Anthony DeCandido
Anthony DeCandido is a partner and financial services senior analyst at RSM US LLP.
Karen Galivan
Karen Galivan is a partner and consumer products senior analyst at the RSM.
Peter Cadigan
Peter Cadigan is a senior manager and consumer products senior analyst at RSM.

Pandemic restrictions on dining out have forced consumers to eat at home more, creating demand for food that’s easy to prepare. Hershey’s, Nestle, Tyson Foods and others are snatching up packaged food makers. Here’s a look at what kinds of companies are in demand and why.

In the packaged food sector, strategic buyers are moving down-market to optimize their brand portfolios.

Recent deals such as Hershey’s acquisition of Quinn Snacks and Tyson Foods’ buyout of Memphis Meats illustrate the trend. These tie-ups, which used to occur later in smaller packaged foods firms’ evolution, are squeezing out the value proposition offered by private equity firms. PEGs historically invested in these businesses, scaled them up, boosted value and sold them off to strategics for hefty profits. But the pandemic is expected to accelerate the new trend, as corporate buyers remain hungry for more at-home meal options to add to their lineup amid shifting consumer preferences.

With at-home dining on the rise, packaged food companies must offer user-friendly e-commerce platforms and quicker meal prep times to compete with take-out and delivery options. According to data from the Food Marketing Institute, the average number of dinners prepared at home in the U.S. was five per week in June 2020, up 11 percent from a year earlier and prior to the pandemic. At-home dining will remain steady until widespread vaccination occurs and society is again comfortable eating in restaurants and other public places.

Innovative companies with sophisticated online ordering and product differentiation are garnering attention. This “Amazonification” includes more personalized food options, on-demand access and collaborative platforms that track customer preferences and tailor fresh purchase suggestions based on browsing and buying habits. Meanwhile, careful curation of consumer feedback gives peer-reviewed products with strong ratings greater credibility, driving repurchase activity. Such tactics help offset high customer acquisition costs in this sector.

Deal values underscore the sector’s momentum. After suffering the worst quarterly output in the second quarter of last year, packaged foods transactions rebounded strongly, reaching $8.billion in the fourth quarter, up from $3.1 billion a year earlier. Through the first 45 days of 2021, deals surpassed $8.8 billion, including the buyout of a $4.2 billion pet food solutions company by a Nestle-led consortium.

Packaged food is attractive because it’s proven to be inelastic amid the global pandemic. While sectors such as retail, hospitality and healthcare have suffered significant financial losses, food makers show strong balance sheets with reduced leverage, positioning them as attractive targets. Since the pandemic’s onset last March, packaged foods companies have outperformed all other firms in the S&P 500.

They’ve also generated ample cash to pay off debt. According to Bloomberg, net debt-to-adjusted-Ebitda for packaged foods declined to 3.0 times by the third quarter of 2020 from 3.2 times in the prior quarter. One caveat for investors amid the significant tailwinds are rising interest rates: A recent sharp increase in bond yields may portend higher borrowing costs.

Promising brands able to breach the shelves of Walmart, Costco and Target stand the best chance of sustained success. Healthy snacking, plant-based alternatives and mission-focused products are complementary features best poised for acquisition. And with the aftershock of Covid still present in investors’ minds, solutions around supply chain disruption, health and wellness, food and workplace safety, packing lifecycle, ingredient sourcing and fuel management will all be challenged when investors kick the tires on attractive targets.