The food and drink industry is a real breeding ground for fast-growth private companies. Will the latest list provide rich pickings for trade buyers and private equity groups? Or, asks Hannah Stodell, will they continue to go it alone?
"The most common question we get asked by private equity houses is 'Where is the next Innocent?'," says Catalyst Corporate Finance principal Simon Peacock. "It's the classic question. They are still looking to spend money and are kicking themselves they missed out on deals for niche but growing brands."
But are coveted brands such as Innocent, Gü, Tyrrells and Dorest Cereals still out there? Or are they gone for good?
Looking at this year's Fast 50 list, a survey of the fastest-growing private food and drink players by compound sales growth compiled for The Grocer by Catalyst a new breed of company is emerging. But what does the latest generation tell us about the market? How have the Fast 50 achieved growth? And what does the future hold for fast-growing privately owned businesses?
Premium snack bar maker Eat Natural, 43 on the Fast 50 (sixth in 2009) is a classic example of a company moving from niche to national. Praveen Vijh, Preet Grewal and William Porter co-founded the company in 1997 from Vijh's kitchen. Today the brand is worth a whopping £35m and UK consumers chomp through 125,000 of the bars daily.
Export sales of Eat Natural's mainstay fruit and nut bars continue to drive growth, accounting for about 20% of the business and growing steadily by about 20% year-on-year. But its toasted muesli range, two years in the making, is gaining traction in the UK and is expected to yield £3m in full-year turnover. "It's true innovation but also something consumers are relatively familiar with," says Vijh. "We use a toasted rye bread as a basis for our muesli. No-one does anything like this. It's not a dull boring dry cereal but something that excites you when you wake up."
Vertical integration
A fruit and nut cleaning and sorting facility has given Eat Natural a firm grip on ingredient quality and created a more efficient and integrated supply chain, adds Vijh, who is targeting 8% to 10% year-on-year growth.
"We are so vertically integrated it's ridiculous short of owning the fields the ingredients are grown on," he says. "We work with the growers, we make everything ourselves, we clean everything ourselves, so production is completely seamless. The supply chain and control on manufacturing is vital to our success controlling your own manufacturing means you can control your own destiny."
Family-owned Seabrook Crisps (12) is another company that has enjoyed a step change in growth in recent years. In August, the Bradford-based supplier announced plans to build a multimillion-pound factory to push sales and distribution south, out of its northern England heartland.
It more than doubled sales in the past two years to £28m and expects this to rise to £63m by 2015 through distribution gains. Industry pundits suggest such growth could make the 65-year-old company an attractive target for midmarket crisp or snack brands, but chequebooks are yet to come out, says MD John Tague.
He has not ruled out seeking extra financing or hitting the acquisition trail when Seabrook has extended its brand further. But for now it is 'growing it alone'.
"Any company that grows to the extent we have is always going to attract speculation over its ownership," he says. "At the moment we believe we can carry on the growth from our own resources. Give us another two to three years."
Other companies on the Fast 50, which, like Seabrook, have grown organically, have benefited from the back-to-basics home cooking trend. These include specialist flour miller Whitworths (6), fats supplier Britannia Food Ingredients (10), and Kent-based Veetee Rice, second-fastest grower on the Fast 50, another innovator though it has also been boosted by commodity inflation. Founded by entrepreneur Moni Varma in 1987 through a joint venture with relatives, Veetee is now the largest rice supplier by volume in UK grocery, accounting for 30% of UK rice consumption.
Of the 47.5% compound annual growth rate delivered over three years, Veetee CEO Vikas Magoon estimates as much as 20% can be attributed to rice price inflation. The remaining balance is thanks to volume growth across the branded sector from major retailers and strong European exports, particularly to Spain, France, Germany and Italy.
"We have seen substantial growth across the entire rice category," says Magoon. "A lot of people talk about product differentiation to gain better margins but we have differentiation through our business model, which has created value, growth and credibility among our customers," he says, adding the company is still enjoying its growth phase as a private company but that there is an exit for everybody "if the price is right".
Key acquisitions by Tangerine
The fastest-growing company on this year's list (eighth last year) is Tangerine Confectionery. Owned 41% by Close Growth Capital, it has rocketed to pole position this year on the back of two key acquisitions in the noughties as well as organic growth.
