Food Industry: Recent M&A Highlights

Food Industry: Recent M&A Highlights

September 01, 2014

What is the Current Environment?

The food industry is a highly competitive, mature-stage industry. In the current environment, industry participants throughout the vertical supply chain continue to seek avenues for improving margins and boosting market share. This has triggered a trend of dramatic consolidation within the industry. While such consolidation represents a general overriding theme, there are a number of specific and varying underlying trends driving the strategic motivations of buyers and sellers. Each of these trends carries certain valuation implications for food producers, processors, distributors, and retailers.

What are the Driving Trends?

Core Strengths

Acquisitions in the food industry continue to be motivated by the potential for the creation of synergies as companies strive to advance their core platforms via acquisitions. Not only do these synergistic acquisitions provide potential cost savings and/or growth opportunities, they also create significant opportunities for the acquirer to bolster its core strengths by building onto its established core brands and divisions. Combining a complementary product line with an established platform through acquisition has the potential to prove more efficient than organically investing in core strength improvement. This is particularly relevant for the large packaged food companies that are dealing with the continued consumer shift from the center of the store to the perimeter in search of fresh produce, natural and organic foods, and protein-rich products.

Tyson Foods, Inc. (“Tyson”), as a result of acquiring The Hillshire Brands Company (“Hillshire”), is a recent example of a strategic acquisition motivated by potential for core strength growth. Tyson, a producer and distributor of chicken, beef, pork, and prepared foods, anticipates $300 million in synergies with its acquisition of Hillshire. Hillshire’s packaged meat and frozen bakery products represent niche product lines that provide the potential for Tyson to bolster its prepared food products division and further strengthen its position as a leader in retail prepared foods. Tyson’s expanded portfolio of established brands will provide a catalyst for operational efficiencies, purchasing power, raw materials upgrades, and substantial supply chain and distribution benefits. Tyson’s pork operations are also expected to benefit from constant demand for its use in Hillshire’s prepared food products. This transaction continues Tyson’s focus on strengthening its prepared foods portfolio following its recent acquisitions of Bosco’s Pizza Co., a maker of partially baked frozen pizza products, and Don Julio Foods, a maker of tortillas and salty snacks.

At the same time, other companies are pursuing strategic divestitures of non-core brands in order to focus and streamline their operations. Unilever PLC (“Unilever”) and Nestle S.A. (“Nestle”) are two food giants currently undergoing a rightsizing of their operations. In recent periods, Unilever has sold its Ragu and Bertolli sauces, Skippy peanut butter, Wish-Bone salad dressing, Bertolli and P.F. Chang’s frozen meals, and meat snacks brands. Similarly, Nestle recently divested its PowerBar and Musashi brands, Juicy Juice brand, Joseph’s Pasta Company, Inc., Jenny Craig, Inc., and multiple other brands in order to focus on its higher growth areas. Overall, in those instances in which underperforming or non-core brands may represent a better fit within another company’s strategic plan or platform, opportunities for value creation through deals are available for both the buyer and seller.

Within the distribution sector, one of the most noteworthy transactions within the industry in the past year was the announced merger between Sysco Corporation (“Sysco”) and US Foods. The Sysco/US Foods transaction represents an $8.4 billion merger, and if completed, the combined companies would control approximately 25% of the foodservice distribution industry in the United States. Similar to the packaged foods industry, the transaction provides the opportunity for the companies to further expand their collective product offering to existing and potential customers through a combination of their broad product portfolios and leading industry brands.

The Sysco/US Foods transaction also has the potential to present significant business development opportunities for certain of their competitors. In particular, smaller foodservice distribution companies may have opportunities to take market share by winning business with customers of US Foods that may dislike conducting business with Sysco, the nation’s largest foodservice distribution company. In order to capitalize on this opportunity, competitors of Sysco and US Foods may seek to acquire middle market businesses in order to take advantage of opportunities before they dissipate.

Health and Wellness

Nutritional food alternatives have increased in popularity in recent years, which has spurred M&A activity as companies seek to capitalize on the increased consumer demand. Companies within the industry are attempting to diversify their product lines through the addition of nutritional offerings. Post Holdings, Inc. (“Post”), in particular, is aggressively pursuing acquisition opportunities in the active nutrition, health, and protein sectors. Notably, in 2013, Post agreed to acquire Premier Nutrition Corporation, a maker of protein bars and shakes, which provides Post the potential to grow its health food platform in an increasingly health-conscious food market. Post’s focus on expanding its health food platform was further evidenced by its announced acquisition of the Musashi and PowerBar brands from Nestle in February 2014. If completed, the transaction would allow Post the opportunity to realize significant synergies and growth opportunities in the health food space, which would pair well with Post’s established distribution networks and wholesaler relationships. Other recent transactions for Post in this market include Michael Foods Group, Golden Boy Foods Ltd., Dymatize Enterprises, LLC, Dakota Growers Pasta Company, Inc., Attune Foods, and the organic and natural cereal, granola, and snacks business of Hearthside Food Solutions.

