Grant Thornton Corporate Finance Winter 2013

Food & Beverage Industry Snapshot

Food and beverage industry M&A snapshot: 2012 in reviewGrant Thornton Corporate Finance LLC (GTCF) is pleased to present its semiannual Food & Beverage Industry Snapshot. This edition contains commentary on key factors that affected the food and beverage industry in 2012, an overview of M&A trends and an analysis of industry stock market performance. This publication also highlights the market trends that continue to influence companies within the industry. Through offices in more than 100 countries worldwide, the partners and employees of Grant Thornton International Ltd member firms serve several hundred 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 brian.basil@us.gt.com

Erik EgererManagerT 248.213.4227E erik.egerer@us.gt.com

OverviewCompanies in the food and beverage industry generally had a strong year in 2012. M&A volume, aggregate value and transaction multiples were all up from 2011 as the economy improved and buyers remained active. The GTCF Food and Beverage Index outperformed the S&P 500 Index, and public company EBITDA multiples rose across all sectors. Companies also had their fair share of challenges, including the drought and subsequent rise of commodity prices. Further, the full impact of the drought will continue to weigh on prices through 2013. Continuing trends, such as changes in consumer tastes and a growing movement toward green packaging, remain important issues that also will alter the industry landscape. continued >

2 Food & Beverage Industry Snapshot – Winter 2013

Industry trendsRetail prices follow commodity prices upward in 20132012 was another volatile year for commodity prices (chart at right). Wheat, corn and soybean prices rose drastically in July as the well-publicized drought devastated major U.S. crop fields, cutting down on supply. Prices have since moderated, but remain above pre-July levels. Commodity price pressures affect retail prices, but it usually takes several months for price changes to flow through the supply chain to the consumer. Therefore, the commodity price increases in 2012 will likely impact the retail food and beverage prices in 2013. The U.S. Department of Agriculture predicts the overall price of food and beverages will increase 3% to 4% in 2013, which is higher than the 2.5% increase in 2012.

Demand for ethnic foods and flavors heats upThe increase in demand for bolder, spicier ethnic foods could lead to increased M&A activity in the near future as companies augment their organic growth plans with acquisitions. U.S. companies have started gradually entering the market by expanding their product lines to include ethnic-flavored foods. One example is Campbell Soup Company’s recent expansion of its soup line, which now includes flavors such as Coconut Curry, Jammin’ Jerk Chicken with Rice & Beans, Sweet Potato Tomatillo and Thai Tomato Coconut. These soups, as described by their names, all have ethnic influences. Another example is the recent launch by Chipotle Mexican Grill, a fast-casual company, of a Southeast Asian spinoff restaurant called ShopHouse Southeast Asian Kitchen. This chain will follow the Chipotle service model with a focus on Thai, Malaysian and Vietnamese cuisines. Flavor companies have also recognized the potential of ethnic foods and have been working to expand their offerings. For example, Flavorchem Corp., a food and beverage flavor solutions manufacturer, has been sending teams of researchers to Latin America to find new food trends from street vendors and shopping centers. The demand for ethnic foods is expected to remain strong because the millennial generation and the Latino population both drive growth. The millennial generation is well-traveled, has developed a diverse cultural palate and demands authentic-tasting ethnic foods. Their strong purchasing power has and will continue to compel food and beverage companies to cater to their needs. Hispanics will also drive industry growth through their demand for traditional Latino foods and their growing population in the U.S.

A new type of greens in the food and beverage industryAs consumers become more environmentally conscious, green packaging has become a major focus for food and beverage companies. Companies are now using more recycled materials, natural packaging and biodegradable plastics to package food and beverage products in their efforts to become more socially responsible. Coca-Cola has changed its packaging in a unique, innovative and ecofriendly way. It recently introduced the PlantBottle, a DuPont Packaging Award-winning sustainable bottle that is partially made of plant-based materials. By 2020, Coca-Cola hopes to package all of its plastic beverage products with the PlantBottle, which will reduce the equivalent consumption of 1.5 million barrels of oil per year. H.J. Heinz Co. is teamed up with Coca-Cola to use the PlantBottle for all of its 20-ounce ketchup containers. The green packing trend is expected to grow as companies continue seeking ways to reduce their carbon footprint.

