May 27, 2010

The recession certainly put a damper on merger and acquisition activity in the food industry during 2009, noted The Food Institute, which reports on divestitures each week in The Food Institute Report.

The recession certainly put a damper on merger and acquisition activity in the food industry during 2009, noted The Food Institute, which reports on divestitures each week in The Food Institute Report.

More recently however there has been increased interest in the buying and selling of food companies, from farm to fork. As result, Food Institute member Lakeshore Advisors LLC, an investment banking firm serving the food industry, was asked to to comment on this upward trend.

Lakeshore reiterated that the first quarter of 2010 saw a continued rebound in the mergers and acquisitions market for companies throughout the food chain. Building on some momentum started in the fourth quarter of 2009 in which the food industry reported 70 transactions, deal activity increased in the first quarter of 2010 with 80 transactions, up significantly from the 50 transactions reported in the first quarter of 2009. Increased activity has been driven by signs of a stabilizing economy, improved credit markets, a return (albeit tepid) of private equity buyers and sellers to the market, industry consolidation opportunities and expiring tax legislation, among others. Interestingly, the increased merger and acquisition activity that occurred in the food sector in the first quarter was not mirrored in the market as a whole.

One possible explanation of this disconnect is that as a sector, the food industry maintained its value better than many other industries during the recent recession. This factor left potential sellers with a company worthy of being considered as an acquisition candidate and it left buyers with the financial wherewithal to be active acquirers. The availability of financing and the attractiveness of the terms (both pricing and structure) showed signs of improvement in the first quarter of 2010. Lenders are eager to put money to work as they have watched their loan portfolios runoff over the past 12 months.

Private equity investors were increasingly active participants in the first quarter evidenced by 21 deals involving private equity buyers or sellers. Lakeshore Partners expects this trend to continue as private equity firms look for liquidity events in their existing portfolio and begin to put some of the more than $400 billion of committed capital to work. On a related note, secondary leveraged buyouts, the selling of the portfolio company of one private equity firm to another private equity firm, was a source of liquidity in five deals in the first quarter. 
In the first quarter of 2010, there were a number of industry transactions worth noting. THE COCA-COLA COMPANY acquired the North American distribution assets of its largest bottler COCA-COLA ENTERPRISES, INC.  for $12.7 billion. With the transaction, Coke increased its North American business from 25% of revenue to 50% of revenue. Similar to PEPSICO’s purchase of its two largest bottling groups last year, Coke’s acquisition of Coca-Cola Enterprise’s North American operations solves the problem of a shift in consumer tastes away from carbonated soft drinks and bottled water (traditionally produced by bottling companies) towards non-carbonated beverages such as juices, teas and sports drinks (produced by concentrate companies).

On the retail side, TOPS MARKETS successfully completed its acquisition of 79 supermarket locations formerly owned by PENN TRAFFIC for $140 million. The transaction was completed as part of Penn Traffic’s Chapter 11 bankruptcy reorganization, its third in the past decade. As expected, since the transaction was completed, Tops Markets closed 12 of the acquired stores and sold 11 others. The transaction continues the strategy of creating a strong regional grocery retailer for Tops Markets’ owner, MORGAN STANLEY PRIVATE EQUITY, which acquired the retailer approximately two years ago.

Store brand maker PERRIGO announced its acquisition of leading infant formula maker PBM HOLDINGS for $808 million. According to the company, the acquisition supports Perrigo’s long-term growth strategy by adding “a substantial adjacent product category” to the company’s over-the counter portfolio of pharmaceutical and nutritional products. The transaction is yet another example of the interest and growth in the private label category, as it was one of five deals in the 1st quarter of 2010 involving target companies operating in the private label space. Supporting these investment decisions is a February 2010 study by the PRIVATE LABEL MANUFACTURERS ASSOCIATION which reported that an economic recovery is unlikely to undo the gains private label products have achieved during the recession. Lakeshore expects that the deal activity seen in the first quarter will continue throughout the year. With some momentum building,  they suggest now may be a good time for potential sellers looking for a liquidity event to test the market.

The complete analysis can be found in the latest food Institute Report or be emailing santista@foodinstitute.com.