M&A activity in 2017 to stay strong as key trends continue
Canada’s food and beverage industry experienced strong merger and acquisition activity in 2016, especially in the bakery, craft brewing, seafood, and natural/organic sectors. We expect that the business trends driving 2016’s transactions will remain strong and make 2017 another banner year for food and beverage M&A deals.
From our perspective, four key factors will continue to provide the motivation for M&A activity across the industry in 2017. Understanding these trends can help owners and executives be ready to seize opportunities when they arise.
Succession and market opportunism
Canada’s food and beverage sector faces a period of significant transition, as a generation of owners transition out of their businesses. The Canadian Federation of Independent Businesses estimates that by 2022, approximately $1 trillion in small-business assets will change hands. Often, owners will pass control of the business to family members or management teams. Yet in many cases, owners will choose to exit by selling their company.
Business succession isn’t the only factor driving owners to sell. Strong business valuations in many sectors of the food and beverage industry are helping to persuade many owners to sell and capitalize on the market’s appetite for their companies and products. Cooke Aquaculture’s acquisition of Virginia-based wild seafood firm Wanchese Fish Company and Les Spécialitiés Prodal’s purchase of New Hampshire’s North Country Smokehouse are instances where succession or valuations provided part of the impetus for the transaction.
The need for scale
Canada’s food retail market is highly consolidated among a handful of very large players. This makes it challenging for small and mid-sized companies, who often lack the size and influence to make significant inroads into national or international markets.
In response, many companies are combining operations to achieve scale, access to markets, leverage strengths, and gain more power in their relationships with large retailers. This M&A activity is enabling companies to build national distribution networks, broaden their customer base, improve their negotiation power, and grow to the size they need to expand across different geographies.
Pursuing product innovation and diversification
Canadian consumers’ food-buying habits are evolving. Today’s socially minded, health-conscious yet time-starved consumers are looking for more natural, organic, and local products—as well as more frozen, functional, and convenient foods. Smaller and mid-sized food businesses are often faster coming to market with innovative products that meet consumers’ changing preferences and emerging behaviours. And larger companies, rather than innovating new products themselves, are opting to buy these smaller companies and their proven, “on-trend” product portfolios. Examples of this driver in action include General Mills’ acquisition of upmarket meat snack innovator EPIC Provisions, Cargill’s move into seafood with the acquisition of Norway’s EWOS, and US-based WhiteWave Foods’ purchase of Vancouver’s Vega, a maker of plant-based natural health and performance nutrition products.
Portfolio diversification and rationalization
Facing a mature Canadian market and changing consumer trends, food and beverage companies are continually refocusing their strategic direction to respond and adapt to the business landscape. Many large companies are diversifying product portfolios by acquiring smaller businesses and proven brands and pursuing deals that open up new categories and geographies. At the same time, companies are also rationalizing existing product portfolios and operations, selling off non-core assets and brands or closing non-productive plants. Saputo recently announced plans to close plants in Eastern and Atlantic Canada, and foreign acquisitions have been key to its growth. Clearwater’s acquisition of UK-based Macduff Shellfish is another example of how Canadian players are pursuing growth through international M&As.
These four key trends are poised to continue to drive M&A activity across the North American food and beverage sector in 2017. Business owners and executives should take time to consider their business in light of these drivers. Do these trends create opportunities for you and your company? What does it mean for your company’s potential valuation? Is there a strategic case for an acquisition—or are you better positioned to be acquired? The answers will help you and your management team chart a path forward as we move into the year ahead.