7
Grant Thornton Corporate Finance Spring 2012 Food & Beverage Industry Snapshot 2011 in review Grant Thornton Corporate Finance LLC (GTCF) is pleased to present the spring 2012 issue of its semiannual Food & Beverage Industry Snapshot. This edition contains commentary on key factors that affected the food and beverage industry in 2011 and an overview of M&A trends, including a summary of industry stock market performance. Also featured in this publication is an outlook for 2012 highlighting anticipated developments within the industry. With offices in more than 100 countries, the partners and employees of Grant Thornton International Ltd member and correspondent firms serve hundreds of food and beverage industry clients ranging from global conglomerates to middle-market companies in all sectors of the industry. GTCF teams have advised on more than 50 food and beverage industry M&A transactions over the past three years. Contact information Brian Basil Director T 248.233.6930 E [email protected] Erik Egerer Manager T 248.213.4227 E [email protected] Overview Food and beverage companies have generally benefited from an improved economy, although many are still cautious in the face of ongoing changes within the industry. Last year, the industry saw record high commodity costs, spikes in retail grocery prices and three publicly traded companies announce their intentions to break into two or more organizations. Continuing trends such as changes in consumer preferences and evolving marketing techniques remain at the forefront of discussions as they too alter the industry landscape. On the M&A front, transaction volume increased but value and deal multiples declined because of the disproportionate number of relatively small transactions last year, compared with more mega- deals in the previous year. Private equity funds were acquisitive, along with strategic buyers, which continued to snap up high-quality companies. continued >

Food & Beverage Industry Snapshot

  • View
    2.393

  • Download
    3

Embed Size (px)

DESCRIPTION

 

Citation preview

Page 1: Food & Beverage Industry Snapshot

Grant Thornton Corporate Finance Spring 2012

Food & Beverage Industry Snapshot

2011 in reviewGrant Thornton Corporate Finance LLC (GTCF) is pleased to present the spring 2012 issue of its semiannual Food & Beverage Industry Snapshot. This edition contains commentary on key factors that affected the food and beverage industry in 2011 and an overview of M&A trends, including a summary of industry stock market performance. Also featured in this publication is an outlook for 2012 highlighting anticipated developments within the industry. With offices in more than 100 countries, the partners and employees of Grant Thornton International Ltd member and correspondent firms serve hundreds of food and beverage industry clients ranging from global conglomerates to middle-market companies in all sectors of the industry. GTCF teams have advised on more than 50 food and beverage industry M&A transactions over the past three years.

Contact information

Brian BasilDirectorT 248.233.6930E [email protected]

Erik EgererManagerT 248.213.4227E [email protected]

OverviewFood and beverage companies have generally benefited from an improved economy, although many are still cautious in the face of ongoing changes within the industry. Last year, the industry saw record high commodity costs, spikes in retail grocery prices and three publicly traded companies announce their intentions to break into two or more organizations. Continuing trends such as changes in consumer preferences and evolving marketing techniques remain at the forefront of discussions as they too alter the industry landscape. On the M&A front, transaction volume increased but value and deal multiples declined because of the disproportionate number of relatively small transactions last year, compared with more mega-deals in the previous year. Private equity funds were acquisitive, along with strategic buyers, which continued to snap up high-quality companies.

continued >

Page 2: Food & Beverage Industry Snapshot

2 Food & Beverage Industry Snapshot – Spring 2012

From a stock market perspective, the GTCF Food and Beverage Index has generally beaten the broader market over the past couple of years, with retailers exceeding the other categories (i.e., food processors, distributors and beverage companies). Moreover, higher-end retailers (e.g., Whole Foods, The Fresh Market) and lower-end retailers (e.g., Wal-Mart, Family Dollar) performed better than traditional retailers (e.g., Kroger, Safeway), as indicated by same-store revenues and stock market data.

