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Consumer Food: Where have all the big deals gone?

The sale of Clif Bar, a California-based energy bar company, to Mondelēz [NASDAQ:MDLZ] for USD 2.9bn last month was somewhat of an outlier.

It is only the North American food industry’s second billion-dollar-plus deal of 2022, compared with seven last year when buyers bet on a rebounding economy.

Shaken by runaway inflation, rising interest rates and fears of a looming recession, buyers now prefer to take smaller bites.

In the year to date, dealmaking in the North American food sector has totaled an anemic USD 7bn. That puts 2022 on track to underperform even 2020, when COVID-19’s onset brought the economy to its knees and shrank M&A to USD 15.6bn, the lowest level since the Greek debt crisis roiled financial markets in 2011.

To be sure, North America’s food sector has been a hotbed of M&A activity for most of the last decade, buoyed by a strong economy and stock market. From 2012 to 2018 larger transactions took up a fatter slice of total dealmaking. Since then, however, mega deals have dipped dramatically as the economy has juddered.

Perimeter preference

How fast a supermarket product category grows sales tends to drive food M&A. The healthier, freshly prepared options consumers increasingly want – typically sold at the perimeter of a store – enjoy growth rates of 8-10% per year. Sales of the processed and dry foods placed in the central aisles inch along at 1-2% annually.

Baked goods, both sweet and savory, is one fast-growing ‘perimeter’ category that has seen increased M&A activity, notes a food sector banker. MondelÄ“z paid a reported USD 1.2bn for Give & Go, owner of ‘Two-Bite’ brownies, in early 2020. Private equity has also bought and sold several bakery assets – one example is Olympus’s 2018 acquisition of Rise Baking – and more M&A activity could be cooking there, he notes.

General Mills [NYSE:GIS] also has been acquiring and divesting products depending on sales growth rates. In May, it agreed to offload
Hamburger Helper, its boxed dry dinner brand, and in June it gobbled up TNT Crust, a frozen pizza crust brand, a category that has surged since the pandemic. Those deals show General Mills is “trying to be more aligned with consumers,” says the banker.

Inflationary opportunity or bust?

Inflation also could play a big factor in M&A. Smaller food companies that lack long-term supply contracts will suffer higher input and transport costs, says Carl Wolf, CEO of meatball company MamaMancini’s [NASDAQ:MMMB]. Many that can’t absorb the extra costs will be pushed into selling, he believes. Although MamaMancini’s is a microcap company, it hopes to snaffle such food businesses, paying 4x-6x EBITDA for those with USD 20m-USD 50m in revenue and EBITDA margins of 8%-plus.

MamaMancini’s freshly prepared meals are also positioned at the perimeter of the store, an area where retailers such as Walmart, Costco and Aldi place greater emphasis.

But others worry the gloomy economic outlook spells trouble. The CEO of a private equity-backed snack brand currently for sale is one. “Given inflation, supply chain disruption, [and] increasing interest rates,” he warns, “Winter is coming for the fundraising space.”