Recent activity in the food and beverage sector Spring 2014

Welcome to the latest edition of ‘Bite Size’, our quarterly overview of activity in the food and beverage (F&B) sector. This edition provides analysis of M&A activity in the first quarter (Q1) of 2014.

In this issue we also provide insight into the key success factors for businesses to consider when carving out an asset, both from the buyer and seller’s perspective. In addition we present a question and answer session with Innocent Drinks, the maker of high quality smoothies, juices and vegetable pots.

We hope that you find this newsletter useful. If you have any further questions or queries, or would like to know how Grant Thornton can help you and your business please do not hesitate to contact me.

Trefor GriffithHead of Food and Beverage, UKT +44 (0)20 7728 2537E trefor.a.griffith@uk.gt.com

Bite Size

Recently, we have seen that large corporates, including Unilever and Nestlé, are looking to rationalise their portfolio and dispose of non-core assets, creating opportunities for M&A buyers. There can be risks in conducting a complex carve-out of a brand, but there is also inherent value. So what are the key success factors to consider when carving out an asset?

This question is different depending on whether you are buying or selling.

For sellers, the key objectives are maximising deal value, minimising the impact on the remaining business and doing the deal quickly and efficiently.

However, these can be conflicting objectives; for example, maximising deal value may include offering lengthy ‘transitional services’ to the buyer, involving many functions across the business. Balancing these demands is key.

We recently supported a carve-out of a well-known drinks business from a FTSE 100 parent, optimising the deal through upfront planning to:• define the perimeter of the deal and tailor

the business to potential buyers, both trade and private equity (PE)

• articulate the ‘value’ story and create a financial track record that you can stand behind

• work closely with the buyer to minimise value leakage and not over complicate the process

• understand how to optimise the retained operation and identify any stranded costs.

For buyers, the key objectives on Day one are maintaining continuity for customers and suppliers, agreeing adequate workable transition services and minimising price and cost obligations.

As with sellers, these objectives are not mutually exclusive; for example, transitional services to support the standalone business can be expensive.

Recent experience with a NYSE buyer of a global snacks brand that was carved out demonstrated the need to:• define the plan and costs to achieve Day

one and completion of transitional services• agree challenging yet realistic timelines

for transitional services duration, while not underestimating the IT challenges

• develop a close relationship with the seller to achieve common objectives

• develop a clear roadmap to optimise the operations post-Day one.

Whether you are the buyer or seller in a carve-out situation, we would recommend you have clear and agreed strategic objectives held together by well defined plans. For more information please contact:

Alan DalePartner, Operational Deal ServicesT +44 (0)20 7865 2777E alan.dale@uk.gt.com

Matthew WoodgateAssociate Director, Operational Deal ServicesT +44 (0)20 7865 2105E matthew.woodgate@uk.gt.com

Cooking up a carve out

We recently interviewed James Davenport, Group Finance Director at Innocent Drinks and asked about life at Innocent and how they’re helping people towards their five portions of fruit a day. Please refer to the back page for the full Q&A.

Quarterly volumes surge Total F&B deal volumes rose significantly in Q1 2014, rising by a third compared with the fourth quarter of 2013 and by a similar proportion compared with the same quarter a year ago. Dry grocery and wholesale and distribution were the two most active sub-sectors, accounting for 18% and 16% of quarterly deal volume respectively.

Looking beneath the headline figures, the quarter’s deals continue to reflect the underlying investment themes that have underpinned recent M&A activity: rising PE activity on both sides of transactions; strong interest in UK assets from foreign buyers; and portfolio optimisation by the large global players.

Private equity is increasingly active

The number of PE deals in the first quarter jumped by 50% compared with Q4 2013 and increased six-fold compared with the first quarter of last year. PE firms were active both as buyers and in exiting portfolio businesses.

In February, for example, It’s All Good, a UK-based manufacturer of tortilla chips, raised development capital by selling an undisclosed minority stake for £3.5 million to NVM Private Equity and Valeo Foods, which is backed by CapVest, bought Rowse Honey from Wellness Foods, providing an exit for Lydian Capital. Wellness is also looking to sell luxury cereal maker Dorset Cereals. Among the exits during Q1 2014, Belgium-based produce supplier, Univeg bought Empire World Trade, a UK importer of fruit, previously owned by ISIS equity partners.

In 2009 PE group Key Capital Partners backed the management buyout of TSC Foods, the owner of the Glorious! Soup brand. In February, Key Capital sold the business to Liverpool food manufacturers, The Billington Group for an undisclosed sum.

Some UK-based PE groups are also looking at deploying capital in overseas markets. In February, Charterhouse Capital Partners agreed to pay a reported €300 million (£248.6 million) for an 80% stake in Nuova Castelli, an Italy-based canned fish products and cheese manufacturer. Charterhouse made its first acquisition in Italy last year with the purchase of pharmaceutical company Doc Generici.