Industry trendsCommodity and retail prices rise2011 was a volatile year for commodity prices. Wheat and corn costs rose drastically in the early months of the year as extreme weather conditions, including droughts and floods, cut into supplies and put upward pressure on prices. Increased demand from emerging markets (mostly China) exacerbated this situation. Prices later moderated as a result of improved supply and weaker consumer demand but remained relatively high. Additionally, crude oil prices rose during the first four months of 2011 as a result of widespread political unrest in the Middle East. Oil prices decreased after their April peak, but to a much lesser extent than wheat and corn. The cost of crude oil is expected to remain volatile in 2012 because of economic and geopolitical uncertainty, and overall commodity prices are likely to remain at elevated levels for the foreseeable future as China and other emerging markets drive increased demand. Commodity price pressures affected retail prices as well. Consumers are now paying more for meats, fruits and vegetables, along with most dairy and coffee products. The food and beverage Consumer Price Index (CPI) rose almost 3.4% in 2011, compared with only 1.9% and 0.8% in 2009 and 2010, respectively.

Pure play Another macroeconomic trend has highly diversified conglomerates breaking up into two or more smaller, pure play companies. Within the food and beverage industry alone, three major companies (Sara Lee, Ralcorp and Kraft) announced in 2011 their plans to break apart over the next year. 2011 was also the year in which Fortune Brands completed its transition into two separate companies: Beam (NYSE: BEAM), which produces and sells branded distilled spirits, and Fortune Brands Home & Security (NYSE: FBHS), which engages in the manufacture and sale of home and security products. Other companies that announced corporate breakups include Tyco International, ConocoPhillips, McGraw-Hill and ITT Corporation. This trend continues; investors believe the parts are worth more than the whole, and companies seek to increase valuations. Moreover, having a leaner business allows management to focus on core operations. This is a reversal of many years of diversification and might be a harbinger of a shift in the focus of M&A activity to more closely track core competencies.

continued >

Commodity price chart

0%Jan-05 Oct-05

200%

50%

150%

100%

250%

300%

350%

Source: International Monetary Fund

Wheat Corn Crude Oil

Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-1180%

Dec-10 Feb-11

120%

90%

110%

100%

130%

Apr-11 Jun-11 Aug-11 Oct-11 Dec-11

Five-year relative value One-year relative value

Page 3: Food & Beverage Industry Snapshot

3 Food & Beverage Industry Snapshot – Spring 2012

Healthy eating and private-label brandsThe rising demand for healthier, good-for-you foods continues to guide consumer shopping trends. Organic and all-natural food products, as well as low-sodium and reduced-fat foods, are becoming more popular. Young consumers are increasingly health-conscious, and baby boomers, many of whom are in their mid-60s, are also focused on nutritious diets. Consumers are willing to pay more for these food products, even in a fragile economy. At the same time, however, sales of less expensive private-label foods are surging. Private-label products have improved dramatically in terms of quality over the past several years and are driving a shift in consumer perception. Once considered the cheap alternative, private-label products have increased in quality, and demand for them is growing. Even as unemployment rates declined and the economy improved (albeit at a very measured rate) last year, private-label sales increased. We expect this trend to continue as price-conscious consumers perceive less of a difference between private labels and major brands.

Social mediaAdvertising through various social media outlets, including Facebook and Twitter, has redefined the market in terms of how companies brand themselves. Using social media enables businesses to participate in a relatively cost-effective manner, allowing smaller middle-market organizations to compete more successfully with larger corporations. The food and beverage industry is also being affected by the increased popularity of daily deal companies such as Groupon and LivingSocial, along with online and mobile coupons. It will be interesting to see how marketing techniques within the food and beverage industry change as social media and digital deal sites continue to penetrate the market.

SustainabilityAs the general population becomes more environmentally conscious, food sustainability has transformed into a major area of focus. In order to reduce their carbon footprint, many consumers have expressed a preference for local foods with fewer food miles, meaning that they would rather purchase food that has been transported over a shorter distance from the producer. In response, retailers and restaurants have started to offer more locally sourced meats and seafood and more locally grown produce. Consumers have also become advocates of environmentally safe packaging products. Companies are using more biodegradable and recyclable materials while minimizing the use of plastic and other non-eco-friendly products. This trend is likely to continue as green initiatives become more and more widespread.

