Q&A Andreas Kulcsar

DC Advisory’s Andreas Kulcsar talks deal-making during the pandemic

Andreas Kulcsar, executive director at M&A corporate finance firm DC Advisory, has worked on deals for more than a decade. He speaks to Dean Best about how Covid-19 has affected M&A activity in packaged food and what could drive transactions in the next few quarters.

Dean Best:

Thinking back to 1 January, what was DC Advisory’s outlook for packaged food M&A volumes and valuations for 2020?

Andreas Kulcsar:

We were quite enthusiastic about what was to come for this year. We had a good year last year, primarily on the back of The Scottish Salmon Company transaction and we had other things in the pipeline in the same industry. We also had good leads and were close to other business owners and their respective packaged food companies. They were all doing quite well, were on-trend and in high demand from a variety of corporate and private-equity investors.

There seems to have been a feeling in M&A advisory circles that 2020 was set to be an active year. And then Covid-19 came along.

That changed the view of it.

In those early weeks, late February, early March, how did that impact the M&A landscape in European packaged food?

We had numerous calls with business owners of packaged food businesses and some had minor wobbles in the beginning to iron out supply-chain issues and other kinds of operational things that subsequently have been smoothed. In the beginning, it was quite scary [for them]. 

Before that, the last 12, 24 months of trading were very strong and some of these business owners were thinking about, looking forward, looking to raise capital, be it bringing in a minority investor or looking for an outright sale. So, that obviously turned around a bit and you needed to go back to the drawing board and reassess the situation. We keep staying close to them. We don't offer only M&A advice. 

We also have a restructuring team and debt advisory team, so we can also be helpful in instances where there may be things you can do on the capital structure of a company, or talk to lenders or other stakeholders in the business, to find the most appropriate way forward. I focus on M&A but I work closely with my colleagues from the debt and restructuring teams.

Are the majority of your transactions on the sell-side?

It's a mix between sell-side and buy-side. As an M&A advisor, you generally try to be on the sell-side. That's where you control the process. On the buy-side, you could be one of several interested parties, and you never really know where your client ends up bidding. It varies from year to year, anywhere from fifty-fifty to two-thirds sell-side, one-third buy-side.

Do you work across packaged food or are there specific categories on which you tend to focus?

We've done quite a bit in the seafood space, we’ve also been recently close to a few situations in the pet food space, which we've followed for a number of years. Ingredients has been another hot area. In packaged food more broadly, I've been involved in the transaction where we advised Nagatanien, a Japanese corporate, together with INCJ, a government-backed sponsor, on the acquisition of Chaucer Foods out of the UK.

One of the areas where the job has changed is you have become much more of a wholesome advisor to the shareholders of businesses. You start much earlier to work with some business owners to help them first acquire smaller bolt-ons that fit the bill before you embark on a sale, sometimes a few years after that. 

Often-times, we start speaking to business owners when they're very much sub-scale for us as an M&A advisor but we know that they're in an interesting sub-sector, which has a very positive outlook. When we're having dialogue early, when we are helpful on introductions, on presenting bolt- on ideas and other things like that, you build rapport and your credibility with a business owner.

Smaller companies have gained greater prominence in the packaged food industry in recent years, being often more able to target on-trend niches and therefore eat into the market shares of established players. Has DC Advisory worked harder to build connections with smaller firms?

Absolutely. We always try to look for different angles, how to differentiate ourselves versus our competitors. One way is obviously through our ownership by Daiwa, one of the largest Japanese banks. We have very good access and relationships with the large trading houses – and blue-chip food companies – in Japan, and in other parts of Asia, which helps us add something different to the conversation when speaking to these up-and-coming businesses. 

They are appearing more and more on the radar of not just their North American and European counterparts but also the large Asian players, who have ample cash on the balance sheet and want to invest not just in their home markets but abroad in order to bring these technologies, products and brands into their home markets. The target companies I pursue are mostly in Europe.

Is interest from Asia, or from Japan specifically, in European packaged food increasing?

It's been pretty steady. There are more and more players that have previously not done international M&A but, as their own teams internationalise, as they look at where else they can grow beyond their home borders, now looking at investment opportunities abroad. Obviously we know, for example, in Japan there are constraints in terms of the demographics, and the growth opportunities there naturally.

