Opinion: Simon Peacock

I have recently run through a list of private UK clothing business and I’m impressed with what I’ve seen.

There are a number of very successful and well know businesses and brands: Reiss, Trespass, Craghoppers, Berwin & Berwin, Lyle & Scott, Dri-Tex, Panache, Barbour, Loakes and Paul Smith to name just a few from near the top of the list (and I could go on - Endura, Bravissimo, etc...)

They range from technical brands and outdoor pursuits to luxury fashion and lingerie but they all have one thing in common: developed and grown in the UK with export appeal around the world or the potential to achieve it through investment.

One such successful business which has already achieved this growth through the private equity route is TM Lewin. TM Lewin is ‘quietly optimistic’ for next year as it plans to double its international presence on the back of record results. 15 new outlets will be opened overseas including Australia, Indonesia, Malaysia and the Czech Republic.

The UK is seen as the home of clothing innovations and classic British tailoring around the world. The opportunity and proven ability for a successful domestic clothing business to roll the model out globally is a hugely desirable route for both shareholders and potential investors.

Lets be proud of that!

The unseasonal hot weather has led to the worst fashion trading figures since 2009. Some retailers described the period as 'awful'.

This continues the longer term theme from larger clothing retail players. SuperGroup, owner of the Superdry brand and Cult chain, warned that full-year profits will be hit by as much as £9 million due to warehousing issues. Tesco meanwhile reported a 0.9% drop in general merchandise sales, which includes clothing, in the UK for the first half of this year. Like for like sales falling a full 4.8%.

So if it is all negative press is there anything positive that can be done? One solution is a multi channel shopping experience including an online and m-commerce offering that is seamlessly linked to mail-order catalogues and in-store availability. A recent survey by HP showed that while 98% of the top European retailers have a bricks-and-mortar presence, 86% have a transactional website and only 28% have a mobile commerce application; so lots to go after.

Perhaps the next time the unseasonal hot weather hits we will have the ability to order what we want on a mobile application while sipping Pimms in the park; and the industry won’t be so shell shocked again!

My own recent 'staycation' in Northumberland reminded me of the quality and convenience of frozen foods, especially with a young family. No longer is it seen as the poor cousin to chilled but it is now seen as a healthier option and continues to be very price competitive.

Recent market information from Key Note supports this with the frozen food retail sector, having been in decline prior to 2006, growing by 17.6%. The pressures of the recession have led to consumers choosing the cheaper option for their tables to cut grocery bills and possibly as an alternative to eating out with pizzas in particular doing very well. Frozen fruit and vegetables have also been helped by manufacturers shedding the ‘unhealthy’ tag through re-education of the consumer on the frozen versus ambient debate.

Good examples of this momentum in frozen in the UK are Birds Eye tapping into home dining with a ‘restaurant’ themed frozen chicken range and the Northern Foods Goodfellas range which has been given a complete overhaul through a more punchy and indulgent range of toppings to stem it’s previous sales decline.

So frozen is back on the menu and in growth. So far we haven’t seen any significant deals in this sector in 2011 but with Mr Boparan now the proud owner of Northern Foods and Unilever rumoured to be reviewing their own food portfolio it will be interesting to see how frozen food businesses come into play. The summer is nearly over - ice cream anyone?

I’ve written previously in my postings about the trends in food production not only focussing on making food taste good, but also making food ‘do something good’, and news from Nestle this week only serves to highlight this thinking.

Nestle have history in this respect. Not only did they acquire CM&D Pharma earlier this year, a young UK start-up which had developed a new chewing gum to help patients with kidney disease, they’ve made big noises in the trade press about their newly established Health Science operation and clearly have large designs on this market and its potential.

This week’s acquisition demonstrates this potently with cold hard cash – the $250 million acquisition of US-based speciality pharmaceutical and diagnostics firm Prometheus, a pioneer in gastroenterology and oncology.

With a number of significant deals in the food & drink space latching onto similar themes of ‘health’ and ‘vitality’ (think Maximuscle’s purchase by GSK for example in late 2010, and this week's MyProtein/The Hut deal), there is more than just talk in the market niche, and I don’t see it disappearing. After all in a world where beauty and fitness are an ever-more sought after commodity and people are living for longer, why would it?

Big Bear was a big game hunt, one more deal amongst the £4 billion of potential UK food and drink M&A that could happen in 2011.

Raisio, who had previously acquired Glisten, have agreed a deal at Eu 95.3 million. This just shows how M&A in the food and drink sector is changing in 2011. The big guns are after the big game and in 2011 they have the ammunition to do the deal and sellers are willing to bite the bullet.

