The food flavorings and ingredients space represents a good opportunity for both strategic and financial buyers. Several of us at Allegiance Capital are working with buyers who are actively seeking to make acquisitions in this sector. Here are some of the reasons it currently is so attractive:
High Value, Recession-Resistant Niche Market
According to consumer research, the primary determinant in a consumer’s decision to buy a food or beverage is its flavor. Additionally, the amount of money spent on food flavorings is unique to an individual product and represents a small portion of the total production cost. Thus, food flavorings are a low cost and high impact input for food manufacturing.
Food ingredients and flavorings manufacturers concentrate time, research, and development to produce unique offerings that respond to consumer tastes. Proprietary products drive demand and value and the industry continues to grow regardless of economic uncertainty. A recent survey of more than 1,000 food industry executives indicated that over 90% of the companies surveyed are “optimistic” about their growth prospects.
A “Perfect Storm” for M&A
The food flavorings business comprises 38% of the flavorings and fragrances market. It currently has $1.7 billion in sales and is projected to grow at 3.6% annually through 2012. Approximately half of this market consists of multinational companies, and the rest of the participants are smaller niche players. Flavor development is often carried out in close partnership with a food manufacturer, leading to the development of relationships, which causes barriers to entry. This creates the ideal situation for acquisition and consolidation. Here are some additional facts that indicate this sector should be hot in 2011 and beyond.
- According to a February 2010 report by The Daily Deal, middle-market M&A transactions will increase due to pent-up demand from private equity groups and large cash positions held by strategic buyers. This year’s M&A activity among companies with enterprise value in the $50-100 million range is up 29.7% according to Mergerstat. Overall, the M&A market is up 13.8% year-to-date 2010 versus 2009.
- Recovering equity and debt markets and rapidly improving capital markets are enabling buyers to be very aggressive and allowing for expanding multiples.
- The S&P 500 has more than $900 billion of cash on their balance sheets today, the most in history, and they are looking to make strategic investments.
- Private equity groups are sitting on more than $480 billion of cash, and they run the risk of paying penalties to their investors if they do not meet deployment time-lines.
- Food sector M&A activity for the first six months of 2010 is up nearly 30%, according to Food Institute data.
- Food ingredients and flavorings transactions tend to be the most attractive segments. Valuations for private equity groups can reach between 7 and 8 times EBITDA (earnings before interest, taxes, depreciation and amortization), and strategic buyers can even push beyond this level.
Please contact me at 312-283-8444 or bcurtis@allcapcorp.com for more information on opportunities in this sector. As mentioned we have acquirers actively looking for food ingredients and flavorings companies.