First the owner of Barratt Sherbet Fountain and Butterkist Popcorn snapped up Burton's confectionery arm in August 2006 for £10m. Then it bought Monkhill Confectionery from Cadbury Schweppes for £58m in February 2008. Within the past three years, turnover has increased from over £40m to £150m.
Much of its recent success has been about "being in the right place at the right time" and hitting the acquisition trail when funding was available, says chairman Stephen Joseph. "Our bankers have been very supportive," he says. "I'm not sure they would make the same decision today but they are very happy with where we have got to and what we have delivered."
But times have changed. And the lack of debt-based funding is starting to shift the balance of power between financial and trade buyers.
According to M&A figures from Oghma Partners for the first eight months of 2010, private equity activity has yet to recover to the levels of the halcyon days before the crash, marked by mammoth deals such as Blackstone and PAI's acquisition of United Biscuits for 2.4bn. While the volume of private equity deals is up from 13% of total M&A activity in 2007 to 20% this year compared with 39% by UK corporates and 41% by overseas corporates the value of such deals is still far down.
The reasons are simple, says Oghma's MD Mark Lynch. Much can be attributed to a far tougher landscape for private equity firms the drying up of the debt market means the leverage the private equity model relies on is often not available.
"In the past, with a £100m transaction for example, private equity would have perhaps used £20m of their equity and borrowed £80m," explains Lynch. "Since the financial crisis the environment has changed financial buyers might be lucky to borrow £40m; some may struggle to get any leverage at all. The changed financing dynamics have improved the competitive position of corporate buyers, who may also have synergies on the table. This represents a marked shift compared with pre-2008."
Private equity's troubles could mean treasures for trade buyers. Indeed they are starting to take on the role of quasi-private equity funds themselves.
Fast 50 stalwarts Innocent and Gü are a case in point. Innocent reigned supreme as a growing brand for years and had initially hoped to attract finance from a well-funded private equity backer, but eventually plumped for Coca-Cola.
Meanwhile Gü, another Fast 50 regular, helped propel the UK's largest egg producer Noble Foods to 31 this year. Noble outbid private equity rivals by a country mile, according to industry insiders, successfully acquiring a majority stake in Gü in January for an estimated £35m. This followed its 2008 acquisition of premium supplier Serious Desserts out of receivership, together helping fuel a 21.9% compound annual growth rate over three years.
Innocent and Gü appear to have been attracted not only by the capital but also by the prospect of being able to grow and develop their businesses independently and in parallel to their parent company.
Quintessentially British brands such as these are not only on the hit list of domestic trade buyers. This week's news that Jaffa Cake maker UB could be bought by Shanghai conglomerate Bright Foods for £2bn highlights the increasing clout of overseas corporate buyers in the deal equation.
Experts suggest such overseas interest is part of a wider trend and that the whisky category, which is prominent in this year's Fast 50 (Benriach Distillery at fourth and Angus Dundee Distillers at 21), could house desirable targets for Asian players looking to expand into the UK and export back home.
"A lot of these small niche whisky distilleries are unlikely to be bought by the big drinks companies because they only need two or three brands but there is a certain sort of snobbery among Chinese or Japanese drinks companies, who would be interested," says Peacock.
Private equity would be an unlikely buy-and-build partner as the inherent value of the companies is in the niche quality of the brands, he adds.
Diageo GB MD Simon Litherland understands the appeal: "Malt whisky is a growing category as consumers want to experiment with differing taste profiles, flavours and prices." He adds that Diageo wouldn't be a buyer given its market share but foreign and smaller domestic competitors might be interested.
Nineteen of the Fast 50 have grown through acquisitions and strong consolidation forces continue apace, notably in the more fragmented fresh produce sectors.
G's Marketing, the salad and veg producer and fifth-fastest riser, is a good example, having acquired the lettuce-growing assets of Maurice Crouch Growers last year after a spate of other deals including the acquisition of the spring onion, asparagus and legume assets of West Midlands-based Bomfords in 2007. "We want to get bigger in the products that suit our portfolio. We are a salads business so we'd look to grow complementary products," says G's senior marketing manager Anthony Gardner.
Though M&A figures show acquisitions through insolvencies are on the decline this year, opportunistic purchases were still to be found in 2009 and accounted for 21% of all transactions [Oghma].
