M&A and Capital Markets Update, Food and beverage - Fourth quarter 2014

2014 M&A activity in the food and beverage sector had another strong year in terms of both deal volume and value for the US and Canadian markets. Deal volume was in line with prior year at 564 transactions, while deal value was up 56 percent to $98 billion due to the closing of several mega-deals. Strong M&A momentum carried into Q4, with the announcement of eighty-five deals. Strategic corporate deals include Olam International Ltd. (SGX:O32) acquisition of Archer Daniels Midland Company’s (NYSE:ADM) cocoa business for $1.3 billion, and Cott Corporation’s (NYSE: COT) acquisition of DS Services Holdings, Inc., a leading national direct-to-consumer provider of bottled water, office coffee, and water filtration services, for approximately $1.3 billion. As has been the case across all industry sectors, M&A activity in the food and beverage space was largely dominated by strategic corporate investors. As corporate buyers continue to show an appetite for strategic food and beverage acquisitions, and private equity groups sit on record levels of dry powder, we expect 2015 to be another strong year for food and beverage M&A activity.

M&A/food and beverage and capital markets metrics

Commodity prices
     Corn (per bushel)
     Beef (per cwt.)
 
$3.77
$168
Valuation and M&A deal activity12.7x
Cash and ST investment of S&P 500 food and beverage companies$51.4 billion
Private equity capital raised year-to-date$189 billion


Corn prices experienced a surprising rally in Q4 2014, which is not the typical narrative for a record corn crop. Domestic sales have been slow; however feed and ethanol demand has been high, which caused a jump in corn futures. Prices are expected to stabilize as the global market has seen a pull back on corn planting. Beef prices are expected to remain high due to low supply and high demand of US cattle. An increase in the supply of US beef is not expected until 2017.

Commodity prices

Deal multiples remain high for food and beverage companies, with EV/EBITDA multiples trading at a 14 percent premium over S&P 500 companies to12.7x. 2014 transactions were largely driven by strategic corporate investors, with particular interest in the healthier food sectors. Valuations are expected to remain high due to the low supply and high demand for quality food and beverage companies.

Valuation and M&A deal activity

Cash and short term investments for food and beverage companies in the S&P 500 continue to increase in the 2014 calendar year, up 5 percent over Q3 2014 and up 14 percent over Q4 2013. Cash balances have grown at a compounded annual growth rate of 18 percent from 2009–2014. As food and beverage companies continue to deploy the significant amount of cash on their balance sheets, deal volume should continue to be strong.

Cash and ST investments of S&P 500 food and beverage companies

US private equity (PE) investment metrics were comparable to prior year figures, with both deals closed and capital invested fluctuating less than 1 percent. Although figures were comparable to prior year, the composition of deal flow was quite different; dominated by smaller acquisitions with high valuations, as opposed to the mega-deals we saw in 2013. As private equity firms continue to seek high quality assets in the food and beverage sector, we expect to see increased activity in 2015.

US private equity deal flow

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