As an extension of the growth in health food products, there has been a rapid increase in demand for organic food products, which has created a niche market in which firms are competing to obtain supply contracts from local food producers to satisfy consumer preferences for locally sourced organic products. U.S. organic food production increased approximately 240% between 2002 and 2011. The organic food industry is projected to again increase at a 14% compound annual growth rate (“CAGR”) from 2013 to 2018.1 Similar trends have also been observed for gluten-free and non-GMO products, thus providing multiple strategic opportunities for companies fulfilling consumer demand for these particular product offerings.

Two significant transactions in the organic foods market include General Mills, Inc.’s acquisition of Annie’s, Inc. and The WhiteWave Foods Company’s acquisition of Natural Selection Foods, LLC, which does business as Earthbound Farm. First, with the intention of boosting the company’s shares and convenient meals categories, General Mills, Inc. agreed to acquire Annie’s, Inc. for approximately $820.0 million on September 8, 2014. Similarly, the WhiteWave transaction represents a category expansion strategy, as it has historically focused on consumer packaged food and beverage products under brand names such as Horizon Organic and Silk.

Operational Efficiencies

Changes in consumer preferences and buying habits necessitate a reinvention of processes, procedures, and supply chain initiatives. The resulting need for increased investment in business operations comes amidst an environment of rising commodity costs and a stubborn recovery in consumer spending, particularly among lower and middle income consumers. In response, acquisitions may provide companies within the industry with the economic scale necessary to pursue investment activity in an effort to improve efficiency and capitalize on opportunities for increased operating leverage. Sysco recently invested heavily in new technology in resource planning and process management and anticipates saving $300 million annually by fiscal 2015 with the integration of its new Enterprise Resource Planning (“ERP”) system. Should the merger between Sysco and US Foods be completed, the combined companies will seek to capitalize on Sysco’s newly integrated ERP system to streamline process management and ultimately increase operational efficiency.

Similarly, companies are striving for operational efficiencies by investing in property, plant, and equipment. Organic and natural foods giant United Natural Foods, Inc. has spent approximately $225 million in the last five years enhancing its distribution network. Additionally, in 2013, United Natural Foods, Inc. launched construction on a new 540,000-square-foot distribution center in Colorado which consolidates all of its existing operations in that area into one distribution center. Companies competing in this industry will be expected to make similar investments or focus on cost-cutting initiatives to prevent being severely disadvantaged in terms of pricing in a low margin environment. Companies have the opportunity to do this in a more accelerated manner by acquiring companies with established distribution centers (especially with advanced technology or efficient/highly automated facilities).

Geographic Expansion

Companies continue to focus on growth via geographic expansion into underserved markets or markets in which they have a low market share. Acquirers apply the knowledge and expertise of their core product lines and business units when contemplating strategic acquisitions into uncharted markets. Link Snacks, Inc. (most known for its Jack Link’s beef jerky product line) recently acquired the European meat snacks business of Unilever. The transaction allows Link Snacks, Inc. to rapidly expand its existing European presence within the German, Austrian, and Swiss markets via the acquired Bifi brand, and the British and Irish markets via the acquired Peperami brand.

Food distributors and retailers are limited by geographical boundaries and tend to focus on catering to a specific location within proximity of their distribution centers and warehouses. Companies looking to expand into new territories must consider the competition and saturation of the overall market when contemplating geographic expansion. As further examples of this strategy, Saputo Inc., the largest dairy processor in Canada, recently increased its global footprint through the acquisition of Warrnambool Cheese and Butter Factor Company Holdings Limited, one of the largest milk processors in Australia. Similarly, the pursuit for leadership in the global banana market spurred acquisition activity centered around Chiquita Brands International, Inc. (“Chiquita”). Following the company’s proposed acquisition of Fyffes plc, in an effort to develop an operating presence in more than 70 countries, Chiquita in turn found itself as the target of an expansion effort by two Brazilian firms, orange juice maker Sucocitrico Cutrale Ltda and banking conglomerate Banco Safra S.A.


While the trend in health and wellness has grown, demand for prepackaged or ready-to-eat snacks has also increased as a result of changes in consumer preferences and faster-paced lifestyles. In order to capitalize on this shift in consumer preferences, there have been a number of transactions with a focus on chips, nutrition bars, and cookies. Recent select transactions in this area include Campbell Soup Company’s acquisition of Danish snack maker Kelsen Group A/S, Hillshire’s acquisition of Golden Island Jerky gourmet jerky brand, and lnvestcorp Bank B.S.C.’s acquisition of Tyrrells Potato Crisps.