As well as UK PE groups focusing outwards, overseas-based financial sponsors are looking at the UK market. US-based firm, the Gores Group paid £30 million for a 51% controlling stake in Premier Foods’ bakery business, which includes the Hovis brand. Premier, which will retain the remaining 49% stake, faces stiff competition in the bakery segment from Warburtons and ABF’s Kingsmill brands. Bakery is a tough segment, with overall

M&A activity – Q1 2014

Announced M&A activity in food and beverage – quarterly

Announced PE activity in food and beverage – quarterly

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consumption of sliced bread under pressure. Bringing in a financial partner will allow the investment in the brand that Hovis has lacked in recent years, as Premier has grappled with debt and pension fund deficit issues.

Ripe for consolidation

Gores’ acquisition also illustrates the second recurring M&A investment theme, which is the attractiveness of UK assets to overseas buyers, particularly North American acquirers. The number of deals featuring an overseas buyer jumped by 71% in Q1 2014 compared with Q4 2013 and by 100% on the same three month period last year.

In the quarter’s largest deal with a disclosed value, US-based Chiquita Brands International agreed to acquire Dublin-based fresh produce wholesaler Fyffes for £302.5 million. The all share deal will create the world’s biggest banana business. Opinion is divided on whether the merger of Chiquita

NB: the spike in 2010 deal values is attributable to the Q1 acquisition of Cadbury by Kraft for £11.9 billion

Seismic change“F&B manufacturers are no strangers to a fiercely competitive market environment, but the level of competition in the UK grocery market looks set to ratchet even higher after recent announcements from major retailers.

Morrisons, Tesco and Asda have all committed to lowering product prices, after which M&S stated that the UK grocery market is undergoing a ‘fairly seismic’ change. Discounters are gaining market share as traditional snobbishness towards them disappears and this trend is only likely to be exacerbated by BHS’s announcement that it intends to introduce up to 50 discount BHS food shops, which will aim to be 10% cheaper than the big four supermarkets. Meanwhile, away from the high street, Amazon, which already offers long life groceries through its website, is set to offer a fresh food home delivery service in the UK.

Intensifying competition is fueling a huge debate over the future shape of the market, creating significant uncertainty for businesses trying to establish what their customer base will look like in five years time. Uncertainty weighs on confidence and some owners will take the view that it is better to sell their business in a market set for further consolidation.”Trefor Griffith Head of Food and Beverage

Sector Date Target AcquirerDeal value(£ million)

Dry grocery Mar-14 Somerset Cuisine Derfield Industries 0.9

Dry grocery Feb-14 It’s All Good NVM Private Capital 3.5

Bakery Jan-14 Hovis Gores Group* 30.0

Sector Date Target AcquirerDeal value(£ million)

Wholesale and distribution Mar-14 BA Cash & Carry (Cardiff) AF Blakemore ND

Deli Feb-14 Lettieri's Greencore Group ND

Dry grocery Feb-14 Rowse Honey Valeo Foods Group ND

Bakery Feb-14 Soreen Gibbs Croft (Samworth Brothers) ND

Deli Feb-14 TSC Foods The Billington Group ND

Dry grocery Feb-14 Unilever's Peperami and Bifi brands LSI (Jack Links) ND

Fruit & veg Jan-14 Empire World Sunshining (Univeg) ND

Functional Jan-14 Nestle's Powerbar and Musashi Post Holding ND

Sector Date Target AcquirerDeal value(£ million)

Dry grocery / Dairy Feb-14 Nuova Castelli Charterhouse Capital* 248.6

Dry grocery Jan-14 Tilda Hain Celestial 217.0

Sector Date Target AcquirerDeal value(£ million)

Fruit & veg Mar-14 Fyffes Chiquita Brands International 302.5

Deals summary – Q1 2014

and Fyffes will tip the balance of power in the banana market away from the big supermarket retailers towards suppliers and help push average retail prices towards the much higher levels prevailing in, for example, France and Germany. The remaining three of the big five banana suppliers, Del Monte, Dole and Nboa, will still account for about two-thirds of the UK market, ensuring continuing competition. The merged ChiquitaFyffes, however, does expect to gain $40 million in annual cost synergies by 2016.

In January, US-based Hain Celestial, which already owns several British food brands – New Covent Garden Soup, Robertsons and Ella’s Kitchen – acquired the Tilda rice company for £217 million. Hain Celestial will use its existing distribution platform to grow the Tilda brand further, but importantly the acquisition also gives Hain access to markets in India, the Middle East and North Africa to expand its existing brands.

Trimming the portfolio

The purchase of Unilever’s peperami brand by US meat snacks group Jack Link’s is an example of both the continuing interest in UK assets from overseas buyers and also the quarter’s third recurring investment theme: portfolio optimisation by the large global players. Unilever’s sale of its meat snacks business, which includes Peperami in the UK and Ireland and the BiFi brand in continental Europe, is the latest in a string of disposals of businesses deemed as non-core.

On a similar theme, Nestlé sold its sports nutrition business, which owns the PowerBar and Musashi brands, to US food group Post Holdings. Nestlé is focusing more on nutritional excellence, while Unilever is reducing its overall exposure to food. We expect there will be further disposals to come and this trend will remain an important deal driver in 2014.

