Foreign appetite for UK food and drink continued to grow in 2016 as the uncertainty created by Brexit failed to hamper M&A activity for a sustained period.
Overseas buyers for UK and Irish targets accounted for 32% of the 198 deals in the sector last year, an increase from 28% in 2015 and 20% in 2014, according to the latest Bite Size M&A report by Grant Thornton.
Trefor Griffith, head of food and beverage UK at the firm, predicted the trend would continue in 2017 as the weakness of sterling made UK assets 20% cheaper for international buyers.
“Currency depreciation has enabled overseas buyers to be more competitive in a sales process - and that can make all the difference,” Griffith said.
North American and European groups continued to dominate overseas transactions in 2016, including the £300m takeover of Tyrrells by Amplify (with the strength of the US dollar versus the pound pushing up the deal value).
However, there has been a steady rise in interest from Asian buyers (up from 13% to 19% of total overseas interest), with a particular appetite from Japan, which struck three deals in the final quarter, including Sumitomo’s £716m offer for Fyffes and the purchase of freeze-dried ingredients producer Chaucer by Nagatanien.
The UK’s exit from the common market once it leaves the EU could hamper deal flow, Griffith added, though he suggested buyers might also need to secure a base in the country.
“Potential buyers assessing how to access UK customers in the post-Brexit world may now consider a direct investment in the UK, given a base in Europe may no longer guarantee free access,” he said. “But the net impact on deal activity is hard to determine at this early stage of the exit process.”
There were 48 deals in the fourth quarter of 2016, bringing the year’s total to 198 compared with 215 in 2015. However, 2016 was still the second busiest year for sector M&A activity since 2007.
Brexit prompted a short-term slowdown from April to June ahead of the EU referendum, with the second quarter the softest of the year, but there was no sustained reduction appetite.
Total disclosed deal value for 2016 stood at £8.4bn, down 22% from £10.8bn for 2015 (after excluding the £80m ‘megabrew’ merger of AB InBev and SAB Miller).
Griffith said the highly volatile trading outlook in 2017 - with a weak pound and rising costs - would present significant M&A opportunities.
“With the price of imported goods and raw materials rising, manufacturers face further upward pressure on costs, which will be difficult to pass on to their supermarket customers, who will always sell to resist price increases,” he added. “Margin pressures will lead some businesses to struggle and there is scope for further consolidation as the sector polarises between the winners and losers.”
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