M&A activity2011 had the greatest number of announced food and beverage transactions since 2007. The number of announced deals increased by almost 13%, from 289 in 2010 to 326 in 2011. Factors driving M&A include (1) strategic buyers taking advantage of improved stock prices, (2) record amounts of cash on strategic buyers’ balance sheets, (3) private equity groups deploying significant stockpiles of cash, and (4) banks aggressively pushing new loans. Even though deal activity was stronger last year than the year prior, aggregate deal value appeared to decline in 2011. However, 2010 saw three transactions of more than $10 billion, while 2011 did not have any transactions over $3 billion. A lack of blockbuster deals with disclosed transaction values resulted in a drop in aggregate deal value last year.

continued >

Food and beverage industry U.S. target transactions

02005 2006 2007 2008 2009 2010

200

50

150

100

250

300

350

400

$0

$60

$20

$40

$80

$100

$120

# Announced transactions Deal value ($Billions)

Sources: GTCF research; certain financial information provided by S&P Capital IQ

# Announced transactions Deal value ($Billions)

2011

Page 4: Food & Beverage Industry Snapshot

The second entity, which is currently being referred to as CoffeeCo, will consist of the international beverage and bakery businesses, as well as the North American beverage business. Its leading brands will include Pickwick, Maison du Café and Bimbo. In order to create a pure-play coffee and tea company, Sara Lee recently acquired both The Coffee Company and Tea Forté and sold a majority of its North American foodservice coffee and beverage business. Analysts report that the breakup of Sara Lee, which should be completed in early 2012, offers great potential for long-term shareholder value. It will provide more opportunities for the new Sara Lee business and has the potential to increase the valuation of the higher-margin CoffeeCo.

continued >

4 Food & Beverage Industry Snapshot – Spring 2012

Based on publicly disclosed data from the food and beverage industry, median transaction valuation multiples decreased by 8%, from 9.0x in 2010 to 8.3x in 2011. Interestingly, public market data tells a different story as average multiple values increased 0.4x EBITDA last year. This discrepancy is primarily because smaller deals dominated the transaction market last year. There is a positive correlation between company size and multiple values because larger businesses have more capital available from more sources. An expanding economy and the desire to grow led to a number of significant M&A transactions in 2011. As shown below, J.M. Smucker was extremely acquisitive in the coffee segment last year. In May 2011, the company acquired Rowland Coffee Roasters, maker of the leading Hispanic coffee brands Café Bustelo and Café Pilon, for more than $350 million. Later in the year, J.M. Smucker announced plans to purchase the majority of the North American foodservice coffee and beverage business of Sara Lee. This acquisition would bolster J.M. Smucker’s position in the coffee market. In addition to acquisitions, the market also saw large diversified food and beverage companies announce plans to break apart into two different entities. Below are a few examples: Sara Lee Corporation (NYSE: SLE)In January 2011, Sara Lee announced its plans to split into two publicly traded entities — a meat-focused Sara Lee and a yet-to-be-named beverage entity. The new Sara Lee will include the North American retail and foodservice businesses (excluding the North American beverage business), keeping brands such as Jimmy Dean, Ball Park, and Hillshire Farm.

Food and beverage median EV/EBITDA multiples

0.0x2005 2006 2007 2008 2009 2010

6.0x

2.0x

4.0x

8.0x

10.0x

12.0x

EV/EBITDA

Sources: GTCF research; certain financial information provided by S&P Capital IQ

2011

Announced Enterprise value EV/ date Target Buyer (in $M) EBITDA 01/03/12 Tea Forté, Inc. Sara Lee Corp. N/A N/A 12/12/11 The Coffee Company Sara Lee Corp. N/A N/A 12/05/11 National Beef Packing Co. LLC Leucadia National Corp. $1,483 4.57x10/28/11 Alberto-Culver Company, Culver Specialty Brands B&G Foods Inc. $325 N/A10/27/11 Great Plains Coca-Cola Bottling Company Coca-Cola Refreshments USA, Inc. $360 N/A10/24/11 Sara Lee Corp.* The J. M. Smucker Company $400 N/A08/08/11 Sara Lee Refrigerated Dough, LLC Ralcorp Frozen Bakery Products, Inc. $545 N/A06/28/11 BJ’s Wholesale Club Inc. CVC Capital Partners and Leonard Green & Partners $2,627 6.82x06/17/11 Clement Pappas & Co., Inc. Lassonde Industries Inc. $497 8.28x05/16/11 Rowland Coffee Roasters, Inc. The J. M. Smucker Company $363 N/A04/05/11 The Wimble Company Diamond Foods, Inc. $2,518 N/A

