Healthier habits and M&A

As consumers are focused on healthier eating habits, sustainable consumption and ethically sourced food, the highly fragmented food ingredients sector has experienced a significant increase in demand. Food ingredients sit at the heart of developing healthier end products, having outpaced all other markets in the consumer staples value chain, such as sugar, salt and fat over the past five years. This growth is supported by exposure to two key consumer trends, health & wellness and convenience, which are driving the need for higher quality and more ingredients [1].

However, not all segments within food ingredients are equally attractive to potential investors. Ten distinctive areas within the $70 billion specialty food ingredients market have been recognised as particularly attractive investment areas.

The below table illustrates ten attractive food ingredient categories and their health / quality attributes.

Growth rates for the different sub-segments have varied between 2% and 8% over the last five years. These rates are dependent upon:

  1. The level of commoditisation of the ingredient, such as sweeteners
  2. Difficulty in sourcing the ingredient, for example texturants, such as algae
  3. Complexities in producing the ingredients, such as the ‘high-tech’ nutrition ingredients
  4. The level of importance for the final product

Many industry players turn to M&A to reshape their business structure and proposition.  This has helped businesses to focus on the more attractive, higher added-value and growth segments.

The below table highlights the industry operators currently dominating the sector.

The rise in value for operators

The current valuation levels for food ingredients companies remain high, with publicly listed specialty food ingredients companies trading at c. 13x 2018 EV/EBITDA. Transformational M&A deals have concluded at between 15-17x EV/EBITDA and smaller to medium size bolt-on deals achieving 10-13x EV/EBITDA.

The below graphs illustrate historical average EV/EBITDA valuation multiples of selected listed manufacturers and current valuation levels.

1 Aquired by IFF in May 2018
2 Acquired by Givaudan in March 2018

With the trend of increased consumer spending on convenient, healthy food set to continue, the attractive financial profile and positive growth outlook for these companies will continue to drive high valuation levels. The often diversified customer base adds yet another layer of appeal.

In addition to the rise in valuation levels, the inclusion of specialty ingredients in an end product, such as ice cream, remains vital and heavily impacts production. The strong significance of the food ingredients element not only applies to its inclusion in production (despite the minimal quantities required), but also helps to contribute to an operator’s increasing valuation. Figure 2 (below) illustrates the small quantity of specialty food ingredients required to produce ice cream.

Whilst there is a broad customer base for operators in the sector, a high proportion of specialty food ingredients operators have Fast Moving Consumer Goods clients accounting for only 20% of turnover. The remaining client base is made up of small to medium sized food companies who rely heavily on the expertise of a food ingredients supplier to continue supplying, developing and distributing sought-after end products.

A taste for alternative flavours generating new opportunities

With growth rates of 4-5% since 2011, specialty ingredients are expected to continue outperforming staples in the medium term [3], primarily as a result of increasing (health) awareness among consumers. This trend is driving demand for new alternative ‘flavours’ to offset the negatively viewed traditional ingredients such as sugar, salt and fat. According to a global health trend study, consumers continue to look for functional foods which provide benefits that can either reduce their risk of disease or promote good health, with one-third of respondents confirming the importance of foods being low in cholesterol, salt, sugar and fat [4].

A prime example of growth activity in the space was seen earlier this year when IFF acquired Frutarom, an Israeli-based company specialising in the production and distribution of extracts for flavours and fragrances, for over $7 billion. The acquisition will boost IFF’s sales to small and midsize customers as well as strengthen its presence in European markets. IFF will also make inroads in faster-growing markets for natural colours, cosmetic ingredients, enzymes and antioxidants.

The continued growth and consumer demand trends, in addition to recent deal activity, present a clear opportunity for operators producing healthier and in-demand speciality food ingredients. M&A provides an appropriate platform for sector operators wishing to expand into new territories or gain exposure to new products and product enhancements.

What industry operators within the sector need to know

With sector growth expected to continue, M&A provides a significant opportunity for small and medium sized specialty ingredients manufacturers to continue on a clear growth path. To capitalise on these opportunities, industry operators should:

  • Be aware of the developing healthy living trends how these are impacting sector growth
  • Understand current and anticipated valuation levels and growth outlook for sector operators
  • Be familiar with evolving product developments and understand how these can influence a company’s growth trajectory

Should you have any questions regarding this content, DC Advisory’s Leisure, Retail & Consumer team would be delighted to discuss in more detail.

 

[1] Deutsche Bank Industry Report: Food Ingredients, 2018
[2] Year-to August
[3] Deutsche Bank Industry Report: Food Ingredients, 2018
[4] Neilsen Healthy Eating Trends Around the World, 2015