Farming company AH Worth acquired the retail foodservice division of MBM Produce in February 2009 after it was put into administration, providing subsidiary QV Foods with a broader national platform, while its acquisition of Perthshire potato packer Taypack this year offered greater scope for growth in Scotland.
"Some of our acquisitions have been opportunistic," says sales and marketing director Simon Martin. "MBM had capacity and capability in a part of the business where QV didn't."
So what does the future hold for our Fast 50? On the one hand, the prospects for making a quick buck have declined considerably, but equally there is still demand for high-quality businesses with trade buyers big and small offering some alternative routes to the market.
Don't rule out private equity either, says PwC's retail and consumer strategy director Kien Tan, stressing "bolt-on acquisitions that chime well with their existing portfolios are still being considered by many firms".
Those with the strongest skills sets will be best placed, adds Peacock. "It's about firms who are willing to roll up their sleeves and do much more due diligence on the business they are looking to buy. Before it was all ex-bankers or people from other private equity firms, now you've got ex-MDs of big food businesses helping them get that understanding."
According to consultancy Commercial Advantage, financial buyers are only too aware of the chink in their armour. "The private equity houses tell us their big challenge is getting the commercial front end right," says CEO Aidan Bocci. "Gone are the days when you could cut cost to repackage a company and deliver serious value creation. You have to find a way of commercially igniting that operating company to make a buyer genuinely interested."
Of course, an exit is not the only option. Many of the businesses in the Fast 50 are proud to remain private. Alastair Salvesen and his family acquired Dawnfresh Seafoods (8) through an MBO from his great grandfather's company Christian Salvesen in 1983, and he extols the benefits of independence. He is not alone. Produce World (18) also has a family heritage dating back to pre-1900 and has a desire to keep it that way, while Eat Natural's co-founders aren't ready to hand over the keys just yet.
"We have had approaches but really do love what we're doing," says Vijh. "We've got a brand we love working with, lots of new product ideas we could bring to the market and we would like to be there to take that forward. Eat Natural is our baby. How can you sell your baby?"
The Fast 50 was produced by The Grocer in conjunction with Catalyst Corporate Finance. Anyone wishing to discuss the rankings with Catalyst Corporate Finance should contact head of global food and drink Simon Peacock on simonpeacock@catalystcf.co.uk.
"The most common question we get asked by private equity houses is 'Where is the next Innocent?'," says Catalyst Corporate Finance principal Simon Peacock. "It's the classic question. They are still looking to spend money and are kicking themselves they missed out on deals for niche but growing brands."
But are coveted brands such as Innocent, Gü, Tyrrells and Dorest Cereals still out there? Or are they gone for good?
Looking at this year's Fast 50 list, a survey of the fastest-growing private food and drink players by compound sales growth compiled for The Grocer by Catalyst a new breed of company is emerging. But what does the latest generation tell us about the market? How have the Fast 50 achieved growth? And what does the future hold for fast-growing privately owned businesses?
Premium snack bar maker Eat Natural, 43 on the Fast 50 (sixth in 2009) is a classic example of a company moving from niche to national. Praveen Vijh, Preet Grewal and William Porter co-founded the company in 1997 from Vijh's kitchen. Today the brand is worth a whopping £35m and UK consumers chomp through 125,000 of the bars daily.
Export sales of Eat Natural's mainstay fruit and nut bars continue to drive growth, accounting for about 20% of the business and growing steadily by about 20% year-on-year. But its toasted muesli range, two years in the making, is gaining traction in the UK and is expected to yield £3m in full-year turnover. "It's true innovation but also something consumers are relatively familiar with," says Vijh. "We use a toasted rye bread as a basis for our muesli. No-one does anything like this. It's not a dull boring dry cereal but something that excites you when you wake up."
Vertical integration
A fruit and nut cleaning and sorting facility has given Eat Natural a firm grip on ingredient quality and created a more efficient and integrated supply chain, adds Vijh, who is targeting 8% to 10% year-on-year growth.
"We are so vertically integrated it's ridiculous short of owning the fields the ingredients are grown on," he says. "We work with the growers, we make everything ourselves, we clean everything ourselves, so production is completely seamless. The supply chain and control on manufacturing is vital to our success controlling your own manufacturing means you can control your own destiny."
