Opinion

Last updated: 1st Jul 2010

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 its Rocky biscuit brand, but the "competitive" environment coincided with its 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.

Simon Peacock
Principal
Catalyst Corporate Finance