“It was a difficult year, which probably isn’t a surprise,” Rabobank’s Francois Sonneville says, reflecting on M&A in the drinks industry in 2022. “My first reaction would be 2023 will be a very difficult year again.”
There was a burst of deal-making in 2021 as confidence returned to the markets after the depths of the pandemic and, going into 2022, there was optimism that level of activity might persist.
However, with Russia’s invasion of Ukraine upending the global economy and puncturing business (and consumer) confidence, this year looks set to see a fall in deal volumes.
“The level of activity is this year quite a lot lower across M&A markets full stop,” Mark Lynch, a partner at UK-based corporate-finance advisors Oghma Partners, says.
Lynch points to a lower level of debt being available to finance deals and to potential acquirers, understandably, focusing their attention elsewhere. “Some buyers will not be at the party because they’ve got their own problems to deal with in terms of dealing with cost pressures and pricing and any volume effect that might have.”
It’s not just in Europe where deal-making has been subdued. The level of transactions in the US has also been muted. Whipstitch Capital is a US-based M&A advisory firm focusing on the “better-for-you” and “emerging consumer brand” sectors. Nick McCoy, the firm’s MD and co-founder, says the number of full acquisitions in the “natural products industry” in the US fell in the first half of 2022 versus a year earlier – but he suggests there remains an appetite for another type of transaction.
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“What was interesting to me is the number of financings continued to climb,” he explains. “In my mind, if you have a liquidity event for investors, that helps recycle capital into the industry, and that’s really what we care about. It may not be a full M&A but I do think the M&A numbers understate a little just because of that.”
McCoy notes how full acquisitions, at least in the part of the market Whipstitch monitors, now tend to centre on larger businesses than in the past and, consequently, the transactions involving emerging companies are focused more on equity stakes. “In the US, looking back to, say, 2010, you could be a US$10m company and big strategics would buy you. Over the last decade, it’s moved to $100m,” he tells Just Drinks. “Beverage is tough because you see beverage [companies] getting larger and larger before they get bought. I said $100m for food and beverage; I think beverage is feeling more like $150m or $200m now.”
In October, Oghma Partners issued a report looking at venture financing in the UK food-and-drinks industry from 2012 to 2022. According to the research, the alcoholic beverage sector saw almost three times as much investment in volume terms compared to any other, as well as the highest value of deals in total.
However, overall, Oghma Partners says it has identified a shift from early- to later-stage funding and argues as confidence fades the appetite for venture investing will wane.
“What we have seen in the last ten years has been a fantastically vibrant environment where people like the Sipsmith guys have set up a business, done very well and flogged it on. We saw, allied to that, a significant step-up in venture money going into these sorts of brands and, with a more difficult environment, there’s less cash about basically,” Lynch explains. “People have got less risk capital available, so then, as a feeder of activity, that feeder money will drop away.”
Signs point to muted 2023 for drinks M&A
At Rabobank, Sonneville, a senior beverages analyst at the Netherlands-based financial-services group, says the cost pressure facing manufacturers – and the constraints on consumer spending – will weigh on corporate profits next year. As a result, buyer appetite may be reduced, at least in Europe, he says.
“I’m based in Europe. I’ve got a colleague in the US and a colleague in Asia and they are a little bit more optimistic, particularly the colleague in Asia,” Sonneville says. “My first reaction would be it’s going to be a tough year to grow earnings. There will be a little bit more caution.”
Whipstitch’s McCoy echoes those sentiments. “Probably the biggest factor right now that is slowing down transactions is if you look at inflation,” he reflects. “Inflation has crept up and companies have not been able to keep up with the price increases behind the inflation, so that means gross margin is going down. Some companies have done a great job but, for some companies, it’s hard.”
However, whenever there is economic uncertainty and pressure on business finances, there will be opportunities for deals.
“It takes two to tango, so you might see there are opportunities from prices coming down,” Sonneville says. “People may look at it and say ‘this is exactly what I need for the longer term, I was scared by the price tag and now it has come down.’ Or someone never wanted to sell and now the deal can happen.
“There will be caution and people will stand on the sidelines, particularly buyers, [but], at some point, sellers might make it so attractive for buyers who have that longer investment horizon to step in. That could help volumes pick up. I don’t really want to say that means 2023 is going to be a boom year.”
Worse, of course, for potential sellers is the likelihood the tough trading conditions seen in markets worldwide will lead to some hitting the wall. “We’re going to see that certain businesses that have struggled cost-wise to deal with the pressures will be up for sale,” Lynch says. “Some of that may well be a crisis sale, as it were, some of them may go bust and then they’ll be bought out of administration.”
Lynch also suggests some of the bigger players will look to rationalise their portfolios and posits the likelihood of more deals in the vein of Diageo’s recent disposal of Archers or Constellation Brands’ asset sales in wine. Some drinks manufacturers, he argues, will be looking closely at which brands they want to support and which they believe no longer offer worthwhile returns. “I think what we will see is further portfolio consolidation and cleaning up. That will help drive M&A in the sector.”
