Sector focus: Saddling up for food production

Private equity has long had a fondness for food production companies thanks to one simple truth: everyone needs to eat. This innate demand makes for a non-cyclical sector that regularly produces strong returns – one recent success being Lion Capital's sale of Weetabix to Chinese conglomerate Bright Food, which when fully exited is expected to return a healthy 5x money.

And private equity's interest in the sector appears as strong as ever with recent news of European Capital's disposal of ingredients and snack producer Whitworths to potentially its third private equity backer.

This year has already seen a huge amount of activity in the food production market with the overall value of UK deals alone at its highest level since 2008, largely due to PAI partner's acquisition of R&R Ice Cream in April for a cool £715m.

Have recent scandals dampened investor appetite for this tasty sector?

According to unquote data", between 2002 and 2012 the UK has been home to 56 deals in the sector totalling €14.7bn, while France has seen 62 deals with a total value of €9.1bn. Looking at Europe as a whole, the most active year for deals in the food production market was unsurprisingly 2007, which saw 43 deals totalling €6.8bn. Investment activity understandably dropped off in 2009 as banks pulled out of the market. However, 15 deals managed to get underway that year, carrying a total value of €798m.

Working up an appetite
One of those deals was Key Capital Partner's (KCP) investment in soup and sauce maker TSC Foods. The £24m deal saw KCP investing £6m for a majority stake while Yorkshire Bank provided £8m in senior debt. "At that time there were very few banks in the market. We were lucky that Yorkshire Bank was on board," reveals Peter Armitage, investment partner at KCP.

While uncertainty and confidence levels were at all-time lows, KCP managed to secure bank debt in an essentially closed market and complete the deal as a result of its sheer confidence in TSC. "Given the backdrop of the financial meltdown, we realised that the food industry is highly resilient to downturns so we were confident going into it that it wouldn't suffer as much as other businesses," says Armitage.

In fact, KCP was so positive on the investment that it brushed aside some negative reports from its advisers. "We always bring in market consultants when looking at a deal to gain a view on the market. But with this deal we chose not to be deterred by what was a fairly negative report," Armitage recalls. Trusting their instincts already seems to be paying off for KCP. TSC owned the Glorious! Soup brand and since KCP's investment sales increased from nought to over £10m. 

Food production companies are a natural fit for private equity investment as they offer a wealth of customers and plenty of opportunity to make operational efficiencies and supply chain improvements. However, the sector seems to be lacking serious exit opportunities as the bulk of recent deals in the sector have more often been secondary transactions between private equity houses.

Indeed, as previously discussed, Whitworths looks as if it is heading into the hands of its third private equity backer. Other notable deals include Intermediate Capital Group's purchase of Symington's from Bridgepoint Capital and IK Investment Partner's acquisition of ingredient manufacturer Savena from Azulis Capital and Céréa Capital. Perhaps most surprising of all was private equity giant Blackstone's foray into the depths of the mid-market with its purchase of confectionery manufacturer Tangerine from Growth Capital Partners in 2011.

However, Lion's divestment of Weetabix to Bright Food highlights potential opportunities for trade sales to large corporates in emerging markets that are under pressure to cater to the growing middle classes, which demand higher-protein foods and more Western-style dishes.

For the short term at least, it looks as if secondary buyouts will remain the most viable exit route for food production companies as more traditional corporates continue to be disenchanted with high valuations and uncertain growth prospects. And crucially, corporates are under no pressure to invest whereas private equity firms are sitting on a mountain of dry powder that desperately needs to be put to work.

 

Neigh-saying

Despite Europe's private equity players enjoying such a healthy relationship with the food manufacturing industry, there have been some recent events that left a sour taste in the mouths of certain GPs.

February saw the notorious horsemeat scandal erupt in the UK, which continued well into the year. Sitting at the forefront of the scandal was Findus, and its owner came under close scrutiny with the UK's media.

Lion Capital acquired Findus for £1.1bn from CapVest in July 2008. Less than five years after its purchase, the GP found itself in the midst of the unsavoury crisis that saw Findus products pulled from shelves once it was revealed the company's beef lasagne contained up to 100% horsemeat. The business's supplier, Comigel - which was acquired by Céréa Gestion and Eurocapital Partners in December 2007, according to unquote" data - was the manufacturer of Findus's frozen lasagne meals.

Since the start of the year there has been a definite lull in investments in the meat-manufacturing side of the industry. According to unquote" data, meat-based companies, particularly, have all but vanished from the private equity radar in 2013. So far this year, only one of the 10 deals in food production has involved a company that supplies meat products - and even then, Norway-based Cardinal Foods is a producer of poultry and eggs, not even red meat. CapVest acquired 49% of the company in April from Capman.

This quiet period, however, could just be a coincidence. Despite the apparent downturn in appetite for meat product manufacturers, KCP's Armitage thinks private equity's relationship with the industry is as strong as ever: "It hasn't changed our attitude towards the sector," he says. "This sort of thing is always a risk when investing in this sector - you must have the controls in place to prevent anything like that happening.

"This can be more difficult for some companies. Part of preventing this sort of situation is having a better understanding of your supply chain. The shorter the supply chain, the better."

 

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