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Food Distribution M&A Update – November 2023

Food Distribution M&A Remains Steady, Driven by Robust Private Equity Investment

The Food Distribution sector has weathered challenges seen in other parts of the Consumer industry, maintaining steady demand for both broadline and specialty distribution. While significant top-line growth characterized 2022, recent months have brought deflation in many food categories, including fresh and dry vegetables and dairy products, according to the Bureau of Labor Statistics. This normalization in pricing has prompted sector participants to shift focus towards growing volumes and exploring additional revenue avenues, fostering a robust Food Distribution merger and acquisition (M&A) market.
This adjustment in food pricing aligns with a slowdown in revenue growth among top sector players in year-to-date (YTD) 2023. Sysco, a leading foodservice distributor, reported a modest 2.6% year-over-year (YOY) sales growth in its latest quarter, a notable decline from the levels seen throughout 2022, where it averaged a quarterly YOY sales gain of 22.6%. Similarly, US Foods experienced a deceleration in sales growth, with 2.1% YOY growth in Q2 compared to 9.5% in Q1. Despite this, both Sysco and US Foods have maintained healthy profitability, evident in their improved gross margins in their recent quarters.
With profitability levels remaining strong and cash positions steady, strategic buyers are expected to increasingly pursue inorganic growth opportunities to offset slower organic sales.
Food Distribution M&A Volume Increases Year-over-Year
M&A activity in the Food Distribution sector has remained robust as we approach the end of the year. Year-to-date, there have been 60 announced or completed transactions, reflecting a 3.4% year-over-year increase. These transactions have been distributed across various subsectors of Distribution, such as Bakery Ingredients, Produce, and Foodservice Equipment. Strategic buyers have dominated the M&A landscape, constituting 63.4% of the transaction volume so far this year.
Key players in the sector have been actively pursuing acquisitions to enhance their service offerings and diversify their capabilities. One notable example is Sysco's acquisition of Edward Don in October, a prominent foodservice equipment distributor. While the transaction terms were undisclosed, Edward Don brings in approximately $1.3 billion in annual revenue, providing Sysco with a specialized Equipment and Supplies platform, as outlined in a press release. This acquisition also presents Sysco with additional revenue opportunities to supply equipment and supplies to its broad customer base.
The acquisition of Edward Don is aligned with Sysco's Recipe for Growth strategy laid out in 2021, aiming to accelerate growth beyond market rates. Acquisitions are a central element of this strategy, expected to contribute 0.5% to 1% of sales growth annually, according to Sysco's investor presentation. Aaron E. Alt, Executive Vice President and Chief Financial Officer, emphasized Sysco's commitment to leveraging acquisitions as a growth tool, building on its history of over 200 deals to date.

In the Specialty Distribution segment, produce distributors have emerged as particularly attractive targets in the current market landscape. Sysco's specialty produce platform, FreshPoint, recently announced its acquisition of BIX Produce, a prominent distributor specializing in produce and fresh-cut products, in June. While the transaction details were not disclosed, this strategic move underscores the growing significance of produce distribution within the sector.
Similarly, GrubMarket has been actively expanding its footprint in the produce distribution space throughout the year. In September, the company acquired Mendez International, a wholesaler specializing in tropical fruits and vegetables, further strengthening its presence in the market. Prior to this, GrubMarket had also acquired London Fruit in August, demonstrating its commitment to expanding its produce distribution solutions.
As we approach the end of the year and look ahead to 2024, high-quality produce distributors are anticipated to continue attracting substantial interest from both strategic and financial buyers, underscoring the ongoing importance of this sector within Specialty Distribution.

Private Equity Continues to Deploy Capital to Sector, Despite a Tightened Lending Environment

Private equity dealmaking across various middle market sectors has shown a significant slowdown YTD, with closed transactions declining by 26.1% YOY through Q3, as highlighted in ESF Equity, LP's Q3 2023 Capital Markets Update. However, despite the challenges posed by elevated transaction financing costs and the demanding operational environment in the Consumer industry, private equity firms have remained steadfast in their investment strategies within the Food Distribution sector. Financial buyers have notably accounted for 36.6% of total transactions YTD, surpassing the three-year average of 31.2%. ESF Equity, LP has observed this trend firsthand, exemplified by the recapitalization of City Line Distributors by Frontenac, as outlined below.
Private equity firms have been actively pursuing expansion strategies by making add-on acquisitions to their existing platform investments, aiming to increase scale, enhance capabilities, or expand geographic reach. In September, Legacy Food Group, a newly formed entity backed by Quad-C Management, announced the acquisitions of foodservice distributors Keck's Food Service and Thomsen Foodservice. The specific financial details of these transactions were not disclosed. Legacy Food Group's strategy focuses on acquiring high-quality regional independent distributors to strengthen its market presence.
Furthermore, bakery and pastry distribution companies have attracted considerable attention from sponsors YTD. Notably, Roland Foods, backed by Vestar Capital, acquired ifiGOURMET in August. ifiGOURMET is a prominent importer and distributor of products catering to the Bakery, Pastry, Confectionary, and Ice Cream segments. The financial terms of this acquisition were also undisclosed. These strategic moves demonstrate private equity firms' ongoing interest in investing in the food distribution sector to capitalize on growth opportunities and broaden their market footprint.

Wind Point Partners has also been active in pursuing add-on acquisitions through the expansion of its FreshEdge platform. In July, FreshEdge acquired Sirna & Sons, a family-run wholesale food distributor. Terms of the transaction were not disclosed. Sirna & Sons operates out of two facilities with a combined 140,000 square feet of warehouse space—bolstering FreshEdge's footprint to 1.1 million square feet of warehouse space across 28 facilities, according to a press release. Sponsor-to-sponsor dealmaking has also been prevalent in the current market, evidenced by Shoreline Equity Partners sale of Mr. Greens to Sterling Investment Partners (May, undisclosed). The acquisition highlights the private equity interest in high quality produce, dairy, and dry goods distributors.
Moving through year end and into 2024, financial buyers are expected to continue to pursue Food Distribution sector players as sponsors look for resilient spaces to deploy capital. Strategic buyers are also anticipated to actively seek out target companies that offer operational synergies, diversification, or expansion of existing services. To provide an update on your business or learn about ESF Equity's wide range of advisory services and Food Distribution M&A knowledge, please contact us.

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