Venture finance dominates Q1 deal-making in food

Overall, the M&A landscape in packaged foods was pretty muted in the opening three months of 2022. Simon Harvey reports.

By Michael Goodier

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Venture financing dominated global deal-making in packaged foods in the opening three months of 2022, a trend that’s likely to continue even in the current challenging environment.

While valuations in terms of overall deal activity were generally flat, as they were for venture finance, volumes for the latter rose 31% in the first quarter, according to analysis by research and intelligence group GlobalData. 

Private equity, meanwhile, saw the value and volume of deals drop, albeit the decline was small from the viewpoint of volume numbers – 24 versus 26, compared to a rise to 111 from 85 for venture funds typically engaged in start-up financing.

Nick McCoy, a founding partner and managing director at US-based M&A advisory Whipstitch Capital, explains there’s been a “blurring” of the lines between venture-financing deals and private equity as the former become larger, often taking larger stakes in emerging companies and brands than they might have done in the past. 

Venture financing in food is also supportive when there’s a “tonne of innovative, up-and-coming better-for-you-food companies”, McCoy says, alluding to the in-demand trends around health and wellness, especially among the Gen Z and Millennial consumers.  

“There’s this wave of these kind of high minority, 30-40-45%, deals happening because the venture funds are getting bigger and people are still able to take money off the table. They just elect to take less and then grow with their new partner,” McCoy suggests. “There's a blurred line there because a lot of these deals are either high minority deals that get classified as venture.” 

The tail-off in the value of private-equity deals, which according to figures from GlobalData amounted to US$42.5m in the first quarter from $931.7m a year earlier, and the tick down in volumes, could be an influence from the debt markets. 

That’s indicative of the challenges as central banks move up the interest-rate hike curve in an attempt to temper inflation. At the same time, food manufacturers face margin-eroding rising input costs, while consumers have to contend with higher prices on shelf.  

McCoy suggests private equity is probably talking to more than 50% of companies involved in transactions and venture funds 50% or less. “The deals that are 50% or less are generally not reliant on outside debt,” he adds. 

“Most of the buyout deals, a lot of those are companies that have a substantial amount of EBITDA and private-equity firms getting – whatever – six or seven turns of debt to do that deal. And I know the debt markets have got hit in quarter one, so that factor alone would explain part of that.” 

Overall, the deal landscape in packaged foods was pretty muted in the opening three months of the year. Deal volumes, including full acquisitions, private equity and venture finance transactions, were relatively flat at 205, versus 198 last year, with the value remaining around US$2.4bn, according to figures from GlobalData, Just Food’s parent company. 

Acquisitions dropped to 68 from 83, but valuations were a healthier $1.04bn, compared to $252.3m in the first quarter of last year when many countries were still in the throes of pandemic-related restrictions. 

The fourth quarter was also robust amid a year-end rush to close deals. And McCoy anticipates a similar scenario could play out again this year. 

And while some consumers might be moving away from premium foods as inflation bites, they’re “not necessarily compromising on wellness.

Food manufacturers small and large are still trying to push through price increases in a bid to support margins and top-line growth. However, private label could well be a beneficiary with inflation widely expected to be higher than thought and around for longer, possibly extending into next year. 

“The smaller companies, just because they don’t have the scale, I think that they’ve got disproportionately hit on that and so I do think that does create a little bit of inertia” in the deal market, McCoy says. “The good news is, now that we’re a couple years into inflation, people are taking price much better. And that gap between small and large is catching up.” 

He also suggests low-income earners have benefited more than their middle-income counterparts because of the labour shortages, or at least those whose wages have kept pace with, or exceeded, inflation. 

“Expenditures are still increasing in food and there’s not this big movement back to the restaurant right now,” McCoy says. “The trends around wellness continue to increase, the trends around consumer preferences, around sustainability, which work their way into premium items, those look very favourable.” 

By food category, deal making in dairy and soy-based alternatives was the most active, with volumes up to 38 from 35 last year, followed by bakery and cereals, and then meat, although volumes were down for both segments.  

Transactions in prepared meals increased to 22 from 12 but meat substitutes volumes fell to 14 from 23. 

“Valuations in public markets around plant-based, and even in private markets, the bubble has kind of rationalised a little bit,” McCoy explains. “It seems like the number of total households is not rising as fast and people are kind of moving from the burgers to other alternatives.” 

McCoy suggests the low-carb food category is “definitely big” as a trend, and not necessarily centred on keto diets, and foods catering to people with diabetes, a sector that “continues to be consistent”. And while some consumers might be moving away from premium foods as inflation bites, they’re “not necessarily compromising on wellness”, he says. 

For the rest of the year, deal-making activity in food could well come down to timing, mapping a similar pattern at the height of the pandemic.  

“If we were to have a soft rest of the year, I would say we would probably make it up next year because the capital cycle and the underlying fundamentals continue to move uninhibited,” McCoy says. “So it could become a timing thing, much like what you saw in 2020, where we had a slowdown in Q2 and Q3 deals and then a rapid acceleration in Q4 and Q1 of 2021.”