertise in private market financings includes: Acquisition Financing Senior and Subordinated Debt Raises Minority Equity Interest Preferred Equity 6

7 Food and Beverage Partner at Billow Butler Robert Billow Managing Director Mr. Billow is responsible for originating and executing middle market acquisition and divestiture assignments. He has over 40 years of transaction experience through his roles as a corporate attorney and as an investment banker. He has participated in more than 200 transactions ranging in size from several million dollars to over one billion dollars with a primary focus on the food and beverage industry. He has been a welcomed lecturer and panel participant before various state and local bar associations and continuing education forums and has presented talks before numerous gatherings of business analysts, lawyers, accountants and business owners. You may contact Robert Billow at bbillow@billowbutler.com 20 North Wacker Drive Suite 2110 Chicago, Illinois Phone Fax 7