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2012 Food and Beverage Commodity Price Index 1-Year

Source: International Monetary Fund.

Wheat Corn Soybean

50%Jan. Mar.

100%

150%

May Jul. Sep. Nov.

As consumers become more environmentally conscious, green packaging has become a major focus for food and beverage companies.

3 Food & Beverage Industry Snapshot – Winter 2013

M&A activityU.S. food and beverage transaction volume and aggregate valueThe number of announced U.S. M&A food and beverage transactions increased by 5.8% from 326 in 2011 to 345 in 2012 (chart below). This makes 2012 the best year for transactions by volume since the record-setting year of 2007. Aggregate deal value increased as well, growing to more than $20 billion in 2012. A scarcity of megadeals prevented aggregate value from growing to the 2007 and 2008 levels. No deals worth more than $10 billion took place, unlike in 2010, when there were three such transactions. Only one transaction, ConAgra Foods Inc.’s purchase of Ralcorp Holdings Inc., broke through the $5 billion barrier. Business owners flocked to the transaction market in 2012 anticipating a capital gains tax increase of 5% and the Patient Protection and Affordable Care Act-driven tax on investment income of 3.8%. Many tax-conscious business owners who were considering a transaction in the next couple of years made the decision to sell in 2012 rather than pay the additional 8.8% in taxes in 2013. These changes pushed deal volume up in 2012, which should lead to a lower supply of good deals in 2013. This low supply should, in turn, lead to a better pricing environment for sellers. A 10% increase in pricing would not be a surprise and would be more than enough to offset the additional taxes. Strategic buyers have record amounts of cash on hand and are looking to grow, often through acquisitions. Financial buyers have billions waiting to be deployed. Moreover, as the uncertainty in the market caused by the fiscal cliff and European financial crisis dissipates, buyers are probably going to be more willing to spend capital in pursuit of acquisitions. All of this points to a strong M&A market for sellers in 2013.

F&B industry multiplesBased on publicly disclosed data, median transaction EV/EBITDA multiples grew from 7.2x in 2011 to 9.3x in 2012, reaching their highest levels since 2008 (chart above). This growth mirrored the increase in public company multiples, reflecting the overall health of the food and beverage industry.

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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 (dollars in billions)

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

# Transactions Deal value (dollars in billions)

2011 2012

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 2012

• Thesecond-largestM&Adealinthefoodandbeveragespace in 2012 was Kellogg’s acquisition of The Wimble Company from Procter & Gamble for nearly $2.7 billion. The Wimble Company, mostly known for its Pringles chips line, generates nearly $1.5 billion in revenue and employs more than 1,600 people. The acquisition will expand Kellogg’s brand portfolio in the snack sector.

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4 Food & Beverage Industry Snapshot – Winter 2013

Notable food and beverage transactionsA few notable food and beverage transactions that occurred in 2012 are shown in table above.

• ThelargestM&Adealinthefoodandbeverageindustryin 2012 was ConAgra’s acquisition of private-label manufacturer Ralcorp. After its initial offers were rejected, ConAgra eventually sealed the deal to acquire Ralcorp for almost $7 billion (enterprise value) with intentions of expanding its private-label portfolio. In addition to Ralcorp, ConAgra has made several other acquisitions to strengthen its position in the private-label market. In May, it acquired Kangaroo Brands Inc.’s private-label pita chips business, a big player in that market with annual revenue of more than $20 million. In late 2011, ConAgra also purchased private-label pretzel manufacturer National Pretzel Co. Inc., which has annual revenue of nearly $200 million.

• Anothernotabletransactionintheprivate-labelmarketwas private equity firm Wind Point Partners’ $500 million acquisition of Ohio-based Shearer’s Foods Inc. Shearer’s, with nearly $200 million in revenue and more than 1,500 employees, is the largest private-label maker of salty snacks and kettle chips in North America. It also offers potato chips, pretzels, popcorn and salsas.

