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Exit and Growth Strategies for Middle Market Businesses

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M&A Quarterly News In The Food and Beverage Industry Sector

By Terry Fick | Sep 19, 2018

The report below gives a good overview of the third quarter M&A activity in the Food and Beverage Industry Sector. M&A activity for North American based target companies in the Food and Beverage sector for Q2 2018 included 70 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions closed in May when Lassonde Industries, Inc. acquired Old Orchard Brands, LLC for US$158.9 million in cash, contingent payout and other payment. Under the terms of the agreement, Lassonde Industries paid US$146 million in cash and an additional US$10 million over next two years subject to specified financial milestones. The transaction is in line with Lassonde Industries’ growth strategy and improves its manufacturing footprint in the Midwestern United States. Founded in 1985, Old Orchard Brands, is located in Sparta, Michigan and processes and bottles fruit juices, frozen juice concentrates and nonalcoholic drink mixers.

The recent acquisition of Body Armor by Coca Cola is a continued example of the growth in the specialty beverage sector. This has been particularly evident in the tea sector.

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M&A Trends in 2018

By Terry Fick | Jul 12, 2018

I was recently interviewed by Andy Jones of Private Equity Info about recent trends in mergers and acquisitions. Below are the highlights of our conversation.

Valuation Trends
The most prominent trend is in valuations over the past 3 years. We always see cycles, but this cycle has pushed company valuations higher than they have been in the 30+ years I have been in the industry. From businesses generating $2-3 million in EBITDA all the way up to $50 million in EBITDA, every company’s valuation is higher than in the past.

Baby Boomer Bulge in the M&A Pipeline
Being a baby boomer myself, I expected the past several years to have been almost a glut of sell-side opportunities. But it hasn’t happened. I think we all thought it would come to pass. The baby boomers are aging better than their parents did. Many are still having fun working 50-60 hours per week.
This is a friendly industry. We frequently talk to our competitors and we generally get the same feedback that we see ourselves. That is, when it was about time for the baby boomers to exit, the economy started doing well. So, these baby boomers’ businesses are making good money. Right or wrong, (mostly wrong), they tend to say, “If things are going great right now, why would I sell?”.
Sooner or later they are going to transfer their businesses. At some point, not only will their age start to make it more imperative, but the economy may start to turn down as well. If we are right, and it happens when the economy isn’t great, their valuations are going to plunge. If the seller-to-buyer ratio starts to shift (in favor of the buyer), that will drive valuations down further. For those that hang on until the last minute, all I can say is “looking back won’t be fun”.

I tell people, if I had a brother or sister or child with a business that was doing well right now and it wasn’t for sale, I would hit them with a two-by-four… unless they want to keep it for another 10 or 20 years.

Increased Valuations Impact on Deal Structure
I don’t think higher valuations are impacting deal structure. We don’t see any more or less earn-outs or notes than we used to as a percentage of transactions. But increased valuations have impacted two things:

One, due diligence is much tougher than before. With buyers paying high multiples, they are making sure to look under every rock, that it’s a squeaky-clean deal.

And two, there is more renegotiation of price than there used to be during the due diligence phase. The rubber band is so tight, the deal has no flexibility. If one little thing is out of place, the buyer wants to re-trade. We see this from both corporate buyers and private equity firms.

Main Challenges in Closing Deals
Most deal challenges now are related to due diligence. It’s almost to the point of being silly. There are a lot of questions being asked and analyses being done that really aren’t relevant.

Quality of Earnings (QE) is the driver of due diligence… and it has become onerous. It can be a difficult process because so much of it is a matter of opinion, not fact. That is the biggest challenge of any deal, the buyer’s QE.

We encourage our clients to do their own due diligence prior to entering the sale process, to have more robust data rooms and to hire someone to do a Quality of Earnings analysis. The buyers are still going to do their own due diligence work. But if the seller has a reputable firm do QE in advance, then the seller has some ammunition to fight gray-area claims that come from the buyer’s QE later. Furthermore, if there’s a real issue, like a revenue recognition issue that needs to be addressed, the seller can address it early in the process rather than having a surprise in the third month of due diligence.

Difference in Contract Terms
The biggest difference in contract terms now is the use of rep & warrants insurance. This insurance is becoming a significant piece of offers and is now used on a larger percentage of deals (including smaller deals). We are seeing a lot of contracts include reps & warrants insurance to give both sides a better feeling about who is going to pay for any future problems with the deal.

Reps & warrants insurance takes the risk off the seller for future discoveries where a rep & warrant is breached. With this insurance in place, instead of having a $5 million cap on reps & warrants going forward, the seller might only have a $500,000 cap. Anything above this is taken care of by the insurance company.

The buy-side usually purchases this insurance because it is easier to collect from an insurance company if a claim is valid than from someone who may now be your partner. So, there’s also a social reason for it. You hate to sue your partner. Buyers now use this as an extra bit of ammunition when they are bidding on a deal.