Notable food and beverage transactions

*Majority North American Foodservice Coffee and Beverage BusinessSources: GTCF research; certain financial information provided by S&P Capital IQ

Page 5: Food & Beverage Industry Snapshot

5 Food & Beverage Industry Snapshot – Spring 2012

Ralcorp Holdings Inc. (NYSE: RAH)In July 2011, Ralcorp announced plans to spin off Post Foods, maker of Raisin Bran and Honey Bunches of Oats, into a separate publicly traded company. The spinoff comes only four years after Post Foods was acquired from Kraft Foods. Under Ralcorp’s ownership, sales of Post Foods’ products suffered because the cereal maker no longer had the support of Kraft’s extensive sales force. This transaction is expected to conclude in early 2012, when Ralcorp will receive approximately $900 million and retain a 20% interest in Post Foods. Going forward, Ralcorp will continue to trade on the New York Stock Exchange (NYSE) under the symbol RAH. Post Foods will also trade on the same exchange after the deal is closed, but under the ticker symbol POST. Ralcorp also plans to grow its private-label business. To further this strategy, Ralcorp recently acquired Sara Lee’s North American refrigerated dough business, which sells private-label food products including biscuits, crescent rolls and pizzas to retailers. After the breakup, Post Foods will focus on various growth strategies for its branded cereal line and should be able to compete more directly with other cereal makers such as General Mills and Kellogg.

Kraft Foods Inc. (NYSE: KFT)During August 2011, only 18 months after its acquisition of Cadbury, Kraft Foods announced its intent to spin off its high-margin, slow-growing North American grocery business in order to focus on the fast-growing global snack business. The more mature grocery business holds iconic brands such as Oscar Mayer, Kraft Macaroni & Cheese, and Jell-O. The global snack business currently includes brands such as Nabisco and Cadbury and after the transaction will consist of units in Europe and developing markets, along with the North American snack and confectionery businesses. This transaction is likely to be completed before the end of 2012, at which time the two businesses will trade as independent public companies.

Public company information Stock market performanceThe GTCF Food and Beverage Index reflects data from food and beverage industry participants that are broadly categorized as food processors, food distributors, food retailers and beverage companies. Public market information indicates that the GTCF Food and Beverage Index is up by almost 35% from October 2007 stock market highs, while the S&P 500 has yet to reach those levels. The food and beverage industry is relatively stable, and the index has outpaced the broader market since 2008.

Grant Thornton Corporate Finance Food and Beverage Index

40%Dec Mar June Sep

80%

50%

70%

60%

90%

100%

110%

120%

130%

140%

Sources: Public company filings; certain financial information provided by S&P Capital IQ

GTCF Food and Beverage Index S&P 500

2006 2007 2008 2009 2010

150%

160%

Dec Mar June Sep Dec Mar June Sep Dec Mar June Sep Dec Mar June Sep Dec2011

Page 6: Food & Beverage Industry Snapshot

6 Food & Beverage Industry Snapshot – Spring 2012

As shown in the chart above, EBITDA multiples increased for food retailers, food processors and beverage companies last year, but decreased for food distributors. On average, however, public company multiples rose from 9.9x EBITDA in 2010 to 10.2x in 2011.