Family-owned Seabrook Crisps (12) is another company that has enjoyed a step change in growth in recent years. In August, the Bradford-based supplier announced plans to build a multimillion-pound factory to push sales and distribution south, out of its northern England heartland.
It more than doubled sales in the past two years to £28m and expects this to rise to £63m by 2015 through distribution gains. Industry pundits suggest such growth could make the 65-year-old company an attractive target for midmarket crisp or snack brands, but chequebooks are yet to come out, says MD John Tague.
He has not ruled out seeking extra financing or hitting the acquisition trail when Seabrook has extended its brand further. But for now it is 'growing it alone'.
"Any company that grows to the extent we have is always going to attract speculation over its ownership," he says. "At the moment we believe we can carry on the growth from our own resources. Give us another two to three years."
Other companies on the Fast 50, which, like Seabrook, have grown organically, have benefited from the back-to-basics home cooking trend. These include specialist flour miller Whitworths (6), fats supplier Britannia Food Ingredients (10), and Kent-based Veetee Rice, second-fastest grower on the Fast 50, another innovator though it has also been boosted by commodity inflation. Founded by entrepreneur Moni Varma in 1987 through a joint venture with relatives, Veetee is now the largest rice supplier by volume in UK grocery, accounting for 30% of UK rice consumption.
Of the 47.5% compound annual growth rate delivered over three years, Veetee CEO Vikas Magoon estimates as much as 20% can be attributed to rice price inflation. The remaining balance is thanks to volume growth across the branded sector from major retailers and strong European exports, particularly to Spain, France, Germany and Italy.
"We have seen substantial growth across the entire rice category," says Magoon. "A lot of people talk about product differentiation to gain better margins but we have differentiation through our business model, which has created value, growth and credibility among our customers," he says, adding the company is still enjoying its growth phase as a private company but that there is an exit for everybody "if the price is right".
Key acquisitions by Tangerine
The fastest-growing company on this year's list (eighth last year) is Tangerine Confectionery. Owned 41% by Close Growth Capital, it has rocketed to pole position this year on the back of two key acquisitions in the noughties as well as organic growth.
First the owner of Barratt Sherbet Fountain and Butterkist Popcorn snapped up Burton's confectionery arm in August 2006 for £10m. Then it bought Monkhill Confectionery from Cadbury Schweppes for £58m in February 2008. Within the past three years, turnover has increased from over £40m to £150m.
Much of its recent success has been about "being in the right place at the right time" and hitting the acquisition trail when funding was available, says chairman Stephen Joseph. "Our bankers have been very supportive," he says. "I'm not sure they would make the same decision today but they are very happy with where we have got to and what we have delivered."
But times have changed. And the lack of debt-based funding is starting to shift the balance of power between financial and trade buyers.
According to M&A figures from Oghma Partners for the first eight months of 2010, private equity activity has yet to recover to the levels of the halcyon days before the crash, marked by mammoth deals such as Blackstone and PAI's acquisition of United Biscuits for 2.4bn. While the volume of private equity deals is up from 13% of total M&A activity in 2007 to 20% this year compared with 39% by UK corporates and 41% by overseas corporates the value of such deals is still far down.
The reasons are simple, says Oghma's MD Mark Lynch. Much can be attributed to a far tougher landscape for private equity firms the drying up of the debt market means the leverage the private equity model relies on is often not available.
"In the past, with a £100m transaction for example, private equity would have perhaps used £20m of their equity and borrowed £80m," explains Lynch. "Since the financial crisis the environment has changed financial buyers might be lucky to borrow £40m; some may struggle to get any leverage at all. The changed financing dynamics have improved the competitive position of corporate buyers, who may also have synergies on the table. This represents a marked shift compared with pre-2008."
Private equity's troubles could mean treasures for trade buyers. Indeed they are starting to take on the role of quasi-private equity funds themselves.
Fast 50 stalwarts Innocent and Gü are a case in point. Innocent reigned supreme as a growing brand for years and had initially hoped to attract finance from a well-funded private equity backer, but eventually plumped for Coca-Cola.
Meanwhile Gü, another Fast 50 regular, helped propel the UK's largest egg producer Noble Foods to 31 this year. Noble outbid private equity rivals by a country mile, according to industry insiders, successfully acquiring a majority stake in Gü in January for an estimated £35m. This followed its 2008 acquisition of premium supplier Serious Desserts out of receivership, together helping fuel a 21.9% compound annual growth rate over three years.
