Bargain hunting: buyers eye cut-price M&A bonanza

After Premier finally managed to offload Quorn in a cut-price deal, the market is bracing itself for a flurry of M&A activity. But will the £4bn worth of food and drink assets still up for grabs achieve ‘cheap as chips’ prices, asks Selwyn Parker


Bargain hunters at the ready!

It may be true that Premier Foods has flogged Quorn, that it’s now a two-horse race for Northern Foods and that Raisio is about to get is paws on Sugar Puffs-owner Big Bear Group but there are plenty of food and drink brands and companies still in play.

United Biscuits, Unilever’s Chicken Tonight and Ragu, PAI Partners’ half of Yoplait, Rémy Cointreau’s Piper-Heidsieck and Charles Heidsieck Champagnes and AB InBev’s Bass beer are among the £4bn or so worth of food and drink interests in the UK alone yet to find buyers.

Some have just hit the market, others have been around for a while, but after the recent flurry of M&A activity, they will all be hoping their time has come.

The question is: with Quorn selling to private equity house Exponent for £205m way under its £250m upper valuation, will buyers meet their expectations on price? Or will they only put their hands in their pockets for something that, as David Dickinson would say, is as cheap as chips?

The M&A market is already shaping up to be very different from 2010’s. Last year, the landscape was dominated by deals that were very much either at one end of the spectrum in scale (think Kraft-Cadbury) or the other (think small but innovative brands such as Gü, Rachel’s and Plum Baby), with nothing much in between (Maxinutrition’s £162m sale to GlaxoSmithKline one of the few notable exceptions).

This year, however, you don’t have to look much further than Quorn to see that there are more overt distress disposals of all sizes in the mix as brand owners look to pay down debt, focus on winning brands or quit assets that either aren’t paying their way or require significant investment. And that’s not the only change.

Private equity players are also back in the game after a year in which precious few propositions hit their sweet spot of £100m to £1bn in size (although Birds Eye Iglo, under the ownership of private equity firm Permira, did buy Findus Italy from Unilever for 805m in October and Trilantic Capital Partners sold canned tuna business MWB, which owned brands such as John West, for 448m in July, albeit to a trade buyer Thai Union Frozen Products).

“If you match up private equity’s aspirations to deal size there wasn’t much in the mid-market last year,” says PricewaterhouseCoopers head of corporate finance Neil Sutton. “But the debt market has improved, so there’s cautious optimism out there in terms of deals returning in 2010.”

Some private equity players were already sitting on cash raised before the downturn to the tune of an estimated half a trillion pounds so there’ll be no shortage of interest when the right deals come along, agrees Harsha Wickremasinghe, an analyst at Livingstone Partners.

“A lot of private equity businesses have been sitting tight so there’s a need for them to get their cash out there they have a mandate to do so,” he says.

You would expect this to equate to greater competition and higher prices and in some cases it may well. Ranjit Singh Boparan’s £342m cash bid for Northern Foods, for instance, could yet flush out an improved offer from Greencore, whose current offer is significantly less than BH Acquisitions’ proposed 73p a share.

However, with so many brand owners selling their assets because they have to rather than want to, some could be forced to lower their price expectations. 

“Ultimately, the brands are on the market because they need to be offloaded,” points out Wickremasinghe. “The longer they are on the market the more likely it is that people are going to make sacrifices.”

He cites Quorn’s sale price. “There was talk it’d go for £250m and it ended up going for just a shade above £200m. That’s not much more than Premier paid for it a few years ago.”

Whether trade or private equity, buyers will be expecting to strike similarly keen deals on some of the other food and drink assets that have come to market, but that doesn’t mean everything will find a buyer, warns Sutton.

“I think we are in a situation where good-quality assets go for good prices and the lesser-quality assets may not sell at all,” he says. “There used to be an opinion that private equity would be a failsafe for more difficult assets but I think private equity is now a bit more selective.”

