01 October 2010

One to watch: food industry M&A

The food industry has been an important target of M&A activity so far in 2010, both among financial buyers looking for consistent revenues and producers trying to secure raw material supplies ahead of expected shortages. It is no coincidence that one of the largest deals by value globally involves a potash manufacturer; with poor harvests sparking concerns about commodity supplies there will naturally be increased demand for fertiliser. As a result, food producers and the associated primary industries should attract high values for some time to come.

There will always be concerns about crop quality linked to weather systems – among the latest is the impact of unusually heavy rainfall in West Africa on this year’s cocoa harvest. An ever increasing pool of mouths to feed is also a constant. However, the natural disasters in Haiti and Pakistan this year further cemented the idea that commodity shortages will be a future reality.

Globally, the value of deals targeting crop, livestock, food and drinks producers has already surpassed the USD 138,310 million that Zephyr recorded for the whole of 2009. In the nine months to September 2010 USD 151,489 million was recorded from 2,285 deals, so it is more than likely that there will be a higher value from less transactions in 2010 (3,667 in 2009).

The largest of these deals so far this year is Kraft’s USD 17,420 million purchase of UK confectioner Cadbury, which completed in March. However, this was not the only transaction to break the USD-10,000-million barrier, with the other being the Coca-Cola Company’s announced purchase of Mexico’s Femsa.

There has been significant trade activity, with the highest value deals involving investment from the two aforementioned bidders, as well as Heineken and Nestlé. However, there have also been significant private equity deals; Goldman Sachs backed a USD 1,700 million institutional buyout of chicken egg producer Michael Foods, which completed at the end of June and was the largest private equity transaction globally in the first half of 2010.

Sugar has been in high demand after poor crops in India, the world’s second-largest exporter of the commodity, pushed up prices. It comes as no surprise to see a 2010 mega-deal targeting a sugar refiner: Wilmar Australia offered USD 1.47 billion for Australia’s Sucrogen in July. And increasing demand for sugarcane ethanol – considered a viable alternative to carbon-based fuels – will continue to boost prices, thus making producers more valuable.

Just some of the agricultural commodities to watch include wheat, cocoa and rice, for reasons as wide ranging as political instability, poor rainfall and flooding. One of the effects of these rising prices will be high value deals targeting food producers in 2011.

© Zephyr