Mid market deals with disclosed values (£50m - £250m deal value)

Large deals with disclosed values (>£250m deal value)

Small deals with disclosed values (<£50m deal value)

Key undisclosed deals

Notes[1] All deal activity is based on announced date of the deal and includes deals where there has been any UK or Ireland involvement (target or acquirer). Administrations, liquidations and receiverships are collated but not counted as M&A unless they have subsequently been acquired.

[2] Business failure data includes administrations, receiverships and liquidations. For the purposes of collating failure statistics, all ‘failures’ are counted irrespective of whether they were subsequently acquired. Only business failures announced in the press are included in the count for years 2007-2011. For 2012 onwards London Gazette data will also be included.

[3] Deal values are primarily sourced from corporate websites, however if no press release is available they are sourced from deal database BvD Zephyr or from press commentary released at the time of the deal. Deal values may subsequently be amended pending earn outs or other finance arrangements or/and as further detail is released by the acquirer.

Sources: All deal data is gathered as it takes place from numerous sources including trade press, BvD Zephyr and ThomsonReuters.

* Charterhouse acquired an 80% stake

* Gores have acquired a 51% stake in Hovis (Premier Foods baking division which includes the Mother’s Pride brand and a milling business)

While broader economic conditions continue to show signs of recovery, uncertainties remain regarding the longer-term business outlook. This may prompt companies to do deals sooner rather than later, within the time frame in which they feel they have some degree of certainty.

As economic growth has picked up and unemployment has fallen, the likelihood that the Bank of England will start to raise interest rates in the next year has increased.

Not only are interest rates at a cyclical low but debt is also in some cases available on pre-crash terms. Potential acquirers may want to lock in low rates and favourable terms while they are still available – although should be mindful of the lessons of the crash with regard to excessive leverage.

With a General Election next year, discussions with clients also reveal some concerns over the political uncertainty this entails, particularly the risk that a future tax regime might be more onerous with respect to capital gains. Some owners of privately owned businesses, who are considering selling, may seek to do so ahead of this political event risk.

In addition to these factors that could bring forward buyers and sellers’ decisions to do a deal, other factors are likely to support deal volumes. Overseas buyers remain keen to acquire UK assets, PE funds have capital they need to spend and the current buoyant valuations in the IPO market will prompt some companies to take advantage now. As a result we remain optimistic about the M&A outlook.

As part of our FDIntelligence series we recently interviewed James Davenport, Group Finance Director at Innocent Drinks. Find out below about life at Innocent and how they’re helping people towards their five portions of fruit a day.

1. What do you think are the three biggest challenges facing the F&B sector?

Uncertainty. There’s a lot of uncertainty for consumers and their spending patterns are changing quite considerably.

Volume. By necessity retailers have changed their approach to really drive volume through their stores so they are actively encouraging promotional volume which does drive volume but comes at quite a cost and I think trying to reverse out of that is going to be very challenging.

The value of the pound. We buy a lot of our fruit from outside the UK. The pound has been relatively stable over the last year or so, however the price of that has a lot of volatility which has a massive impact on the input prices that we face and consequently the impact it has on our margins because it’s not that straight-forward to pass that on to retailers.

2. What are the factors that will unlock growth in the UK?

The growth figures for the UK over the last couple of quarters have been good and it sounds like they’re going to strengthen. I think the main thing that needs to happen is that we stick to the plan that currently exists. I think that we have an agenda that broadly seems to be working.

3. Where do you see the biggest opportunities for mid-market firms in the next 12 months?

I think there is the opportunity to become more efficient and that will involve investing in more technology to make it happen and freeing up the funds to invest in ways to grow the business as a consequence. I do think there is the

opportunity to look outside the UK. It’s tough, it’s challenging. The culture in particular in other countries is very different from the UK. However, it’s worth taking a bit of a risk and seeing what you can do there.

4. What is the most rewarding thing about working in the F&B sector?

We make a product which is tasty and healthy. People enjoy drinking it and as a consequence they will be a little bit healthier than they were beforehand. The ability to be involved in a company that does that I think is something which is really important.

5. What big issues are causing you concern at the moment?

Over the last five or six years we’ve invested in Europe, in particular France and Germany. Our business in Germany will be around 37-38 million euros this year, so we’ve seen a lot of growth there which has caught us a bit by surprise.

6. What are you most proud of in your career to date?

I am immensely proud that I work in a company that last year sold 750 million portions of fruit and veg in Western Europe. It’s amazing we’re helping millions of people to their five a day and it will have an impact on their health which is just fantastic.

I also know that because we buy a lot of our fruit from the developing world we are helping those communities as well, which also makes me incredibly proud.

In terms of something I’ve specifically done myself, I did a transaction with the Coca Cola Company in 2009 which rolled all the way through to 2013 and I think that transaction has meant the ability of this business and this brand to get out to more people across the world has been significantly enhanced. And ultimately that’s what we’re about: trying to get as much fruit into as many people as possible and that deal has made that possible.

Q&A with: Innocent Drinks

L king forward

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Watch the video and hear the full interview from James Davenport on how two parties came together to turn a healthy startup into the highly fruitful £215 million UK business that is Innocent Drinks – FD interview: James Davenport, Group FD, Innocent Drinks (http://bit.ly/PQGBR4)