Private equity hot on food

The sector's relative 'recession-proof' backbone and steady cash-generative qualities are leading private equity by the nose.

These may be post-bubble times, but there sure is plenty of cash sloshing around to flow into the food and drink industry.

Can this wholesome influx of cash into the archly competitive food and drink industry bring good? Or is the quick exit, means-to-an-end value creation strategy so indicative of private equity investment actually harmful to industry?

Pushing M&A activity into the shadow, private equity backed the three largest European food manufacturing sector transactions last year.

From 2003 to 2004 private equity investments in Europe more than doubled in value from €1.1 billion to €2.6 billion annually: with the considerable billion euro leap attributable to just three more deals in 2004 than the previous year.

In other words, the deals are getting bigger…and bigger.

Last year five private equity-backed food deals tipped the scales at more than €100 million, with the Hicks, Muse, Tate & Furst bid for cereals maker Weetabix topping the charts at €915 million.

In 2003, just three deals marched above the €100 million mark.

But slicing an easy path to the head of the pack comes French private equity firm PAI, that has just pulled a massive €1.1 billion from its treasure chest to buy Danish ingredients firm Chr Hansen.

For any business, in any sector, injections of cash to feed selected investments and new opportunities will be welcomed with open arms.

And strapped into an ever-tightening supply chain, dogged by the behemoths - the retailers - that lead a sadistic price-dance, the food industry is clearly no exception.

But a force for good?

Analyst, industry and private equity participants all have their own take.

The private equity investors are out to convince the industry that their investment is the holy grail of strong returns, enabling survival in a potentially lethal competitive climate.

One area they highlight is innovation. Against the backdrop of slow volume growth and saturated markets, the food and drink sector is dependent on innovation to keep ahead of the game. No more evident than the current trend for a health and wellness twist on foods.

Cash from the funds can feed into R&D efforts to build higher-margin, value-added l'air du temps​ products. Access to cheap financials can open up previously cash-restricted opportunities, letting individual firms fly on the wings of innovation to clouds of profit.

But more than this. Private equity has the means to fund consolidation. Battling against mounting price pressures from the retailers, the food supply chain needs a plan to survive the force majeure​ that comes at the end of the line. And joining like-with-like businesses to construct more powerful ramparts is one such weapon.

Consolidation can bring tremendous economies of scale to the players concerned, a bolstered market position, and a combined strength to weather the climate of price squeezes, and soaring energy and commodity costs.

But there are signs that firms in the food and drink sector may be finding it hard to stoke up the necessary cash to fund consolidation. M&A deals in the sector declined by 9 per cent in 2004 to €7.28 billion, compared to €7.99 billion in 2003.

This is exactly where private equity can strike, stepping in and pulling the necessary euros from its pockets to fund previously unattainable acquisitions.

Feeding, rather than driving, consolidation.

Afterall, while cash can fuel consolidation, it can also be used for fragmentation and sell-offs.

For a small number of folks, the entrance of private equity funds heralds a get-rich-quick opportunity. In any such deal, there will be strong cash incentives for the management to create value for themselves, for it is they who will carry the beast to its exit.

And by all accounts the exits are on the up. In 2004, private equity firms played a strong role in the divestor stakes, pushing through 27 sell-off deals compared with 24 in 2003.

But focused on the end-game, the exit date, private equity can be particularly pushy in the boardroom. Funds feeling aggrieved, crossed or simply dissatisfied will not hesitate to muscle in, exercising their under performance rights.

For the City, private equity in the food and drink sector serves to reduce visibility. While most leading European food and beverage companies are quoted on the markets, laying themselves bare on demanded transparency, private equity is opaque.

These puppeteers are beholden to no-one.

Neither the City, nor industry competitors can track their movements. Out of the headlights of the markets and the press, private equity funded firms enjoy a flexibility only dreamt of by listed companies.

But while obvious that flowing funds can ease squeezed suppliers in a taut chain, industry players may argue that knowledge, not cash, is the absolute key to sustainability and growth.

Only a deep insight into the machinations of the food and drink industry will offer any true opportunities for survival.

For any business to succeed, cash is simply not enough.

Know-how rules.

Lindsey Partos is the editor of FoodNavigator.com and a winner of journalism awards for both the publication and her editorship. A long-time food writer, and the founder of the Novis Group editorial operation, she is oft-interviewed by other media, and widely cited as an expert in her field.​

If you would like to comment on the article, please contact Lindsey Partos.​