Private equity's growing appetite for premium food assets

Across Europe, private equity firms are pouring money into a specific niche of the food sector: basic products with a premium offering. And they are doing so with good reason: turnover for Europe's food and drink industry reached €1tn in 2012, according to the Food Drink Europe association – up by 3.1% from 2011 – showing that consumers are once again willing to spend a little extra on their food as the economy strengthens.

"Fundamentally, food is an area where people are sometimes prepared to splash out for something a bit more expensive or different," says Tom Whelan, global co-head of private equity at Hogan Lovells. "It's all to do with how wealthy people are feeling – in times of recession many people are obviously looking to cut costs, so they're less likely to pay for premium brands."

In the UK particularly, focus has been largely on the rise of the value supermarket over the last 18 months, with chains such as Aldi and Lidl swallowing up an increasing share of the UK grocery market. The former reported a 35.7% rise in turnover for 2013, reaching £5.27bn.

Meanwhile, high-end offerings in the market have been quietly increasing their shares of the UK food market, mirroring the "Prada/Primark" divide seen in the retail industry. Marks & Spencer and Waitrose have seen their revenues increase by 4.2% to £5.1bn and 6.8% to £5.42bn in the last financial year respectively.

Aside from recent events that have sent Tesco's share price tumbling, the supermarket giant had already been caught by choppy waters, having experienced a 3.6% loss in trading profit in the UK and an astonishing 27.7% loss in trading profit across Europe in its last financial year. The titan's painful fall from its pedestal has shaken up the food sector and created a little more room for fresh or smaller brands to make a name for themselves.

Supreme selection
In the private equity space, recent deals such as Investcorp's £100m acquisition of UK crisp maker Tyrrells Potato Chips highlight the consumer trend of buying basic products with a premium edge. In just five years – from when Langholm Capital bought the business in 2008 to Investcorp's secondary buyout last year – the company's turnover has increased from £13m to £100m.

"The premium snacks market is very dynamic and attractive, which is why we were attracted to Tyrrells," says Investcorp managing director Carsten Hagenbucher. "In particular, we are seeing rapid demand growth for natural, authentic and tasty snack options. The strong market dynamics mean that both strategic and private equity players remain active in the sector."

Indeed, buyout houses are not the only group seeking investments in this sector – strategic buyers are also targeting the space. In November, Blackstone and PAI Partners sold United Biscuits, the UK maker of well-known brands Jaffa Cakes, McVitie's and Penguin, to Turkey's Yildiz Holding – the owner of high-end chocolate maker Godiva – for £2bn.

Take the biscuit
Yildiz reportedly fended off other corporate giants such as Kellogg's and Burton's Biscuits to snap up the biscuit maker, and Campbell's Soup had already been touted as a potential buyer when Blackstone and PAI first began exploring exit options for the business in 2010.

"Firms holding assets in this sector are seeing quite racy prices being paid, principally by strategic buyers, but some private equity houses are chasing these types of investments as well," says Whelan. "There are a lot of cash-rich buyers out there at the moment."

Anthony Dalwood, an adviser to LDC – which listed its portfolio company Fever Tree on the London Stock Exchange's AIM in November – agrees that M&A is driving an increase in activity in the sector: "In terms of trade buyers, we expect activity in this market to increase through 2015 as organic growth becomes harder to generate and strong corporate balance sheets are channelled into M&A. We have also seen a number of the big multinational corporates, such as P&G and Unilever, refocus on their core product lines, which could translate into increased M&A activity around non-core assets."

Public investors are also seeking a slice of the action. LDC portfolio company Fever Tree raised £93.3m in its IPO on the AIM last month, giving the tonic maker a market cap of £154.4m. The flotation resulted in a partial exit for LDC, which had acquired a 25% stake in the business in March 2013 for £12m – a deal that valued it at £48m.

Sector is a tonic
The sharp rise in Fever Tree's value is further proof of consumer appetite in this part of the food market. The company's product offering includes Indian tonic water and Sicilian lemonade – a marked difference from a supermarket's own-brand offerings of the same products. In 2012, Fever Tree generated turnover of £16.2m, according to unquote" data, while it recorded an EBITDA of £6.7m on revenues of £23.3m in 2013.

"In terms of the public market, we are seeing a growing popularity towards food and drink products with two specific attributes: a strong brand and robust growth prospects," says Dalwood. "We have seen these attributes prove a great success for Fever Tree on the public market following its IPO last month. Similarly, we have seen other companies such as Patisserie Valerie reap the rewards of a strong premium offering in the luxury food and confectionery sector – both of these shares are trading at premiums to IPO listing prices."

This area of the food sector has also seen a notable increase in interest from the Asian market, says Whelan: "There's increased competition coming particularly from China – it's a mass market with a growing affluence and influence."

Investcorp's Hagenbucher agrees: "Emerging markets' consumer groups continue to find western food products attractive. We saw this recently when Turkey's Yildiz purchased United Biscuits or when China's Bright Food acquired Weetabix."

New niche
This development correlates with another trend forming, namely the niche sector of premium products crossing into the restaurant industry. In July, Chinese firm Hony Capital paid £900m – equivalent to 10x EBITDA – for UK restaurant chain Pizza Express, which was part of the Cinven-owned Gondola Holdings.

But other European players are getting on board with investing in restaurants that offer a single relatively basic product with a speciality, premium edge. In October last year, Hutton Collins bought high-end burger chain Byron for £100m from Cinven's Gondola, while in July 2013, Graphite Capital bought high-end steak restaurant chain Hawksmoor for an estimated £35-40m.

However, firms investing in this sector need to be aware of the regulations surrounding it. "Any private equity firm looking to buy will have one eye on exit, so anything that's going to damage the exit process is detrimental," says Whelan. "GPs have to make sure that their portfolio companies in this sector are up to scratch with their compliance regimes and governance. The last thing any private equity house would want is something that affects its reputation."

Whelan is well aware of private equity's image problem: "I think some people have misconceptions about private equity houses – that they run a lean machine and are only out to cut costs. They are actually very keen to avoid being in breach and like to make sure that these things are being done properly, and will invest the necessary capital and resources to do so."

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• Topics
• Consumer
• Sector focus
• Top story
• Hogan Lovells
• Investcorp
• Blackstone Group
• PAI Partners
• LDC
• Risk Capital Partners
• Cinven
• Hutton Collins
• Graphite Capital