There is a belief the larger drinks manufacturers will also continue to pursue M&A. Michael Collinson, a managing director at the European arm of M&A bankers Houlihan Lokey, seeks to differentiate between the size of a buyer when weighing up deal activity next year.
“The big spirits companies, the big beer companies, the big soft drinks companies: extremely well-capitalised M&A is part of the playbook. I think they will continue to buy,” he says. “If they see an opportunity in a certain segment in a certain subcategory in a certain geography, I think they’ll be very willing to get the chequebook out because it’s just important to them. I don’t think where we are in the cycle and raw materials particularly matters to them. Managing supply chain inflation is very much just part of what they do and I think they’ll probably also take the view that the worst has passed.”
At Rabobank, Sonneville suggests some manufacturers may eschew the more conventional type of acquisition of a brand or company and instead look to invest – even via M&A – in their supply chains. He acknowledges it is more unusual for drinks manufacturers to use M&A in this way but believes it could be of interest, particularly in the context of the supply-chain disruption of the last 12 to 24 months.
“You might see some investment in the on-trade, you might see some forward and backward integration. I think that we will see a little bit of that trend,” Sonneville says. “They will still make [brand/company] acquisitions but I think it will be accompanied by acquisitions in the value chain. Sometimes when your supply chain is under threat you might decide to step in with equity rather than build things yourself.”
Premiumisation has been a driver of corporate activity in the drinks industry in recent years, both organically and via M&A. It’s been a feature of the deal-making seen in 2022, with the likes of Diageo, Campari, Treasury Wine Estates, fellow winemaker Les Grands Chais de France and Heineken all touting the higher-end attributes of businesses they have bought.
“Premiumisation will not go away. That will definitely stay,” Sonneville says. “It’s probably more difficult in the current environment. I do see it as a long-term trend [but] I do think that there’s also some money that needs to be spent on making companies more resilient.”
At Oghma Partners, Lynch believes the current pressure on consumer spending may make more upmarket assets less attractive in the short term. “Why would it be the case that premiumisation would continue to stroll on regardless of the pressure that consumers are under?” he asks. “I think what we get is more of a bifurcated sector, which is you’re a value player, you’re a premium player and there’s not much in between possibly – but that doesn’t mean there’s not going to be pressure on all areas to give the consumer a better cost offer one way or another. There may well be some near-term let-up in that sort of trend.”
Whipstitch’s McCoy finds it difficult to call out particular drinks categories or product areas that may be relatively buoyant in 2023. He prefers instead to focus on “the attributes behind the beverage” and lists “rising tides” that the advisory firm believes could boost FMCG brands’ growth prospects and, therefore, make them potentially attractive assets – sustainability, diversity (which McCoy says is the diversity of a brand’s consumer base) and “consumer self-awareness”, a concept that includes health and wellness.
“Things that align with those are getting free growth. Those are secular trends,” he says. “These aren’t big headline things but, if you look at big strategics, they don’t have a size problem. They have a growth problem and, if you can get an incremental, say, 1% growth in a big strategic, that’s big bonus time for a CEO.”
McCoy, meanwhile, also highlights the financial might of private equity and how that could continue to present competition for trade buyers and be a driver of deals, particularly for smaller assets. “Fighting with strategics is an interesting point because the number of these innovative brands continues to climb faster than the number of strategic buyers,” he says. “There’s still a tremendous amount of LP money out there that wants to come into the sector.”
Might 2024 be more buoyant?
Overall, there is consensus 2023 may be another flat year for M&A in the drinks sector. “It’s not sounding like it’s going to be very exciting, is it?” Lynch says. “But I’m afraid I think that’s a bit where we are.”
Sonneville underlines how he believes there may be openings for buyers. “It will be subdued but there will be selected opportunities for people who look for bargains and are willing to look through difficult periods, which particularly in the first two quarters of 2023 might happen,” he suggests.
Collinson demurs. “I'm not sure I would say that it’s going to be really, really subdued,” he says, before laying out the categories where he thinks the drinks industry could see M&A next year. “Premium spirits for sure. People aren’t going to let opportunities go by. I think decent-sized craft beer businesses. And I think premium soft drinks, definitely. So, I think it’s a continuation of where the M&A has been and where the interest is.”
Looking further ahead, McCoy points to the flow of deals in 2021 as the worst of the pandemic eased as a sign activity may pick up again beyond 2023.
“We continue to see wellness purchases and purchases of innovative brands increasing despite whatever the economic conditions are. So, I think you do have an M&A pipeline, which swells when you don’t actually have deals on the other side happening as much,” he says.
“I don’t think we can discount that, even if 2023 is a softer year, 2024 is going to be pretty material. We saw this happen with 2020. Covid came, deals went down and then it just rocketed up. The end of 2020 through mid-21 was really a robust time, economy aside, because you’ve had essentially all those backlog deals coming back to the market and getting done.”
A version of this article was originally published in the November edition of Just Drinks’ digital magazine.