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Food Mergers up in 2011, but slow in second half

A robust start to 2011 provided a reason for optimism among eager dealmakers and analysts that a nascent economic recovery was already being borne by the markets. Private equity investors were active during the first half of the year, peaking with affiliates of Leonard Green & Partners, L.P. reaching an agreement to acquire BJ's Wholesale Club for approximately $2.8 billion in cash.

Posted: Jan 24, 2012

Upper Saddle River, NJ (January 24, 2012) A robust start to 2011 provided a reason for optimism among eager dealmakers and analysts that a nascent economic recovery was already being borne by the markets. Private equity investors were active during the first half of the year, peaking with affiliates of Leonard Green & Partners, L.P. reaching an agreement to acquire BJ's Wholesale Club for approximately $2.8 billion in cash. Roark Capital Group also continued to pursue interests in the food industry, purchasing the beleaguered Arby's Restaurant Group, Inc. for about $430 million, while the chic Crumbs Holdings LLC merged with 57th Street General Acquisition Corp.

Those deals were among many that fostered increased expectations for the second half of the year, as some analysts began questioning whether their forecasts for 2011 had perhaps been too conservative. Predictions for an expedient recovery in mergers and acquisitions were leveled, however, at around the midpoint of the year when an acknowledgment that Greece would require a second bailout package to prevent a collapse sent markets reeling.

At the midpoint of the year, analysts responded to the disconcerting news by amending their previous outlooks and adopting a bearish stance. "Dealmakers sat on their hands and coffers, waiting for further developments as the M&A market hobbled along, buoyed by smaller deals that demonstrated a conservative attitude toward acquisitions," commented The Food Institute's Henry Mollman, who tracks food industry mergers and acquisitions.

Rather than focus on acquisitions to improve profits or increase a banner's footprint, many organizations instead sought to streamline their own operations rather than expand into new territory with uncertain consequences. Food processors looking to divest pieces that do not fit the larger portfolio of brands were sold off while other interests were retained, a trend expected to continue in a rosier, but still uncertain 2012. Sara Lee Corp.'s sale of its North American foodservice coffee and tea operations to The J.M. Smucker Company for $350 million and concurrent establishment of a long-term partnership to collaborate on liquid coffee innovation may represent the model for many transactions going forward.

The Sara Lee sale, Ralcorp Holdings' decision to separate Ralcorp and Post Foods and Kraft Foods' split into two companies all indicate a shift in corporate attitude toward internal concerns rather than external interests. "Distressed or undervalued asset purchases and business spin-offs are the transactions that corporations will be attracted to, both to assist reorganization efforts and placate investors by removing value-sapping assets from the ledger," predicts Mollman. Rather than lock up considerable assets in a deal that may be consummated long after the debt crisis in Europe is resolved and markets react, dealmakers will seek mergers and acquisitions that are in line with wider corporate strategies without significantly altering their path.

The freezing of the markets was thawed somewhat by the announced merger of BI-LO, LLC and Winn-Dixie Stores, Inc. While the $560 million agreement will create an organization of approximately 690 grocery stores in eight states throughout the southeastern U.S., its surprising announcement is more of an outlier within the industry than a harbinger of increased M&A activity, and many analysts have not adjusted their own forecasts in light of the development. While the timing of the merger does encourage higher expectations for future deals, it should not be read as an indication of anything but two formerly bankrupt assets recognizing an operational opportunity without each of the companies' retail footprints causing conflicts, Mollman advises. Both Bi-Lo and Winn-Dixie had been the subject of acquisition rumors for some time, but when a cautious M&A environment produced no suitors, the retailers entered into a merger that would increase their respective sizes without forcing changes in both companies' operations.

After engaging in fewer food industry mergers and acquisitions in 2010, private equity was involved in 69 deals last year, an increase of 50% over 2010 but still below the two consecutive years of 96 mergers and acquisitions recorded in 2009 and 2008. Within the food industry, investment firms and banks were responsible for about 18% of acquisitions in 2011, compared with about 14.5% in 2010. In total, The Food Institute tracked 384 mergers in fiscal 2011, an increase of about 21% over the 317 deals in 2010.

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