Recognizable brand names are attractive acquisition targets, especially within the snacking products sector. Brand name recognition may allow for the acquiring company to leverage the reputation to expand the product line or add other product categories. For example, Back to Nature Foods Company, LLC (a portfolio company of Brynwood Partners) acquired the SnackWell’s cookies and snacks business from Mondelez International, Inc., at the end of fiscal 2013. This strategy presents an opportunity for the SnackWell’s name to be utilized and expanded into additional health-conscious consumer staples.

What do the Trends Mean?

Recent Noteworthy Transactions

Transaction EV/LTM EBITDA2 multiples have averaged approximately 10 times since the first quarter of 2011 and have maintained that level over the past 12 months. The trend of strategic acquisitions across the entire food industry continues to result in elevated multiples throughout the industry. The following table summarizes recent noteworthy transactions within the food industry.

The lower interest rate environment, improving economic confidence, and cash-rich balance sheets (with respect to both corporate and private equity buyers) are anticipated to continue to fuel investment activity within the industry. In certain instances, acquisitions have the opportunity to create “win-win” scenarios for both buyers and sellers. This is often the case in situations in which a seller elects to refocus operations through the divestiture of a non-core brand, while the buyer, in turn, finds value in investing in the brand for product or geographic diversification and expansion.

At the same time, it should be pointed out that the rash of acquisition activity certainly does not represent a panacea for all food companies. Rather, the winners and losers in the industry will be largely determined by their strategic decision-making and overall market positioning within the context of the prevailing industry trends. Companies with a strong portfolio of products that cater to the current consumer trends, such as health, fitness, gluten-free, non-GMO, or locally sourced, are in a relatively stronger competitive position than those packaged food companies with only a center of the store presence, all else equal. In addition to their operational strength, these companies also have a greater number of opportunities available to them. For example, they likely have a greater ability to raise capital and otherwise explore strategic alternatives should they choose to do so. In fact, as consolidation continues, smaller companies may find it difficult to compete on their own without a niche product line, as pricing pressures from larger competitors with greater manufacturing and supply-chain efficiencies will impact bottom-line margins.

The impact of increasing consolidation on smaller companies is particularly notable in the distribution industry. Aggressive acquisitions of smaller companies have been fueled by a shrinking wholesale sector as retailers are bypassing wholesale distributors in an effort to minimize supply chain costs. These increased acquisitions of smaller companies have further reduced the number of companies operating in the industry while skewing profits toward a smaller number of market leaders. This has resulted in much larger companies controlling distribution networks that span throughout the United States, bypassing the networks crowded out by a large number of smaller companies. Large distribution networks have provided companies with increased opportunities to integrate their supply chain and improve their ability to forecast demand more efficiently, increasing margins. Geography continues to play a key role in these strategic acquisitions as distributors tend to focus on a specific geographic area that is located within the vicinity of their distribution centers.

While limited internal growth and increased industry concentration are fueling supplier and retailer consolidation in order to cut costs, high food prices have further added to the escalation of supplier and retailer consolidation. In fact, retailer acquisition activity in 2013 increased to its highest level since 2007. Several notable transactions in this segment include the acquisitions of Harris Teeter Supermarkets, Inc. by The Kroger Co. and certain Supervalu banners by Cerberus Capital Management LP, as well as the announced acquisition of Safeway Inc. by Albertsons, LLC. This consolidation allows companies with strong buying power to purchase directly from the manufacturer, eliminating the margin a wholesaler demands. The consolidation in the retail market has made it increasingly difficult for wholesalers to purchase at low prices as they are slowly being pushed out of the retail picture. Wholesale distributors, in turn, must respond by implementing necessary changes to their business operations, such as capitalizing on the increased demand for health products by increasing their selection of organic foods. This can be accomplished through greater integration with local distributors. Smaller and more localized distributors may have the advantage of working with producers in their area.


Traditional growth opportunities across the industry are minimal, with the exception of proprietary brands and organic food products. As such, consolidation continues to be the most prominent trend in the food industry. The aggressive acquisition activity has been fueled heavily by the market trends discussed in this article, the low interest rate environment, and available capital among large food companies and private equity. Certainly, the valuation multiple realized by any one company will be impacted by its ability to offer potential suitors a key competitive advantage. Such an advantage may take many different forms and will generally coincide with the prevailing market trends, such as the ability to provide product line diversification, health and wellness products, operational efficiencies, or geographic expansion. Conversely, those companies that are not well-positioned tocapitalize on these trends may find the current competitive environment increasingly challenging on their own, while also being unable to attract potential suitors. Overall, the consolidation occurring within the industry may represent either an opportunity or threat for industry participants, depending upon their respective strengths and weaknesses and corresponding market position. Thus, now represents a good opportunity for food companies to assess their current situation and position themselves accordingly for continued success in this mature market, either on their own or with a strategic partner.