Sellers won’t necessarily sell at any cost either, as Sara Lee demonstrated this week. Chief executive Marcel Smits announced it was splitting the business in two “in the best interests of the business and shareholders” and that it had decided against pursuing “unsolicited indications of interest” from unnamed parties to buy the company.

As well as the Northern deal, many buyers will be keeping a close eye on Ragu and Chicken Tonight, put up for sale by Unilever last September, to get a steer on the values achievable.

The brands are fairly typical of the more challenging assets on the market at the moment, in that they are difficult to strip out of the mix, production or value-wise.

That makes them less enticing prospects for private equity buyers, believes Catalyst Corporate Finance’s Simon Peacock. “The question, is how do you draw a line around Ragu when it is so integrated,” he says. ” I think it’s more likely it’s going to be a medium-sized food manufacturer that buys these brands.”

Premier wouldn’t be in a dissimilar position if it attempts to follow the Quorn sale with the disposal of other assets. It insists it has no intention of holding a fire sale and that all brands “have a place in their portfolio”, although it adds, somewhat contradicting this message, that it will talk with prospective purchasers, probably about “ex-growth” assets such as Hovis.

This means there could be more bargains to be had, says Martin Deboo, an analyst at Investec Securities, but don’t expect rock-bottom prices.

“Premier needs to achieve disposals of £200m to £300m in value to make a meaningful dent in their debt,” he points out. “The complication is that disposals need to be done at more than five times EBITDA or so if they are to pay off their fair share of the group’s debt and pension deficit.”

At least Premier is able to offload individual assets, unlike United Biscuits, which has struggled to find a single buyer willing to cough up £2bn for the business as a whole. In September, that buyer looked to have been found in the form of China’s Bright Food, but talks collapsed.

Sutton believes its private equity owners, Blackstone and PAI Partners, may have to break it up to sell it, having also reportedly held talks with Campbell’s, Kraft and Kellogg’s that have amounted to nothing.

“The issue isn’t that the United Biscuits brand isn’t a great business,” he says. “The fact is different groups of trade buyers are motivated by different parts of the business, so maybe there could be a more piecemeal solution for United Biscuits.”

Given that it has now been 0n the market for seven months, a quick resolution is not likely, believe experts, and PAI Partners faces a similarly lengthy battle to offload its half of yoghurt maker Yoplait. The 50% stake was put on the market in December after the two owners (it is co-owned by French farmers’ co-operative Sodiaal) rejected a 1.4bn (£1.09m) unsolicited bid from Lactalis in November.

As appealing a prospect as Yoplait is, its ownership structure and licensing arrangements in the United States, where General Mills is the sole licensee, could complicate matters. Those eyeing Rémy Cointreau’s Heidsieck brands, meanwhile, will be wary of the fact that they have never turned a profit although that hasn’t stopped speculation that Diageo, Pernod Ricard and private equity groups are all interested in the potential 450m deal.

Experts are putting their money on a private equity player winning out in this instance. Generally, however, the competition for deals looks more evenly pitched between private equity and trade buyers than it has for a long time and they’re all prepared to do a deal if the price is right. But that’s a very big if. 


Quornnot such a meaty deal Initially, commentators speculated Premier Food’s meat-free brands Quorn and Cauldron would sell for £250m. In the end, they went for £205m to Exponent Private Equity and Intermediate Capital Group.

The deal has set the tone of M&A activity this year, believe experts. For one it involves distress assets Premier was selling the brands to pay down a £1.4bn debt pile built up following an acquisition spree that included Hovis-owner RHM and Campbell’s Soup in the UK and Ireland.

For another, it marks the return of private equity players after a quiet 2010 in which trade buyers very much had the upper hand. It could also signal that sellers have to adjust their value expectations downwards if they really want do do a deal.

Premier will no doubt be pleased to have offloaded the two brands, which have seen sales decline sharply over the past year. But it probably wishes they could have commanded a higher price. After all, it shelled out £172m for Quorn and £27m for Cauldron when it bought them in 2005.