Big Bear isn’t the only business up for sale. Still in process are United Biscuits, Unilever’s Chicken Tonight and Ragu, Yoplait, Remy Cointreau’s Piper-Heidsiec/Charles Hiedsieck Champagnes and AB InBev’s Bass beer, all among the £4 billion of UK food and drink companies up for sale in 2011. And why?

Well, one side of the answer is that as debt markets have improved there is cautious optimism out there for both trade and private equity buyers and this is encouraging sellers. In fact private equity are still sitting on cash raised before the downturn – to the tune of half a trillion pounds – so there should be no shortage of interest.

The other part of the answer is that some of the disposals, while not distressed, have an element of ‘distress’ in them since their owners need to realise cash. Quorn is one example, sold for £200 million, which is not much more than Premier paid for it originally, because they need to put a serious dent into their net debt position.

The challenge for a large corporate or plc selling part of it’s business is that the assets for sale are usually highly integrated within a large company. There is often a shared financial service provider, a group wide sales force, a range of functional business partners rather than a distinct management team and most challenging of all, a lack of a clearly separate and separable balance sheet.

It is not the lack of bullets that will cause a delay in the 2011 M&A landscape, its the challenge of identifying which bit of the bear you want.

It may be -15 degrees C outside but food deals are hotting up. The proposed merger between Northern Foods and Greencore is taking a lot of the headlines however I’ve counted at least five new food deals in the press in as many days. Trade buyers, private equity houses and the administrator are all getting in on the food and drink sector activity.

The Northern Foods / Greencore merger is an example of how to find a home for two businesses that by themselves may otherwise have struggled in the long term to stand up against sector pricing pressures. There are £40 million of synergies being quoted in the deal which is significant, being one third of the entire combined operating profit (pre-exceptionals) at the last set of full accounts. This gives the strongest indication of the transaction rational rather than the opportunity to exploit the lower Irish corporation tax rates which I believe is a red herring in the current climate. These rates will any event be tested under the austerity measures that the Irish Finance Minister, Brian Lenihan, is announcing on 7 December.

Stefan Barden’s role should not be underestimated in the merger. From the outside he has steered a clear course, working on the deal for over 12 months, to find a safe home for Northern. It is no surprise to me that Brakes’ Philip Jansen snapped up Barden so quickly to be his new CEO. With a private equity owner Barden will be expected to show the same foresight in terms of an exit and hard work to get there.

A number of other food businesses have shown that they too are in process. Premier is trying to sell Quorn, at the lofty price tag of £250m. PAI have put Yoplait up for sale, Abel and Cole have appointed advisors and the swift action of Privet Capital and the administrators with Polestar Foods all demonstrate the same message – activity is increasing!

My own views on this are pretty straight forward. The economic conditions are still tough but the better businesses will continue to succeed while the weaker ones will struggle and this creates the platform for deal activity. Deals in food and drink are still being borne out of the synergy opportunities where there is usually one party with a significant edge. The banks are still cautious lenders, demonstrated by the Northern merger at 2.46x EBITDA for net debt. However greenshoots of private equity activity in food is clear as shown by Axa Private Equity’s interest in Yoplait and a number of financial institutions looking at Quorn. 2011 will be the year of the big thaw!

On the eve of our most recent international partners conference, I have been reflecting on the current state of the global food & drink M&A market.

And in my mind, there are signs that it is definitely stirring into life, and not necessarily from the quarters or territories you would traditionally expect either.

Bright Food Group, one of China’s rising stars in the sector, certainly surprised people in recent weeks with news of its attempt to buy United Biscuits. Whilst it may not arouse the same patriotic outbursts that dogged Kraft’s attempts (although ultimately successful) to buy Cadbury Plc, it certainly wouldn’t have been the first choice on most M&A advisors lips when pushed to suggest a buyer for UB (by the way, my old employer!), and it will be interesting to see how this, and other processes play out in time.

With the next update of our global food & drink survey due shortly, I’m looking forward to tracking the market more quantitatively. It is going to make interesting reading so please get in touch if you’d like to find out more

My recent trip to Eire not only reminded me of the qualities of ‘the black stuff’ but also that there are a number of small and innovative drinks businesses out there in an industry that is very sensitive to the current economic conditions. In the off-trade alcoholic market, innovation is leading the fight against falling sales and heavy price promotions: Fosters is modernising its cans, Jack Daniel’s has launched a JD and Ginger in a can, and Captain Morgan, the dark rum drink, is now showing a more handsome character.

Across non-alcoholic drinks the story is mixed: fizzy drinks and impulse occasions are growing however consumers are more price conscious than ever and premium smoothies are falling out of favour. The tactics here seem to be intelligent differentiation with Perrier using Dita Von Teese on labels to be more ‘chic’ and who could have missed the most recent format development ‘the shot’ for the high growth energy sector? The trends in M&A have also been interesting. Past trends have included the global drinks players paying premium prices for highly scalabale ‘on trend’ formats such as PJ Smoothies and V Water which were bought by Pepsi. Coke acquired a share of Innocent, and also bought the mineral drinks business Abbey Well.

