Venture capitalists’ appetite for UK food and drink may well hang on the fate of the Premier Foods flotation, as Glynn Davis reports
They came. They saw. They did a bit of shopping. Now many of the private equity players that bought up swathes of UK food and drink plc over recent years are looking for an exit. And they are scrutinising the share performance of Premier Foods, which floated this week, as well as assessing the prospects for RHM, which is expected to float next year, to determine whether the sector is good for another flutter or whether the party is over.
The timing of Premier’s listing by US-based venture capital company Hicks, Muse, Tate & Furst, as the market for new issues is worsening, ensured shares were listed at 215p on Tuesday - at the bottom of a revised price range, while the expected £1bn listing of RHM next year would be the second attempt by its venture capitalist owner Doughty Hanson to cash in its chips on an investment it has held since 2000.
But that doesn’t mean food and drink is suddenly a bad bet. While mega deals are difficult to sell on to a trade buyer (leaving a public listing as the only option for their VC owners to be able to exit their investments), a decent amount of mergers and acquisitions activity continues among the smaller food processors. Michael O’Donnell, Legal and General Ventures director, says of Premier and RHM: “If they get them away and they’re successful it will be a fillip for the sector.”
LGV is among the venture capitalists that find the sector attractive - no doubt helped by successfully exiting Young’s Bluecrest and Golden Wonder with decent returns. Young’s Bluecrest was created from the merger of the seafood arm of Booker with the Young’s operation from United Biscuits and was sold by LGV for £137m, three times its original investment.
“It is a defensive sector because in an economic downturn people still have to eat
and it generates good cashflows,” O’Donnell explains. Because a lot of debt is taken on, cashflow is essential to pay down the debt. Within the current climate, he says, he is keen to do further deals in the £70m to £300m range with UK-focused companies.
O’Donnell would be very reluctant to invest in purely own label businesses and instead he prefers branded manufacturers. “We would be most happy with pure branded businesses although most mid-size operators will have some element of own label,” he says.
This appetite for brands is based on the fact that private equity deals in the retail sector have the benefit of being underpinned by property portfolios. In food manufacturing it is the brands that act as the equivalent asset. “A fish factory in Grimsby has only so much equity but the food brands can be very valuable,” he explains.
One major attraction for private equity buyers continues to be consolidation in the food sector - especially among smaller companies. Under its new owners - Cap-Vest and management - Young’s is playing an integral part.
The company is being used as a vehicle to buy complementary businesses with the most recent purchase the Macrae Food Group that adds £80m of turnover to the Young’s business.
Steffen Andersen, of the corporate finance department at KPMG, says a number of VC-owned food businesses similar to Young’s - such as Premier Foods, Perkins Foods Holdings and United Biscuits - have sufficient mass to act as platforms to buy complementary operators and are therefore playing a serious part in the consolidation of the sector.
On the back of this trend, Andersen says: “There are a number of medium- sized deals being done as private equity is very active compared with a few years back. VCs are more aggressive.” Typically these deals are in the £100m-plus turnover range.
WT Foods is another VC-backed business that is consolidating the market. Bridgepoint Capital purchased it in November 2001 and recent deals in its core ready-made meals market includes the purchase of Marston Valley Foods for £102m last August. As part of its focus on its core business, it raised funds by allowing a management buyout of its Bart Spices in January.
Guy Weldon, director at Bridgepoint Capital, says: “WT Foods is achieving consolidation in the categories in which it operates. Private equity is helping consolidation in the sector because larger companies are better able to counteract the food retailers.”
This is critical because Weldon suggests the “worst feature of the industry” is the pricing pressure from the multiples. “It is a black cloud and it has got worse.” And the situation could get worse still as he cites the recent profit warnings from Morrisons and Sainsbury as an indication of what is to come.
Andersen suggests that with Marks & Spencer and Waitrose also looking for improved terms from their manufacturers, this will add to the woes of all suppliers. But he counters this by suggesting: “Yes, the industry is under pressure but it has always been so.” His view is that some VCs will regard this as an opportunity for picking up undervalued assets.
