An animal-free supply chain. Plant-based fiber. Low-carbon packaging. What sounds like a Gen-Z shopper’s wish list is increasingly powering food and beverage transactions and valuations, as public markets and private acquirers chase demand for snacks that are as good for the waistline as they are for the planet. Private equity firms, like Blue Point Capital and L Catterton, and corporations like Cargill and Mondelez are leveraging the trends, as Mergers & Acquisitions explores in this feature from our May issue.
Pandemic-fueled snacking is still a demand driver for acquirers, say dealmakers, but the definition of “comfort food” is growing to include products that taste good to both the palate and the conscience. And crucially, the sector’s most-watched deals are now fueled by the perceived healthiness of ingredients, even within nutritious product lines.
“Better-for-you and plant-based are big themes,” said John LeMay, a partner at Blue Point Capital’s Cleveland office.
But all health foods are not created equal. Nutritious inputs matter to customers, and increasingly, to PE and strategic acquirers, said Christopher Nolan, managing director at Dresner Partners investment bank. Whether a granola bar contains milk-derived whey or pea protein could mean the difference between an average multiple and one with “flex.”
Take Oatly. With its grain-based signature product, it’s everything Millennials and Gen-Z want in a “milk.” The Sweden-based beverage company avoids the carbon emissions of factory farming and is vegan — the holy duo in a market growing secularly towards health and social consciousness.
The firm’s anticipated initial public offering is reportedly heading towards a $5 billion valuation only months after a July funding round pegged it nearer $2 billion — an “extraordinary” level, LeMay said.
Buyer interest is now focused on industry players that differentiate products based on ingredients to capture customer health, allergy, and niche preferences, Nolan said. The potato chip producer that innovates by releasing a new flavor could see a lower valuation than one that scraps the potato, for, say kale or squash.
Blue Point Capital’s 2019 acquisition of nutritious play Country Pure Foods is instructive.
“Country Pure has a growing presence in plant-based beverages, including almond and oat milk, and there are terrific tailwinds in those sectors,” LeMay said. “Another asset we own is Perimeter Brands. Its core product is fresh salsa, playing off the healthier snacks trend, and is a relatively clean-label product with a better-for-you ingredient deck.”
That earlier riff on pea vs whey protein is not just theoretical. The protein category remains attractive for buyers, said Josh Benn, head of Americas M&A and global head of consumer corporate finance at Duff & Phelps, a Kroll business. And the market offers an opportunity for niche players to build share, given the predominance of whey-based protein in after-work-out protein drinks like Muscle Milk and GNC’s Pro Performance, Nolan said. Consumers with milk allergies or a preference for vegan options could pay a premium.
“That’s a very important food ingredient, pea protein,” Nolan says. “You couldn’t have Beyond Meat burgers or the fastest growing non-dairy protein supplement bars without pea protein.”
Companies including Puris and Hippeas have already attracted backing from serious strategics. Cargill invested $75 million in textured vegetable protein maker Puris to bring its total investment to $100 million in 2019.
“I think the broader snacking theme is here to stay,” LeMay said. “It’s driven by sustainable changes in eating habits and is evolving towards healthier options in those snacking events.”
Private equity is circling snack names with the same sector tailwinds, while strategics shift to rebalancing portfolios now seen as overstocked with calories. “My sense is, strategic buyers are quite active right now and there’s a lot of portfolio re-setting,” LeMay said.
LeMay pointed to Mondelez’s 2019 acquisition of a majority stake in Perfect Snack owner Perfect Brands as a zeitgeist transaction: the maker of Oreos and Cadbury eggs acquired organic, non-GMO clean snacks in the deal. Meanwhile, Kraft Heinz sold its U.S. natural cheese business last year to Groupe Lactalis in a bid to rationalize its own portfolio.
Private equity-led transactions are also heating up, said Dresner’s Nolan. Sponsors that previously focused on lining up Paycheck Protection Program loans and devoting resources to managing their portfolio companies during the early stages of the pandemic have begun to pivot back toward acquisitions, he said.
While sponsor-led acquisitions constituted 8 percent of food and beverage deal volume in 2020 as a whole, approximately 13 percent of 4Q20 food and beverage transactions featured private equity, according to data gathered by Capital IQ and presented by Dresner Partners.
“PE buyers were back in the saddle and getting deals done at a pretty good pace and at a pace higher than they did in the earlier parts of 2020, and even more aggressively than they did since 2015,” Nolan said.
Pent up demand for takeover targets and outperformance in certain subsectors like better-for-you and frozen foods could be a recipe for high deal multiples. As ever, Nolan expects assets with strong brand recognition, growth prospects, and cash flow to feature highly on the list of potential targets.
Sector valuations are generally strong, even in categories that have shown softness in the past, said Benn. One such category is sauces, as McCormick’s $800 million acquisition of Cholula Hot Sauce’s parent company from L Catterton clocked in at a solid 8.3 times revenue, Benn noted.
A Tale of Two Pantries
The pandemic has created complicated demand dynamics across other food and beverage categories.
Frozen food sales rose substantially as home dining replaced trips to restaurants, a trend that might create a reliably strong customer base, Nolan argued. Older consumers, in particular, could become loyal category buyers after noticing meal variety and flavor profiles have improved substantially over offerings available a decade ago.
Moreover, it might be difficult to avoid a bullish case for frozen food M&A, given recent performance. Frozen pizza alone had its best year in nearly a decade: year-over-year sales clocked in at almost $1 billion higher, or 19.0 percent above the prior year, Nolan noted.
Food and beverage has historically been an attractive sector for private equity buyers, said Benn. Stable demand and cash flow will continue to draw takeover interest.
Consumers financially impacted by Covid are likely to continue to provide stable demand for frozen food, Benn said. But the category as a whole could see declining interest, as less impacted customers begin to substitute restaurant outings for at-home meals.
Indulgences might have gotten a benefit during the pandemic, Benn said, “But we should be cautious on those sectors. People are worried that given the ‘pandemic 15 pounds,’ people will be focused on health and eating better-for-you categories.”