More recently I’ve seen some very interesting and quite clear cross-border and cross-sector steps being taken. Britvic acquired Fruite in France earlier this year, a big business to absorb considering the challenges in their Irish portfolio. Even more insightful was the acquisition last November of Orangina Schweppes in France by Suntory, the Japanese drinks business better known for its alcoholic portfolio.

In a mature industry where consumers are always ready to try new things, drinks businesses with strong balance sheets will want to ensure they are not just investing in the short terms trends but also the longer term ones. I suspect that some longer term trends may actually be outside the current core offerings for drinks businesses and so there lies the choice of internal development or strategic acquisition. Either way the market will have some fizz. Cheers!

Despite Sainsbury selling out of 50,000 world cup vuvuzelas, retail sales have been flat across the big UK retailers. Sainsbury reported like for like growth of only 0.1% for the twelve weeks to June 2010 (after adjusting for the VAT change impact) citing low food inflation.

Figures from the British Retail Consortium seem to confirm that financial uncertainty is dampening the consumer mood. The trade body said that total retail sales in April fell 0.2%, and were down 2.3% on a like for like basis. At competitors Tesco, the departure of Sir Terry Leahy and subsequent departure of fresh foods commercial director Colin Homes will be important gaps to fill. Ocado meanwhile is tempting loyal consumers (those who have spent over £300) with the chance to buy shares in their likely initial public offering, despite still being loss making before tax. All of this says that retailers need new ideas to find profit growth, but from where?

The issue is compounded by the competitive promotions between retailers. Take beer for example, during the world cup I believe the main retailers must be actually losing money on every sale of beer or lager as they look for a decisive ‘land grab’. Tesco were selling a 24 pack of beer for £10 or 54p a pint in one of my local stores. The profit growth won’t be coming from here!

One area I am acutely aware of that the retailers are looking at carefully is the direct marketing and promotional spend. Right from the cost of printing material through to the cost of digital images and efficient workflow management of the marketing campaign, there are opportunities to think creatively to cut costs while maintaining the effectiveness of the management and execution of the campaign. I experienced this first hand with the Inspired Thinking Group (ITG), for whom I helped raise development capital from the private equity industry. ITG provides services that help marketing departments significantly improve the efficiency of their marketing operations using the latest digital and data technologies. I believe this is a trend that will continue as experienced entrepreneurs are fleeter of foot than the large retailers and will help them with outsourcing and reducing big chunks of the retailer’s marketing costs.

So what of vuvuzelas and the world cup? Well I hope they are a short lived line, but nevertheless retailers will look more towards cost cutting and bringing in outside ideas while inflation stays low and promotions stay high. Entrepreneurs in retail services will be an important part of retail in 2010.

I still believe M&A in the food & drink sector over the next six to nine months will include some of the world class mid and small sized businesses here in the UK, something I'm even more positive about following my role as a judge for the Grocer Gold awards in late April. Whilst I can’t reveal the shortlist for the awards, there are some very likely candidates that will be acquisition targets and possibly one or two who may turn trade acquirers in 2010 and 2011.

Earlier this month, I presented at the ICAEW on the state of the food and drink M&A market and I was delighted by the response I received from my predictions. The food and drink industry has declined by 50% in deal value globally and by 90% in the UK in 2009 versus 2008. This is pretty severe and it has been very hard hit in the mid-market. I predicted in a seminar including sector experts and business directors that the food and drink industry will bounce back.

My reasoning for this is three-fold: firstly the industry itself has been one of the first sectors to show growth in the UK coming out of the recession; secondly overseas acquirers have continued to acquire in the UK at the same proportion of the total market as before 2007; and finally from a survey of private equity houses their appetite to invest in the sector has only marginally reduced since the Lehman’s collapse compared to other sectors where they expect not to invest in at all in the short and medium term.

It is no surprise to me then that a recent survey by ACG / Thomson Reuters Deal Makers at the end of 2009 showed that 82% of respondents expect M&A activity to increase over the first six months of 2010. The first quarter of 2010 has showed that UK Food and Drink M&A volumes were roughly on par with where 2009 finished. 2010 volumes were just under one quarter of 2009’s full year deal volume. This means that the next six to nine months could see the increase in deals coming through.

Of course there is still uncertainty. A hung parliament and the Greek economy cannot be taken lightly. The latter has seen a pretty speedy response giving confidence back to the markets. Let’s hope on the former that Cameron, Clegg and the Labour party see fit to serve the electorate in a similar timely manner.