The argument from one City analyst, who did not wish to be named, that inflation had “stabilised and could fall back” over the coming three to six months, was disputed by Weldon. However, he does believe that the extent of pricing pressure on a food company depended on which supermarket is aligned. He suggests that with Tesco there is some certainty of decent volume growth so economies of scale will kick in for the manufacturer to offset pricing pressure.
Mark Baillache, head of the food sector at KPMG, believes that another deterrent is the issue of obesity: “What will be the regulatory environment in the future and can you predict earnings?” he asks.
This is particularly serious for a VC that might only have a single food company in its portfolio. In contrast, large manufacturers can utilise their broad spread of businesses to hedge their less healthy operations during times of media and regulatory pressure.
According to Simon Smith, chief executive of quoted venture capitalist Springboard, this is not the only difficulty for a VC with a single investment in the food sector. Although its Latina Brands business avoids the unhealthy end of the sector - with its Latin American foodstuffs - Smith admits it has been difficult building a brand presence for the range.
“It’s difficult to get a listing and retailers expect you to do lots of promotion and advertising. This is a big barrier to entry for a small brand,” he says. As a result, the focus of the business has switched to the foodservice sector - a strategy he would employ with any future food companies in which he invests.
But for now, as an operator of a small VC fund, Smith says he would not want to add another food producer to his portfolio. The main focus is on building scale within foodservice for Latina.
Despite scale still being the all-important factor behind a successful manufacturing business, Andersen says VCs are still sufficiently jittery to not get involved in any mega-sized deals.
“There is no indication in the UK that there are big deals coming along. Private equity has the potential for big things but typically it is cautious at the moment. There aren’t many venture capitalists around that would make a big and bold move because they can see the risks associated,” he says.
These risks won’t disappear overnight. But if the Premier and RHM flotations go favourably, it could be just what is needed to inject confidence into the sector and boost the prospects for deals of all sizes. If not, it could be a case of nothing gained, nothing ventured.
They came. They saw. They did a bit of shopping. Now many of the private equity players that bought up swathes of UK food and drink plc over recent years are looking for an exit. And they are scrutinising the share performance of Premier Foods, which floated this week, as well as assessing the prospects for RHM, which is expected to float next year, to determine whether the sector is good for another flutter or whether the party is over.
The timing of Premier’s listing by US-based venture capital company Hicks, Muse, Tate & Furst, as the market for new issues is worsening, ensured shares were listed at 215p on Tuesday - at the bottom of a revised price range, while the expected £1bn listing of RHM next year would be the second attempt by its venture capitalist owner Doughty Hanson to cash in its chips on an investment it has held since 2000.
But that doesn’t mean food and drink is suddenly a bad bet. While mega deals are difficult to sell on to a trade buyer (leaving a public listing as the only option for their VC owners to be able to exit their investments), a decent amount of mergers and acquisitions activity continues among the smaller food processors. Michael O’Donnell, Legal and General Ventures director, says of Premier and RHM: “If they get them away and they’re successful it will be a fillip for the sector.”
LGV is among the venture capitalists that find the sector attractive - no doubt helped by successfully exiting Young’s Bluecrest and Golden Wonder with decent returns. Young’s Bluecrest was created from the merger of the seafood arm of Booker with the Young’s operation from United Biscuits and was sold by LGV for £137m, three times its original investment.
“It is a defensive sector because in an economic downturn people still have to eat
and it generates good cashflows,” O’Donnell explains. Because a lot of debt is taken on, cashflow is essential to pay down the debt. Within the current climate, he says, he is keen to do further deals in the £70m to £300m range with UK-focused companies.
O’Donnell would be very reluctant to invest in purely own label businesses and instead he prefers branded manufacturers. “We would be most happy with pure branded businesses although most mid-size operators will have some element of own label,” he says.
