A slowdown in private equity growth?

United Kingdom

The acquisition by ECI Partners, the UK-based private equity house, of Bargain Booze in January of this year suggests that 2006 will be another year of high activity in the consumer products sector by private equity players. However, on closer examination, the rate at which private equity houses have completed deals in the sector over the recent period has slowed, suggesting that the convergence of increased competition amongst buyers (with trade players in particular becoming far more active) and the slowdown in the pace of growth in UK consumer spending is having a material impact on the private equity role in the industry.

Private equity houses have been concerned to avoid overbidding for businesses in the current economic climate. As supermarkets continue to exert downward price pressure on food manufacturers and increasingly seek to take advantage of cheap EU imports, margins that can be achieved in the sector are becoming increasingly squeezed. In addition, consumer spending patterns are making the sector even more price sensitive. Interest rates have seen an upward shift and household debts continue to rise, with the result that retail sales growth has tumbled and is, to all intents, static – a healthy 7% growth rate in 2004 is just 0.7% today.

With private equity players refusing to be led to overpaying for business, the M&A sector has been kept afloat by increasing activity by trade players. Kerry’s acquisition of Noon in 2005 evidences how trade players who can benefit from synergies and economies of scale can outbid private equity players in a competitive auction process. HP Foods was sold to Heinz in 2005 – once again an incumbent trade player could pay a multiple of 2.7 times worldwide sales and acquire a new portfolio ahead of the financial investors.

Lion Capital, the former European unit of Hicks, Muse, Tate & Furst, is perhaps the one private equity house which has bucked the current market trend and which continues to lead the industry in the acquisition of food businesses. Its reputation, which has been built largely on successful food investments (Premier Foods) has been enhanced by its acquisition (with Blackstone Group) of Cadbury Schweppes’ European drinks business. It will be interesting to see what’s next in store for Lion Capital in 2006.

As competition increases in an ever demanding environment, perhaps it is time for trade players and private equity houses to join together to utilise all available skills – combining the financial acumen of the private equity community, and the existing infrastructure and economies of scale of trading groups. We have already seen consortia of private equity houses coming together to fund large scale acquisitions (Lion/Blackstone on Cadbury Schweppes, Bain Capital, Carlyle Group and Thomas H. Lee Partners $2.4bn acquisition on Dunkin’ Donuts from Pernod Ricard). Expectations for 2006 are that such consortia, aided and abetted by strategic trade players, could be the driver behind M&A activity in this sector.

No news isn’t always good news

Perhaps the biggest news in the sector of the last year has been the deals that haven’t happened. After intense speculation about orphan brands and businesses being made available to the market and being swiftly snapped up, the anticipated bumper deals did not reach their expected conclusion.

By way of example, Heinz’ announcement of the potential divestiture of non-core businesses (including its European seafood, frozen and vegetable divisions) and the proposed breakup of Whitbread, have long been rumoured, but we have yet to see the champagne corks popping on completed deals.

CapVest’s announcement on 1 February 2006 that it had, subject to competition clearances, acquired EQT’s Findus brand in the Nordic region and France (with net sales of 450m p.a.) may provide impetus to a market that has been short on major transactions – requiring those that fuel the market rumour mill to focus on new jastargets and new brands.

Golden Wonder – a salutary lesson

The demise of the much-loved Golden Wonder proves that whilst private equity houses can deliver strong profits for many years, they can’t ignore the demands of the market and they can’t produce miracles. As a firm, the Golden Wonder brand is important to us – we were pleased to act for Legal & General Ventures as it doubled Golden Wonder’s market value in the 1990’s and sold it to Bridgepoint. Our association with the business continued as we sold the “Wotsits” brand to Walkers for management/Bridgepoint and the remainder of the business to Longulf in 2003. However, in the face of Walkers’ high-profile onslaught, Golden Wonder has suffered and, in January 2006, the administrators were called in. The fierce competition in the market and the continued focus on healthier foods has not helped Golden Wonder continue its success story – all private equity players should bear this in mind before launching their next offer for once much heralded brands.

This article first appeared in our food industry law bulletin March 2006. To view this publication, please click here to open a new window.