Global M&A Review
The global food & beverage M&A market remained resilient during 2016, reaching a total volume of US$3.9 trillion, making it the third best year on record.
Opportunities for geographic growth, expansion of product portfolio and know-how, with low cost of funding as a complement, drove much of the M&A activity, in a year in which global uncertainty (geopolitical changes, increased regulatory scrutiny and speculation around both Brexit and China certainly did their part) created a challenging business environment that reduced total deal value by 18% year-on-year.
Cross-border M&A remained an important feature of the market, accounting for 36% of total volume versus 31% in 2015. A surge in China outbound deal volumes contributed to overall cross-border M&A growth, as Chinese companies sought attractive opportunities abroad. China’s outbound activity into the U.S. and EMEA increased by 471% and 252% year-over-year, respectively.
M&A Activity in Agri, Food & Beverages
The most influential development in the Agri, Food & Beverages sector in 2016 was Annheuser-Busch InBev NV’s acquisition of SABMiller Plc. for over US$100 billion, revolutionizing the global brewery industry. The merger between the first and second brewer giants is likely to stir the M&A activity in the sector, triggering several subsequent deals due to anti-trust regulations.
Following this megadeal came Bayer AG’s acquisition of Monsanto Co. for US$66 billion, forming an agribusiness behemoth which will concentrate about a quarter of the world’s market for seeds and pesticides, with over €25 billion in sales. As a result of the merger, total savings from synergies are expected to reach US$1.5 billion after year three.
Nonetheless, this was not the only evidence of concentration in the industry. As resources become increasingly scarce and margins get thinner and thinner, market concentrations tend to happen in order to secure economies of scale. For example, seeking to achieve an estimate of US$500 million in savings, the Potash Corp. – Agrium Inc. merger with a combined market value of approximately US$27 billion will employ 20,000 people and have investments in 18 countries.
On the retail side, M&A activity was also large, with Hormel Food Corp. acquiring Justin’s LLC, a producer and marketer of peanut butters and snacks, for US$286 million and Country Pure Foods Inc. acquiring The Ridgefield’s Brand Corp., a producer of fruit juice, for US$1.5 billion.
In addition to these high-value mergers, we are seeing increasing market concentrations industry-wide and all across the globe. Buyers are not only looking to obtain economies of scale in order to reduce inefficient cost structures, but also to incorporate technological know-how that allows maximizing agricultural productivity in a context of growing population for a fixed stock of land.
The global Agri, Food & Beverages M&A activity reached 2,157 deals in 2016 (a 20% fall from 2015). The sector was somehow hit by the same challenges that the entire M&A industry faced.
There are several trends that are affecting the industry today. How mid-and-large market players will face them might affect M&A activity in the short and long term.
M&A Rationale
As mentioned before, M&A activity is an important factor in the Agri, Food & Beverages industry. Mergers and acquisitions in this sector are being driven by a few key macro and micro- economic trends. The table on the bottom right summarizes the key elements to look out for in 2017.
Looking at the big picture, we can see players trying to concentrate upstream operations into structures of mass production in order to obtain economies of scale, while also supplying their increasingly demanding end consumers with high-quality specialty products.
Limited Resources
It is no news that population growth is a concern among policy makers all over the world. By 2050, the world will have 9.7 billion mouths to feed, and the same provision of land and resources to do so. This is already impacting M&A in several ways.
First of all, producers are trying to secure access to primary resources as well as productive operations that ensure food availability in the future. This is evidenced by repeated Chinese-led acquisition in foreign markets, targeting agricultural companies or meat, pork and poultry producers, mainly. Such was the case of Smithfields Foods (with Chinese WH Group as its controlling shareholder), which acquired several pork processing operations from Hormel Foods for over US$145 million, or another Chinese company, Foresun Group, purchasing Estancias del Sur S.A., an Argentine pork producer for US$75 million. These should not come as a surprise given that China accounts for more than half of the world’s pork consumption.
Additionally, producers are trying to stretch this fixed amount of resources as much as possible and, in this context, technologies, products and know-how that expand on agricultural yields are quickly appreciating in value. China, home to 19% of the world’s population but only 8% of its arable land is already taking action in this aspect. The state-owned agrochemical company ChemChina is acquiring Swiss seed and crop protection giant Syngenta for over US$43 billion, in what will be the largest acquisition ever for any Chinese company abroad.
Picky Consumers
This increased competition for resources and production efficiency does not mean that anything at the dinner table will get the job done.
Especially in developed economies, but a tendency that is becoming more universal, consumers are becoming progressively conscious about their diets and the sustainability of the foods that integrate them. We are seeing several large Food & Beverage companies acquiring players in healthy and environmentally friendly segments.
In line with this, Nestlé’s newly appointed CEO’s background is running a large health-care group, indicating the company’s realization that, more and more, consumers are starting to drop foods that are high in sugars or preservatives. The White Wave’s Food Company, which has been able to successfully attract consumers with high-quality and healthy products, was recently acquired by Danone in a US$12.5 billion deal.