RetailersAn evolving consumer market has helped both higher- and lower-end retailers gain significant momentum in the past few years. During the economic downturn, consumers quickly became price-sensitive; the job market was bleak, the stock market was down, and confidence was low. Along with purchasing private-label brands, buyers also began to shop for everyday items at lower-end, less expensive retailers. As the

economy improved, consumers continued to shop at budget stores but were also inclined to purchase from higher-end retailers if a luxury item or important product was desired. This trend can be seen in both same-store sales (sales from existing stores, excluding sales from new stores opened during the year) and public market data. In 2010, lower- and higher-end same-store sales grew by an average of 5.1% and 6.1%, respectively, while sales at traditional retailers rose by only 0.8% (2011 data is not yet available). In addition, as depicted below, retailers from both ends of the spectrum have outpaced the S&P 500 and traditional stores over the past two years. We expect this trend to continue over the medium term, until the U.S. economy recovers fully.

continued >

Historical metrics

Category % of 52-week high

Enterprise value ($M)

LTMEBITDA % EV/EBIT LTM EV/

EBITDA 12/31/10 EV/EBITDA

Food distributors 82.2% $ 6,171 4.6% 11.2x 8.5x 8.9x

Food retailers 90.7% 25,261 13.9% 14.6x 10.3x 9.5x

Food processors 96.5% 47,922 16.1% 13.1x 10.8x 10.4x

Beverage companies 93.3% 35,709 21.5% 14.8x 11.1x 10.9x

Average 90.7% $28,766 14.0% 13.4x 10.2x 9.9x

As of 12/31/2011Sources: Public company filings; certain financial information provided by S&P Capital IQ

Average metrics

Food and beverage EBITDA multiples

GTCF Food and Beverage Retailer Index

0%Jan Mar May Sep

200%

50%

150%

100%

Sources: Public company filings; certain financial information provided by S&P Capital IQ

Lower-end food retailers Traditional food retailers Higher-end food retailers S&P 500

2008 2009 2010Nov

2011Jul Jan Mar May Sep NovJul Jan Mar May Sep NovJul Jan Mar May Sep NovJul

Page 7: Food & Beverage Industry Snapshot

7 Food & Beverage Industry Snapshot – Spring 2012

Outlook2011 was an eventful year for participants in the food and beverage industry. Prices rose; major conglomerates split into smaller, more focused units; and an increased number of M&A transactions took place. Looking ahead, the changes in consumer preferences give some idea as to what 2012 may hold. Companies will probably continue to push into the healthy alternative, organic food and private-label sectors. Moreover, businesses are likely to sharpen their focus on green initiatives as consumers see the benefits of locally sourced foods, eco-friendly packaging and sustainability. M&A will also be affected by expected changes to the capital gains tax rate. Currently, this rate is scheduled to rise from 15% to 20% at the end of 2012. The last time such a large increase was expected was in 2010. The response from business owners that were considering a fairly quick sale was to pull the sale forward to take advantage of the lower rate. Unless clear signals of an extension are received, it will not be surprising to see a similar reaction this year. •

About Grant Thornton Corporate Finance LLCGrant Thornton Corporate Finance LLC provides boutique investment banking services to privately held middle-market businesses in the United States and around the world. As a recognized advisor on middle-market mergers and acquisitions, we offer a range of investment banking services including sell-side advisory, buy-side advisory, management buyouts, restructurings and capital raising. Grant Thornton LLP provides investment banking services through its wholly owned broker-dealer subsidiary Grant Thornton Corporate Finance LLC, member FINRA, SIPC.

About Grant Thornton LLPThe people in the independent firms of Grant Thornton International Ltd provide personalized attention and the highest-quality service to public and private clients in more than 100 countries. Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd, one of the six global audit, tax and advisory organizations. Grant Thornton International Ltd and its member firms are not a worldwide partnership, as each member firm is a separate and distinct legal entity.

The factual statements and data from third-party sources contained herein are taken from sources believed to be reliable, but such statements are made without representation as to accuracy or completeness or otherwise. Grant Thornton Corporate Finance LLC does not engage in the business of recommending or effecting transactions in securities. The above information is presented solely in connection with describing Grant Thornton Corporate Finance LLC’s mergers and acquisitions services, and should not be considered as constituting a research report or as providing information reasonably sufficient upon which to base an investment decision.

© 2012 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd

Businesses are likely to sharpen their focus on green initiatives as consumers see the benefits of locally sourced foods, eco-friendly packaging and sustainability.