Is interest from Asia, or from Japan specifically, in European packaged food increasing?

It's been pretty steady. There are more and more players that have previously not done international M&A but, as their own teams internationalise, as they look at where else they can grow beyond their home borders, now looking at investment opportunities abroad. Obviously we know for example in Japan there are constraints in terms of the demographics, and the growth opportunities there naturally.

Have you seen an increase in interest in those companies wanting to buy assets in the UK because of Brexit?

Absolutely. I was in Japan in December. I met quite a few trading houses and larger, blue-chip companies. They are looking at not just the UK but also European assets and they are not shying away from a UK asset because of Brexit. That's not a reason not to select an asset. They follow the market very closely. They know what brands are doing well and they fully understand the implications of what a bolt-on of a UK asset would bring to their performance as a whole.

More broadly, has Covid-19 put on hold some of the transactions you were working on? Have you been able to reactivate some of those potential processes? Or are things still quite cautious out there?

Quite a few transactions and processes have been paused where the business owners are contemplating when to bring the assets back to market, not necessarily because trading is softer but it could also be because [potential] investors are looking at their own operations. They may need to iron out a supply-chain issue. 

On the private-equity side, investment committees may not be open yet because they have the portfolio companies to look after. It may be that investors are not able to attend management presentations, or do site visits.

The other point we see more often now, especially in packaged food where quite a few companies have been trading well throughout the last quarter, is investors want to see what will happen once the foodservice part of the economy comes out of lockdown. People say 'can we see the next quarter or the next two quarters of trading?'

Looking into the second half of 2020, do you think M&A activity in packaged food in Europe will be lower year-on-year, given the caution that's out there?

I think so. I think business owners will be careful in terms of the timing of when they want to bring their business to market, or back to market. It also depends on investor appetite. Or, it depends if the target is generally quite a seasonal business? Do we need to encompass maybe one year of full trading throughout these unprecedented times to really understand the new cyclicality, or the changed cyclicality, of the business?

I think there will be a few factors. But, at the end of the day, there is a lot of money available to be deployed both from corporates and private equity. 

There will be competitive tension. Some private equities will step forward and say they’re willing to pay maybe a slight premium to what they would have paid otherwise because otherwise their investors, the next time they’re trying to raise a fund, will maybe not invest because they’re seen as too cautious or too hesitant. 

This is a very competitive market. There's so much money that needs to be invested with several private-equity firms having recently raised new funds as well.

In which packaged food sectors do you expect to see an uptick in activity?

I think better-for-you products, free-from, meat-alternatives, plant-based food all continue to be on the radar of corporates that want to bring these technologies and products in-house and also of private-equity investors that feel like they could be the first step [owner] before then scaling up the business further and selling to a corporate thereafter.

However, there's also a resurgence in more long-shelf-life, staple foods coming out of this crisis. Some of those companies have worked on NPD, striking a balance between the foods that you know from when you were a child and then supplementing those with new products that are, say, better-for-you, or tick also the meat-alternatives box. There will also be some activity coming out of those companies.

Among some M&A advisors, there is the view 2020 and 2021 will be years where deal-making is not of its usual level. Do you agree?

That's probably true to an extent. There may be businesses that are ripe – or would have been ripe for a sale before – and now owners are saying: 'actually, trading has been so strong and, with a limited amount of extra investment, we have increased the capabilities and the volumes of the business, so we may end up holding it a bit longer'.

We’ve also seen private-equity investors transfer a portfolio business from one fund to the next – it’s a kind of an internal sale – because they believe in the business. They believe it's future-proofed and will continue to be a very successful portfolio company. 

Rather than spending the due diligence costs and the time and effort to look at a new business maybe in the same or similar sector, they say: 'we will be here for the next cycle in a business we have invested five six years ago'. That's probably something we would not have seen pre-Covid and more and more investors are thinking along those lines.

And, obviously, the other aspect is we just don't know yet who is going to come out really as the long-term winners and losers of this. It's very hard to call as consumer behaviour switches and changes as we come out of these lockdowns.

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