The rollercoaster ride of M&A in Europe’s food and beverage industry

According to Oghma Partners’ tracking of deal activity in the UK food and beverages sector, the total value of mergers and acquisition (M&A) transactions in that market fell from approximately 4 billion GBP in 2019 to around 2 billion GBP in 2023. Stefan Kirk, Partner at Translink Corporate Finance Poland, says such findings reflect the turbulent rollercoaster ride Europe’s food and beverage mergers and acquisitions (M&A) industry has been on since 2020.

“This period has been marked by unprecedented challenges stemming from the COVID-19 pandemic and the subsequent disruptions caused by geopolitical events. This has caused constant earnings before interest, taxes, depreciation, and amortisation (EBITDA) fluctuations, impacting valuations significantly. As we look ahead to 2024, the big question is whether these levels will finally stabilise and what scenarios we can expect in this dynamic market.”

Impact of EBITDA fluctuations on M&A activity

Kirk says while Translink CF has completed many consumer sector transactions in this period, a closer look reveals that most transactions don’t involve food and beverage manufacturers. “Few of our transactions classified under food and beverage are food and beverage manufacturers. Most deals comprise distributors, retailers, supplements producers, and ingredients producers – not finished-product manufacturers with high materials, packaging, and energy costs.”

He says this disparity stems from fluctuations in EBITDA, making it extremely difficult for buyers and sellers to agree on a sustainable underlying profitability level as the basis for valuations. Without an agreement on valuations, manufacturer deal activity has seized up over the past four years.

In contrast, food and beverage distributors, retailers, supplements and ingredients producers are not as heavily impacted by fluctuating input costs. As a result, it is easier for buyers and sellers to reach a consensus on sustainable EBITDA and valuations for these types of companies.

“When there’s an unnaturally high EBITDA in a given year, the seller will claim that is the sustainable underlying profitability. But the buyer will disagree, pointing out it was lower in the previous year and could fall again next year. Even taking a three-year average doesn’t work because the seller will argue the most recent year’s higher figure is the new normal.”

Expect a return to normal in 2024

Kirk believes the M&A sector can expect a return to normal EBITDA levels in 2024. He says high energy prices have affected raw material and packaging costs, with food and beverage manufacturers paying more for electricity, gas, and heating. They also faced higher costs for packaging materials like glass that are very energy-intensive.

He adds that freight and logistics costs to transport raw materials like coffee beans from source countries to Europe spiked when the war began, further squeezing manufacturer margins. However, energy and freight prices have now declined back to pre-war levels.

“Unless there’s another escalation in the Ukraine war, these fluctuations should be out of the system. While rising labour costs remain an ongoing factor, they represent more of a constant increase than the extreme volatility seen in other input costs over the past few years. With the major sources of cost fluctuations potentially stabilising, 2024 could see a return to more normal underlying profitability for food and beverage manufacturers. This would provide a clearer foundation for M&A valuations and negotiations between buyers and sellers.”

Implications of price negotiations and deflation

While costs may stabilise, Kirk says food and beverage manufacturers now face a new challenge – price negotiations with retailers in a deflationary environment. He says many producers raised prices over the past few years to offset higher costs. However, retailers are pressuring them to lower prices again as costs decline.

He uses an example of a preserved food producer in Poland whose materials and energy costs increased by 70% since 2020 while their prices have risen 50%. “As costs normalise this year, retailers are pushing back on maintaining those price increases amid competitive pressures. The outcome of these price negotiations will be critical, potentially leading to a shake-up in the industry.”

Differentiation will allow companies to maintain prices

Kirk says well-differentiated players should be able to maintain prices and margins in the deflationary environment. This includes companies with:

• Strong brands
• Speciality offerings
• Value-added services
• The flexibility to diversify sales channels beyond major retailers

However, undifferentiated mid-sized producers may struggle, becoming less active in the M&A market due to shrinking margins. “Strong producers could keep their prices because the retailers won’t want to delist them. Whereas if you’re not differentiated, then you might be delisted. The middle-sized guys may be out.”

Stefan adds that being “out” doesn’t necessarily mean going out of business entirely. These mid-sized undifferentiated players will likely reduce their prices because they have no choice. He says they can find ways to survive, such as family-owned businesses paying themselves lower salaries. However, they might not be active in the M&A market because their low margins make them unattractive targets and unable to make acquisitions.

Kirk says there are few arguments manufacturers without differentiation can make to resist the pressure from retail behemoths.

Sustainable EBITDA key for food and beverage M&A success

The rollercoaster ride of Europe’s food and beverage industry is not over. But as external cost fluctuations ease, a return to more normal EBITDA levels is expected in 2024.

Kirk concludes, “Overall M&A activity will hinge on demonstrating sustainable profitability to buyers in the evolving market. While unprecedented in recent history, this turbulent period will ultimately reveal which food and beverage companies have the resilience to succeed – and perhaps provide a glimpse into the industry’s future landscape. Translink can help clients navigate this new food and beverage landscape with experienced local advisors and a rich global network to tap into.”

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