Exploring Food and Beverage Cross-Border M&A

By Nicolas A. McCoy

Given the relatively mature U.S. food and beverage market and the increasingly globalized broader economy, more than ever before U.S.-based food and beverage companies are exploring international expansion as a leading mechanism for growth.

This can be achieved organically through the launch of new or existing products in new countries or through the acquisition of an international company with successful in-country products and local expertise. These transactions can also serve as a tool to exit underperforming geographies or those too distant from the sellers core business.

A cross-border merger or acquisition transaction occurs when a company, or a portion of a company, is sold to a buyer located in a different country. The transactions create additional complexity compared to one-country deals because buyers must understand the business, legal, regulatory and other issues specific to the targets country. Accordingly, the buyer will usually conduct significant research and analysis, resulting in a strategic mandate to expand into the new country or region prior to commencing transaction discussions.

As illustrated in the chart to the left, cross-border mergers and acquisitions have been growing consistently since bottoming out after the financial crisis of 2009. Looking at the chart, it appears M&A activity has declined in 2012 when completed transactions year-to-date are compared to 2011 activity levels. If this number is adjusted for the unusually high level of announced transactions in the pipeline, 2012 M&A activity level appears more in line with the trend in recent years.

Some examples of announced but pending transactions include:

Announced Food and Beverage Cross-Border Transactions Greater Than $1 billion in Value

Source: CapitalIQ

Rationale for Acquirers

The primary motivation of buyers in cross-border food and beverage M&A transactions is to generate incremental revenue growth through access to new markets. Many multi-national food and beverage companies have significant core operations in the United States and Europe   two large markets with aggregate food and beverage growth that typically tracks GDP.

Growth of food and beverage products is much higher in emerging markets that are experiencing more rapid economic expansion. With record levels of available cash resources, the response of many large, established companies has been to seek international acquisitions in high-growth markets.

Organic growth can be slower than growth through acquisition and can present unique challenges. For example, in domestic markets, many large mainstream brands core to multi-national food and beverage companies face increasing competitive pressure from higher-quality private label alternatives and disruptive new healthier and functional products.

Emerging markets have greater organic growth potential since their economies are developing. However, launching new products in these markets can be a more difficult path than acquiring successful existing products that come with management teams.

Hain Celestial provides a great example of a company that has expanded its international acquisition efforts significantly in recent years. Since January 2011, four out of five Hain acquisitions have been international deals. Prior to 2011, less than 25% of its acquisitions involved an overseas target. 

Rationale for Divestitures

In the post-financial crisis world, many companies have revisited their long-term corporate strategies. In many cases, this strategic realignment involves a return to a focus on the core business and eliminating underperforming adjacent businesses that consume resources and involve more risk.

This is evidenced by the proliferation of corporate divestitures and spin-offs. Within the food and beverage industry, there have been a number of M&A transactions that highlight this shift in strategy.

In the food and beverage industry, expansion into unfamiliar markets adds another dimension of complexity that is difficult to understand fully prior to actually marketing product in the new locale. In many geographies, fundamental data on consumers and retail patterns may not exist. Advertising costs can escalate rapidly in emerging markets, and without perfect knowledge of the local market, marketing spend may produce disappointing returns.

Foreign consumers have different tastes, packaging preferences and expectations on product pricing compared to domestic consumers as these are highly variable across continents, countries and even regions within a country. These complexities combined with often less available local marketing human resources can easily result in poor sales and weak profitability, providing the opportunity for an acquirer with more knowledge of a certain market to create significant value. 

For example, in September 2012, Dole announced the sale of Worldwide Packaged Foods and Asia Fresh Produce Businesses to Itochu Corp., a Japanese conglomerate, for $1.7 billion in cash. This proposed transaction resulted from Doles previously announced strategic business review process announced in May. In connection with the sale, David A. DeLorenzo, Doles president and CEO said, "We are realizing a premium valuation for our worldwide packaged foods and Asia fresh produce businesses and will retain a strong fresh produce business that has increased financial flexibility to grow."

The Future

We expect to see continued interest in food and beverage cross-border transactions.  Economic stimulus such as the low rates and bond buying in the United States has resulted in corporate balance sheets rich with cash earning little to no interest.  Multi-national food and beverage companies will continue to grow through acquisition as these companies remain profitable but such growth is challenged as a result of the stagnant global economy. 

Although emerging markets come with their share of risk and volatility, an increasing consumer affluence driven by rapidly developing economies provides an overall attractive opportunity for food and beverage companies.

Nicolas A. McCoy is Managing Director of Silverwood Partners, a specialized investment bank that provides mergers & acquisition and private placement advisory services to information technology, communications technology, consumer products, business services and healthcare companies.