Innocent and Gü appear to have been attracted not only by the capital but also by the prospect of being able to grow and develop their businesses independently and in parallel to their parent company.
Quintessentially British brands such as these are not only on the hit list of domestic trade buyers. This week's news that Jaffa Cake maker UB could be bought by Shanghai conglomerate Bright Foods for £2bn highlights the increasing clout of overseas corporate buyers in the deal equation.
Experts suggest such overseas interest is part of a wider trend and that the whisky category, which is prominent in this year's Fast 50 (Benriach Distillery at fourth and Angus Dundee Distillers at 21), could house desirable targets for Asian players looking to expand into the UK and export back home.
"A lot of these small niche whisky distilleries are unlikely to be bought by the big drinks companies because they only need two or three brands but there is a certain sort of snobbery among Chinese or Japanese drinks companies, who would be interested," says Peacock.
Private equity would be an unlikely buy-and-build partner as the inherent value of the companies is in the niche quality of the brands, he adds.
Diageo GB MD Simon Litherland understands the appeal: "Malt whisky is a growing category as consumers want to experiment with differing taste profiles, flavours and prices." He adds that Diageo wouldn't be a buyer given its market share but foreign and smaller domestic competitors might be interested.
Nineteen of the Fast 50 have grown through acquisitions and strong consolidation forces continue apace, notably in the more fragmented fresh produce sectors.
G's Marketing, the salad and veg producer and fifth-fastest riser, is a good example, having acquired the lettuce-growing assets of Maurice Crouch Growers last year after a spate of other deals including the acquisition of the spring onion, asparagus and legume assets of West Midlands-based Bomfords in 2007. "We want to get bigger in the products that suit our portfolio. We are a salads business so we'd look to grow complementary products," says G's senior marketing manager Anthony Gardner.
Though M&A figures show acquisitions through insolvencies are on the decline this year, opportunistic purchases were still to be found in 2009 and accounted for 21% of all transactions [Oghma].
Farming company AH Worth acquired the retail foodservice division of MBM Produce in February 2009 after it was put into administration, providing subsidiary QV Foods with a broader national platform, while its acquisition of Perthshire potato packer Taypack this year offered greater scope for growth in Scotland.
"Some of our acquisitions have been opportunistic," says sales and marketing director Simon Martin. "MBM had capacity and capability in a part of the business where QV didn't."
So what does the future hold for our Fast 50? On the one hand, the prospects for making a quick buck have declined considerably, but equally there is still demand for high-quality businesses with trade buyers big and small offering some alternative routes to the market.
Don't rule out private equity either, says PwC's retail and consumer strategy director Kien Tan, stressing "bolt-on acquisitions that chime well with their existing portfolios are still being considered by many firms".
Those with the strongest skills sets will be best placed, adds Peacock. "It's about firms who are willing to roll up their sleeves and do much more due diligence on the business they are looking to buy. Before it was all ex-bankers or people from other private equity firms, now you've got ex-MDs of big food businesses helping them get that understanding."
According to consultancy Commercial Advantage, financial buyers are only too aware of the chink in their armour. "The private equity houses tell us their big challenge is getting the commercial front end right," says CEO Aidan Bocci. "Gone are the days when you could cut cost to repackage a company and deliver serious value creation. You have to find a way of commercially igniting that operating company to make a buyer genuinely interested."
Of course, an exit is not the only option. Many of the businesses in the Fast 50 are proud to remain private. Alastair Salvesen and his family acquired Dawnfresh Seafoods (8) through an MBO from his great grandfather's company Christian Salvesen in 1983, and he extols the benefits of independence. He is not alone. Produce World (18) also has a family heritage dating back to pre-1900 and has a desire to keep it that way, while Eat Natural's co-founders aren't ready to hand over the keys just yet.
"We have had approaches but really do love what we're doing," says Vijh. "We've got a brand we love working with, lots of new product ideas we could bring to the market and we would like to be there to take that forward. Eat Natural is our baby. How can you sell your baby?"
The Fast 50 was produced by The Grocer in conjunction with Catalyst Corporate Finance. Anyone wishing to discuss the rankings with Catalyst Corporate Finance should contact head of global food and drink Simon Peacock on simonpeacock@catalystcf.co.uk.
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