This appetite for brands is based on the fact that private equity deals in the retail sector have the benefit of being underpinned by property portfolios. In food manufacturing it is the brands that act as the equivalent asset. “A fish factory in Grimsby has only so much equity but the food brands can be very valuable,” he explains.
One major attraction for private equity buyers continues to be consolidation in the food sector - especially among smaller companies. Under its new owners - Cap-Vest and management - Young’s is playing an integral part.
The company is being used as a vehicle to buy complementary businesses with the most recent purchase the Macrae Food Group that adds £80m of turnover to the Young’s business.
Steffen Andersen, of the corporate finance department at KPMG, says a number of VC-owned food businesses similar to Young’s - such as Premier Foods, Perkins Foods Holdings and United Biscuits - have sufficient mass to act as platforms to buy complementary operators and are therefore playing a serious part in the consolidation of the sector.
On the back of this trend, Andersen says: “There are a number of medium- sized deals being done as private equity is very active compared with a few years back. VCs are more aggressive.” Typically these deals are in the £100m-plus turnover range.
WT Foods is another VC-backed business that is consolidating the market. Bridgepoint Capital purchased it in November 2001 and recent deals in its core ready-made meals market includes the purchase of Marston Valley Foods for £102m last August. As part of its focus on its core business, it raised funds by allowing a management buyout of its Bart Spices in January.
Guy Weldon, director at Bridgepoint Capital, says: “WT Foods is achieving consolidation in the categories in which it operates. Private equity is helping consolidation in the sector because larger companies are better able to counteract the food retailers.”
This is critical because Weldon suggests the “worst feature of the industry” is the pricing pressure from the multiples. “It is a black cloud and it has got worse.” And the situation could get worse still as he cites the recent profit warnings from Morrisons and Sainsbury as an indication of what is to come.
Andersen suggests that with Marks & Spencer and Waitrose also looking for improved terms from their manufacturers, this will add to the woes of all suppliers. But he counters this by suggesting: “Yes, the industry is under pressure but it has always been so.” His view is that some VCs will regard this as an opportunity for picking up undervalued assets.
The argument from one City analyst, who did not wish to be named, that inflation had “stabilised and could fall back” over the coming three to six months, was disputed by Weldon. However, he does believe that the extent of pricing pressure on a food company depended on which supermarket is aligned. He suggests that with Tesco there is some certainty of decent volume growth so economies of scale will kick in for the manufacturer to offset pricing pressure.
Mark Baillache, head of the food sector at KPMG, believes that another deterrent is the issue of obesity: “What will be the regulatory environment in the future and can you predict earnings?” he asks.
This is particularly serious for a VC that might only have a single food company in its portfolio. In contrast, large manufacturers can utilise their broad spread of businesses to hedge their less healthy operations during times of media and regulatory pressure.
According to Simon Smith, chief executive of quoted venture capitalist Springboard, this is not the only difficulty for a VC with a single investment in the food sector. Although its Latina Brands business avoids the unhealthy end of the sector - with its Latin American foodstuffs - Smith admits it has been difficult building a brand presence for the range.
“It’s difficult to get a listing and retailers expect you to do lots of promotion and advertising. This is a big barrier to entry for a small brand,” he says. As a result, the focus of the business has switched to the foodservice sector - a strategy he would employ with any future food companies in which he invests.
But for now, as an operator of a small VC fund, Smith says he would not want to add another food producer to his portfolio. The main focus is on building scale within foodservice for Latina.
Despite scale still being the all-important factor behind a successful manufacturing business, Andersen says VCs are still sufficiently jittery to not get involved in any mega-sized deals.
“There is no indication in the UK that there are big deals coming along. Private equity has the potential for big things but typically it is cautious at the moment. There aren’t many venture capitalists around that would make a big and bold move because they can see the risks associated,” he says.
These risks won’t disappear overnight. But if the Premier and RHM flotations go favourably, it could be just what is needed to inject confidence into the sector and boost the prospects for deals of all sizes. If not, it could be a case of nothing gained, nothing ventured.
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