Strong food and beverage industry M&A activity continued through the first quarter of 2018. Trailing-12-month (TTM) value was up 20% at $76.4 billion (due to the recent rash of large deals), though TTM volume was down slightly with 293 transactions completed.
Barring an extraneous geopolitical event (e.g. crippling trade war with China), we expect the remainder of 2018 to be robust given numerous factors: 1) valuations remain at peak levels, 2) credit markets remain highly accommodative, 3) strategic buyers continue hoarding cash, 4) private equity’s capital overhang remains at or near historical highs, and 5) large consumer packaged goods companies continue to seek accretive growth at all costs.
Across all sectors of the economy, we estimate that transaction valuations are two to four multiples of EBITDA higher than just a few years ago. Food and beverage is no exception. In fact, a linear regression of our proprietary data set indicates that such multiple expansion for food and beverage may be as high as 3.8x EBITDA. Valuations at these levels are unprecedented.
Larger deals still command size premiums, though even at the lower end of the market (i.e. transactions below $250 million) multiples have recently averaged 8.5x EBITDA.
Recent deals of note include:
The past 12 months have been a mixed bag for large, publicly traded food and beverage company stock prices. All subsectors except for ingredients/flavorings underperformed the S&P 500 while two subsectors – retail and packaged/manufactured – are down 23% and 15%, respectively, YOY. Both retail and large consumer packaged goods companies that sell into grocery are clearly feeling the effects of the Amazon/Whole Foods transaction as well as expected growth from German deep discounters such as Aldi/Lidl. Neither Amazon/Whole Foods nor Aldi/Lidl are shy about swapping branded products for private label; indeed, private label can constitute up to 80% of the Aldi/Lidl SKU count. This obviously would hurt any branded product currently fighting for ever-shrinking shelf space in the center of the store.
Every subsector except protein and retail are currently trading above 10x total enterprise value (TEV)/forward EBITDA, with beverages and ingredients/flavorings commanding the highest valuations in the public markets.
Source for charts: S&P Capital IQ and Stout research.