At Catalyst I’m pleased to say that we’ve continued to focus on the food and drink sector through the downturn in 2009 and uncertainty in early 2010. This has meant we are well placed to understand the buyers and sellers of businesses as opportunities come up throughout 2010. I’m feeling pretty upbeat about this year and look forward to doing more deals in the food and drink sector!

Recent stock exchange announcements show the power of brands within the food & drink sector with impressive growth, albeit with other associated issues, from the likes of industry giants Premier and Northern Foods.

While Premier reported strong sales in the relaunched Hovis and Lloyd Grossman cooking sauces, their expected trading profits disappointed the city with cost inflation squeezing margins. Meanwhile, Northern Foods reported a ‘solid’ Christmas period with the relaunch of it’s Rocky biscuit brand, but the ‘competitive’ environment coincided with it’s chilled division showing profits well behind last year.

I believe the picture in food and drink is therefore mixed. Examples of this appear regularly: Unilever found itself in the unusual position of being considered a better credit insurance risk than the UK or US governments, following the recent rise in demand for corporate bonds. And despite the mighty oracle from Omaha, usually silent on such deals, Warren Buffett giving clear warning that this is not a time to rush, overpay or over leverage despite the opportunities, Kraft have overcome the opposition of management and swallowed up british icon Cadbury.

I’ve visited many food and drink businesses in the last year and three months in particular, and I’m aware of a long list of managers and shareholders ready to commit themselves to processes involving M&A in 2010.

The clear impresssion that I am left with from these meetings is that there are three good reasons why branded businesses and those with strong market positions will come to market first in the food and drink sector.

Firstly there is continued strong performances in brands because consumers remain loyal to branded treats and manufacturers continue to invest in brands attracted by their growth. Secondly the competitive pressures being felt in the sector are felt even more by the weaker players with either secondary brands, low market share or undifferentiated private label portfolios.

And the third point is that branded and niche food and drink businesses fit the private equity investment model very well. Whilst private equity houses saw a 96% drop by value in UK food and drink sector buyouts in 2009, private equity investors in general have a build up of cash to invest once the market stabilises and will seek out bargains in the sector.

Challenging times for the food and drink sector indeed, however those with strong brands will be at a premium in the early part of 2010.

I read with astonishment that Desperate Housewives star Marcia Cross, who plays Bree Van De Kamp, is to become the new advertising face of Rooster branded potatoes since this is not the kind of the product these stars have usually fronted. However this is perhaps an astute move on behalf of Albert Bartlett sensing the change in the shopping habits of the average housewife (or househusband in these credit crunch times) away from fancy consumer goods and back to trusted brands and simple food stuffs.

In a recent league of the fastest growing privately owned food businesses in the UK prepared by Catalyst for the Grocer magazine this month, a number of well trusted brands appear in the list. For example: Butterkist (Tangerine Confectionary); Aunt Bessies (William Jackson & Sons); Crosse & Blackwell (Symingtons); Warburtons and of course Roosters (Albert Bartlett) all ranking in the league.

In difficult economic times consumers can tend to polarise in terms of their buying habits showing either a flight to lowest price or a flight to trusted brands. With this growth of companies owning trusted brands, housewives will be desperate no longer. Perhaps this is also the kickstart that the second half needs in the food and drink M&A market. As businesses with better balance sheets seek counter cyclical growth they may look to trusted brands and we could find a number of them changing hands if they can be prized from their long established owners.

With the economic downturn likely to continue through a big part of 2009, home cooking, casual and simple meals and recession-proof dining are some of buzzwords in this year’s culinary world. The Daily Telegraph is printing recipe ideas to help its readers make the most of their leftovers. Traditional recipes and ‘necessary luxuries’ like chocolate, wines and baking are expected to make people feel a bit safer in this turbulent and stormy period.

These ideas are also being echoed at boardroom level and in the latest M&A deals. Asda CEO Andy Bond has reported a 40 per cent increase in sales of cooking ingredients, alongside a similar drop in the sale of certain ready meals. Cadburys first quarter results show chocolate up seven percent due to their standard dairy milk brand rather than the premium niche Green and Blacks. And in a period where private equity buyouts are at their lowest in the first quarter of 2009 for thirteen years, a £24m buyout of a sauces business, TSC, takes up most of the second page of Companies and Markets in the FT.

So what does this mean for consumers, owners of businesses and investors? Will consumers continue to spend on traditional foods and spend time in the kitchen rather than buying their usual convenience food? Will the next flurry of food deals involve a ‘Good Life’ styled Tom and Barbara management team? Will the financing community resemble their neighbours the middle-class Jerry and Margot, who cannot bear the realities of this return to prudence and self-sufficiency? The reality is that food businesses can be a resilient sector in the current recession. A return to a ‘Good Life’ self-sufficiency may be an extreme but the growth in food ingredients and basic food pleasures is a trend that is probably here for a little while longer.