“I would expect the M&A activity to continue, driven in part by the overall attractive macroeconomic environment, capital markets environment, and M&A environment,” Jacobs told Food Business News, sister publication to MEAT+POULTRY. “Valuations are relatively high from a historic standpoint, the financing market is generally quite receptive, and equity investors are supportive of public companies that are executing an M&A strategy in the food sector, which is well articulated, and you see that in the relatively higher valuations for especially mid-cap oriented food companies.”
Heightened activity in recent years, he added, has been driven in part by an increase in private companies coming to market and divestitures from large consumer packaged goods firms.
“I would say for larger packaged food, especially brand-oriented packaged food companies, often these companies have relatively attractive portfolios of brands, but sometimes these brands don’t have differentiated growth versus the broad market,” Jacobs said. “In cases like that, there may be an imperative to reduce cost and consolidate, and that pressure isn’t going to go away, and that may be a driver of large-cap M&A activity.”
He added, “I would not be surprised if there are continued corporate divestitures in part because of some of the trends … in terms of the need to focus portfolios, the need to continue to make businesses more efficient. That has been a long-term trend in the food space. I think food businesses are much better run than they were 10 years ago, much more focused on cost and efficiency and changing their business models to wring out additional costs. That pressure, I think, will lead to more corporate divestitures to make portfolios more efficient and allow larger (corporations) to focus on the parts of their businesses that have real growth.”
At the same time, many large packaged food companies seek to diversify by buying businesses in high-growth spaces.
“They’re going to be focused on enhancing the portfolio to focus more on growth, to focus more on where consumers are shopping today and the types of products they’re interested in,” Jacobs said, citing as an example the Hershey Co.’s 2015 acquisition of jerky maker Krave Pure Foods.
“It’s a different type of snack than what they’ve sold in the past, but it’s a snack, and meat snacks has been an area of growth.”
Another path to growth for food manufacturers and retailers may be e-commerce.
“E-commerce in food is a new and very important phenomenon,” Jacobs said. “Even five years ago it was not on the radar screen of most food companies and people who invest in the food sector. I believe food sales would be one of the largest areas in US consumption that has not been materially affected by e-commerce to date, and because of that it represents a very attractive prize for companies that are focused on e-commerce.
“It could go in many different directions. But I think there’s no question that e-commerce is going to be a growing factor, and that brands and companies that have a viable strategy are more likely to achieve growth because that’s going to be a growing part in terms of where food is sold.”
Jacobs said he has seen a shift in food and beverage M&A away from branded businesses.
“Brands are very important, but there is a much broader array of companies out there, and when you look at the activity over any given period, probably the minority are branded businesses,” he said. “They’re easier to talk about because most people have an awareness of some of the larger brands, but they don’t necessarily drive M&A activity anymore.”
Looking ahead, Jacobs said, “It continues to be a historically attractive period as it relates to valuations within the broad food and beverage space. How long this period will last, I don’t know, but it has been relatively attractive versus historic norms over the last three to five years or so. Probably the biggest risk to the industry would be more macroeconomic or external events. I don’t think it’s going to come from within the food space.”