The food and agri sector was once an acquired taste for investors. It's now becoming a staple part of their diet, and there's no sign of this healthy appetite waning in the months ahead.
Industry figures show there were 727 food and drink acquisitions in 2017. This was up on the 626 deals recorded in 2016. In the five years from and including 2013, the number of deals completed annually has jumped by 53%.
The food and agri sector hasn’t always been the first port of call for investors. Some were concerned about the continued capital expenditure needed to maintain premises, plant and machinery. Others felt simpler; more attractive returns were available elsewhere.
Investors have turned their attention to the food and agri sector, lured by attractive returns from ‘star performing’ branded consumer products and more reliable order books in an otherwise variable and volatile global economic climate.
Similarly, existing operators in the market want to generate economies of scale and build portfolios of complementary products. As they push this consolidation agenda, they’re also adding to the volume of deals.
The recently proposed merger between Asda and Sainsbury’s is a prime example of this consolidation trend and the UK’s competition watchdog is currently examining the impact the deal would have on the market.
To ensure mergers and acquisitions (M&A) complete successfully, there are some key areas that require detailed due diligence. In particular, purchasers need to examine potential exposures around:
- Supply chains
- Food safety
- Health and safety.
Oversights in due diligence can quickly destroy the financial sustainability of a deal and create unwanted and unaffordable headaches for buyers.
In one case, for example, the buyer discovered late on in proceedings that the manufacturing premises of its target acquisition were constructed from composite panels. To secure the level of insurance required by the purchaser on these premises was going to add an additional cost line of GBP 1 million annually. This hadn’t been factored into the initial negotiations and blew a hole in the financial viability of the deal.
Premium costs can be a particular issue where buyers are carving out a division from a multinational conglomerate. These global businesses tend to keep significant risks on their balance sheets, and their insurance programmes often start at a level where most others end.
As a result, insurance cover is not often in place at the level required by the purchaser and will create a new cost line to factor into the negotiations.
But it’s not just property risks that need to be examined. Analysing supply chain exposures will highlight potential pinch points and enable purchasers to explore resilience measures. Similarly, understanding the food safety culture at a target acquisition will help avoid product contamination events and regulatory shutdowns. Such incidents create significant business interruption losses and can force companies under within weeks.
CREATING VALUE FOR SHAREHOLDERS
Understanding these exposures will enable sellers to improve risk performance before a sale and materially increase shareholder value. For example, where insurance spend can be reduced by GBP 1 million through better risk performance, this will be reflected in the bottom line profit.
It’s not uncommon to see multiples approaching the high teens for strategic mergers in the food sector.
Thus, a GBP 1 million saving on the insurance programme can result in added shareholder value running to GBP 18 million or GBP 19 million where high-end multiples are involved. Such understanding will enable sellers to secure the best price for their asset.
Conversely, if buyers target underperforming companies where they believe they can improve the risk performance, there’s an opportunity to reduce insurance spend and secure an increased exit price.
Engaging insurance brokers at an early stage in negotiations creates benefits for both the seller and the buyer. For the buyer, it enables them to identify and quantify exposures and to understand what insurance is available, what protection it will provide, and how much it will cost.
For the seller, it enables them to prepare and present the information required by interested parties in a complete and timely manner. The ready availability of this data will expedite the sales process.
In many negotiations, due diligence around a target company’s risk performance isn’t completed in sufficient detail or at an early stage in proceedings. If issues such as composite panelling or poor food safety standards come to light late in the day, it will result in sellers having to take a haircut on the initial offer. This prolongs negotiations and can often mean deals fail to get across the line or don’t meet the expectations of the selling party.
A selection of headline deals completed recently in the food and agri sector:
- Reckitt Benckiser bought infant nutrition specialist Mead Johnson in a USD 17.9 billion deal
- US private equity firm KKR bought Unilever’s spreads business for USD 6.83 billion. The acquisition includes brands such as Flora, Stork and Blue Brand
- JCB Holdings purchased US-based Panera Bread for USD 7.5 billion
- Campbell’s bought Snyder’s-Lance for USD 4.87 billion, gaining ownership of brands including Kettle Chips, Snack Factory Pretzel Crisps and Pop Secret
- The Middleby Corporation acquired the Taylor Company from UTC Climate, Controls & Security, a unit of United Technologies, for USD 1 billion. Taylor specialises in ice cream dispensing equipment and frozen drink machines.
INSURING PERSONAL LIABILITIES
Another important insurance consideration surrounding mergers and acquisitions is the warranty and indemnity cover (W&I) available to directors and officers.
These individuals often have to give significant and personal warranties when signing on the dotted line. In many instances, these warranties entail significant potential liabilities that don’t always match their own personal stake in the asset for sale; W&I insurance gives confidence to the buyer and comfort to the seller and can play a vital role in oiling the wheels of a deal.
Liabilities for food safety and health and safety issues run all the way up to corporate manslaughter and shouldn’t be taken lightly. These liabilities can be addressed with an appropriately constructed directors’ and officers’ liability policy.
In a buoyant market it’s easy to rush towards completing deals and making the most of the opportunities available. But taking shortcuts on understanding the insurance risks and commercial exposures of a target acquisition is false economy.
For more information, please contact Adrian Lamasz, Senior Partner on +44 (0)345 346 328