Announced Enterprise value date Target Buyer Subsector (millions of dollars) Nov. 27 Ralcorp Holdings ConAgra Foods Food products $6,734 Feb. 15 The Wimble Company (Pringles) Kellogg Company Food products $2,695 Jul. 9 Bolthouse Farms Campbell Soup Food products $1,550 Dec. 3 Morningstar Foods Saputo Cheese USA Food products $1,450 May 22 Lactalis American Group Parmalat Belgium Food products $926 Oct. 17 Jimmy Sanders Pinnacle Operating Corp. Food products $750 Apr. 23 White Rock Distilleries, Pinnacle Vodka And Beam, Inc. Beverages $605 Calico Jack Rum Brands And Other Related AssetsAug. 27 Shearer’s Foods Mistral Equity Partners; Ontario Teachers’ Food products $500 Pension Plan; Wind Point PartnersOct. 26 North American Breweries Florida Ice and Farm Co. Beverages $388 Sep.5 Snack Factory, Princeton Vanguard, Snyder’s-Lance Food products $340 and VMG Snack Factory Blocker

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

5 Food & Beverage Industry Snapshot – Winter 2013

GTCF Food and Beverage IndexThe GTCF Food and Beverage Index (see chart below) 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 more than 50% from 2010 market prices, significantly outpacing the S&P 500. High-end health-food retailer Whole Foods Market, specialty-foods distributor United Natural Foods Inc. and beverage company Constellation Brands Inc. led the index with gains of over 45% each.

As indicated in the table below, public company EV/EBITDA multiples across three of the four subcategories of the GTCF Food and Beverage Index increased from the previous year. The slight decrease for retailers is most likely from the commodity pricing increases, which could not be immediately passed along to consumers. On average, public company EV/EBITDA multiples increased from 10.2x in 2011 to 10.5x in 2012.

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GTCF Food and Beverage Index

40%Dec

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

2009 2010 2011

150%

160%

Mar June Sep Dec Mar June Sep Dec Mar June Sep Dec2012

Historical metrics

Category % of 52-week high

Enterprise value (dollars in millions)

LTMEBITDA % EV/EBIT

LTM EV/ EBITDA

12/31/11 EV/EBITDA

Food distributors 83.8% $6,654 4.6% 11.8x 8.7x 8.5x

Food retailers 86.9% 25,992 13.8% 13.4x 10.1x 10.3x

Food processors 88.0% 46,233 16.4% 16.5x 11.2x 10.8x

Beverage companies 89.0% 37,587 23.9% 13.6x 12.1x 11.1x

Average 86.9% $29,117 14.7% 13.8x 10.5x 10.2x

As of 12/31/2012.Sources: Public company filings; certain financial information provided by S&P Capital IQ.

Average metrics

Public company comparables

6 Food & Beverage Industry Snapshot – Winter 2013

2013 outlookThe food and beverage industry had an eventful past year. Looking ahead, the changes in consumer preferences give some idea as to what 2013 may hold. Some companies will continue to push into the ecofriendly packaging sector while others will continue to scoop up high-margin private-label manufacturers. Moreover, increased interest in ethnic foods could spur M&A activity.

The M&A market should remain strong in 2013 with a better pricing environment for sellers. Some food and beverage business owners who were already looking to sell in the near future chose to sell in 2012 to avoid increased tax implications. This led to increased deal volume in 2012 and could mean a lower supply of good deals this year. However, since demand should stay strong as cash-flush financial and strategic buyers are looking for food and beverage acquisitions, the pricing environment for sellers is likely to improve. Moreover, as the uncertainty in the global economy subsides, business owners can be confident the time is right to sell their businesses, making it a strong overall M&A market for food and beverage companies. •

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.

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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.

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Some companies will continue to push into the ecofriendly packaging sector while others will continue to scoop up high-margin, private-label manufacturers.