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Food & Agriculture Market Update
The M&A landscape in the Food & Agriculture market continues to thrive, characterized by sustained interest from both strategic players and financial investors.
The Food & Agriculture sector is experiencing a positive outlook fueled by several factors. An easing labor market, decreasing input costs, and persistent demand are contributing to its health. Notably, the labor market's resilience and the normalization of supply chains are benefiting sector players, especially food processors.
A recent jobs report, which saw the addition of 336,000 jobs in September, reflects this trend. Employment in food services and drinking places, food manufacturing, and food and beverage retailers all saw year-over-year increases, according to the Bureau of Labor Statistics (BLS).
While inflation can sometimes boost top-line growth and earnings for Distribution segment players, businesses reliant on inputs are benefiting from a more stable pricing environment. Consumer-level food inflation dropped to 3.7% in September, marking its lowest level since August 2021, according to the BLS. Producer-level pricing moderation has been even more significant, with notable declines in categories like eggs (41.4% year-over-year) and processed turkey (37.7%), according to BLS data.
Given these dynamics, participants in the Food & Agriculture sector are closely monitoring pricing trends, particularly as consumers increasingly prioritize value-oriented purchases.
Consumers are placing a growing emphasis on value when making purchasing decisions.
In recent months, consumers have been increasingly strategic in their grocery spending, opting for food products that offer more value and can be stretched over multiple meals rather than ready-to-eat options. This shift in consumer behavior has had a noticeable impact on certain business categories, as highlighted by leading brands like Campbell Soup and Conagra Brands.
Campbell Soup has observed a rise in purchases of value-driven meals, particularly in categories such as pasta sauce and condensed cooking soups, while sales of ready-to-eat soup have faced pressure, according to their latest earnings release. Similarly, Conagra Brands has reported a similar trend, noting a decline in spending on convenience-oriented items as consumers opt for more hands-on food preparation to make their budgets stretch further, as stated in their earnings release. This shift underscores the importance of persistent pricing moderation in shaping consumer spending patterns in the coming quarters.
Despite economic volatility, valuations in select segments of the Food & Agriculture market have remained strong. Average EBITDA multiples in ESF Equity’s Protein Processors index have notably increased year-over-year, reaching 10.4x EV/EBITDA compared to 7.4x EV/EBITDA in the previous year. This robust valuation trend among public companies is promising for prospective middle-market sellers, especially as large strategics demonstrate a willingness to pay premiums for complementary brands to drive sales growth.
The Food & Agriculture market has emerged as a standout in the realm of consumer mergers and acquisitions (M&A), experiencing robust growth in transaction activity throughout year-to-date (YTD) 2023 compared to the previous year. With 219 transactions announced or completed through Q3, this represents a 7.9% year-over-year increase, solidifying the sector's position as a leader within the broader Consumer industry. While other sectors tracked by ESF Equity have struggled with transaction volume, the Food & Agriculture market has shown significant gains, trailing only behind the Food Distribution space, which saw a 10.0% increase in transaction volume through Q3.
Despite facing a more stringent regulatory environment and increased antitrust scrutiny, deal activity in the Food & Agriculture space has remained healthy. Recent proposed changes to Hart-Scott-Rodino (HSR) filing procedures could further impact the M&A landscape by requiring parties involved in reportable transactions to provide a greater level of information and documentation during the premerger review process. Consequently, dealmakers will continue to closely monitor the regulatory environment, which is anticipated to remain tight in the near-term.
Transaction activity within the Food & Agriculture space has been dynamic and diverse, spanning various subsegments and underscoring the sector's robust M&A landscape. Segments such as Bakery, Seafood, Confectionary, Produce, Distribution, and Meats have all witnessed strong acquisition interest, indicating the breadth and depth of activity in the current market.
Moreover, international buyers have shown significant interest in acquiring high-quality domestic businesses, further enhancing the global nature of M&A transactions in the Food & Agriculture sector. An illustrative example of this trend is the acquisition of Sea Fresh U.S.A. by Peru-based Océano Seafood in September, although the financial details remain undisclosed. Sea Fresh U.S.A., with its annual sales of approximately $50 million, is expected to bolster Océano's supplier network and product offerings, as outlined in a press release.
Overall, the diversity of subsegments involved in M&A transactions, coupled with the active participation of international buyers, reflects the health and vibrancy of the Food & Agriculture market.
Strategic buyers are vigorously pursuing large-scale acquisitions in the Food & Agriculture sector, often paying premium multiples for desirable targets.
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Strategic buyers have maintained their dominance in driving consolidation efforts within the Food & Agriculture sector, accounting for 67.1% of year-to-date transactions. Their motivations include gaining economies of scale, expanding complementary product offerings, and enhancing market share.
In addition, select branded food players have pursued large acquisitions to capitalize on synergies and unlock additional revenue opportunities, often willing to pay premium multiples for desirable targets. Companies demonstrating healthy revenue growth and aligning with favorable consumer trends have garnered significant interest from strategic buyers.
Two notable transactions exemplify this trend:
1. J.M. Smucker Acquires Hostess Brands (September, $5.6 Billion): J.M. Smucker entered into a definitive agreement to acquire Hostess Brands for $5.6 billion, representing 4.1x EV/Revenue and 18.5x EV/EBITDA. This acquisition significantly expands J.M. Smucker's portfolio of snacking brands, providing greater exposure to the Convenience channel. Hostess is expected to yield annual run rate cost synergies of approximately $100 million within the first two years of ownership.
2. Campbell Soup Acquires Sovos Brands (August, $2.8 Billion): Campbell Soup agreed to acquire Sovos Brands for $2.8 billion, representing 3.0x EV/Revenue and 15.7x EV/EBITDA. Sovos offers premium products including pasta sauces, dry pasta, soups, frozen entrées, frozen pizza, and yogurts under various brand names. The acquisition significantly strengthens Campbell's Meals & Beverages division, particularly with the addition of the Rao’s brand, which achieved impressive organic net sales growth.
These transactions underscore the value that large strategics place on acquiring businesses in attractive categories within the Food & Agriculture market. Despite consumer trends leaning towards healthier options, indulgent snacking continues to be a significant market segment, with companies like J.M. Smucker and Campbell Soup showing a favorable long-term outlook for this space.