There are probably a dozen companies aggressively offering reps & warrants insurance for M&A transactions. There were perhaps as many as 3,000 policies written last year (2017). Now, with sufficient history with these policies, the underwriters are realizing there are very few claims.

We are also seeing heftier letters of intent (LOI), meaning that more of the detail that used to be reserved for the final purchase documents is at least addressed in the LOI due to sellers’ concerns about re-trading.


M&A Quarterly News In The Food and Beverage Industry Sector

By Terry Fick | Jun 15, 2018

The second quarter M&A below provides you a good overview on activities in the Food and Beverage Industry Sector. M&A activity for North American based target companies in the Food and Beverage sector for Q1 2018 included 38 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in January when Highlander Partners LP acquired Chicago Custom Foods LLC, trading as Kernel Season’s from VMG Equity Partners LLC for an undisclosed amount in cash. The transaction was funded by Regions Bank and Norwest Mezzanine Partners. The acquisition allows Highlander Partners to expand its investment portfolio and enables it to focus on food companies and the CPG sector in general. Founded in 2000, Chicago Custom Foods LLC is located in Elk Grove Village, Illinois and provides popcorn seasonings and other snack products.

The cost of food in the United States increased 1.40 percent in April of 2018 over the same month in 2017.

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M&A Quarterly News In The Food and Beverage Industry Sector

By Terry Fick | Mar 28, 2018

The first quarter M&A below provides you a good overview on activities in the Food and Beverage Industry Sector. M&A activity for North American based target companies in the Food and Beverage sector sector for Q4 2017 included 72 closed deals, according to data published by industry data tracker FactSet. One of the notable transactions of the quarter was announced in October when Ferrero SpA acquired Ferrara Candy Co, Inc., a portfolio company of Catterton Management Co LLC, for a.. Read more »


M&A Quarterly News In The Food & Beverage Industry Sector

By Terry Fick | Nov 06, 2017

The fourth quarter M&A below provides you a good overview on activities in the Food and Beverage Industry SectorM&A activity for North American based target companies in the Food and Beverage sector for Q3 2017 included 49 closed deals, according to data published by industry data tracker FactSet.

Consolidation continues in the sector as McCormick & Co, Inc. acquired the business and assets of the food division of Reckitt Benckiser Group Plc for US$4.2 billion in cash. The deal includes a 100% stake in The French’s Food Co LLC, The French’s Food Co, Inc., The RT French’s Food Co Ltd and Tiger’s Milk LLC. The acquisition strengthens McCormick & Co.’s market position. According to reports, Kraft Heinz Co and other American private equity firms were interested in acquiring the business.

With the rise in popularity of organic foods, one sub-sector that continues to grow is the gluten-free sector, which is on a strong upward trajectory.

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M&A News In The Food and Beverage Industry

By Terry Fick | Sep 19, 2017

The 3rd Quarter M&A report below provides you a good overview on activities in the Food and Beverage Industry Sector. M&A activity for North American based target companies in the Food and Beverage sector for Q2 2017 included 37 closed deals, according to data published by industry data tracker FactSet. The average transaction value was $89 million.

One of the largest deals of the quarter closed in April when Tyson Foods, Inc. acquired  AdvancePierre Foods Holdings, Inc. for US$3.2 billion in cash, via tender offer. Based in Cincinnati, Ohio, AdvancePierre Foods Holdings produces and supplies sandwich products for foodservice and retail customers, schools, and convenience channels. The merger complements and expands existing business.

Farm and wholesale food prices continue to remain low, which is beneficial to consumers but limiting to retail profits.

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SHOULD I SELL THE COMPANY’S REAL ESTATE WITH THE BUSINESS OR KEEP IT AS A SEPARATE ASSET?

By Terry Fick | May 30, 2017

The easiest (and cleanest”) thing to do with your real estate is to include it with the sale of your business. However, that is not usually the way to maximize your financial outcome.

Let’s first look at the purely financial aspects of keeping the real estate vs. selling it with the business.

  • It is important to recognize that most buyers of businesses prefer not to own the real estate.
  • Let’s assume you are selling your company at a value equal to 7 times your EBITDA.
  • Since the business owns the real estate, the company has no lease payments, thereby increasing the EBITDA and the selling value.
  • While Real Estate values swing broadly based on type of real estate and location, that value is almost always higher than 7 times the decrease in the value of the company that results from adding a market lease to your expenses.

EXAMPLE:

  • Assume you can lease it to the buyer for $600,000/year.
  • This reduces the value of your company by 7 times $600,000, or $4,200,000
  • However, using a recent transaction we were in, the “Cap rate” of the warehouse owned by the company was 6%, which is a multiple of 16.6x the annual rate.
  • So, he kept the real estate (Then sold it to a third party real estate investor) for almost $10 Million, but reduced the value of his business by only $4,200,000.

You might want to simply keep the real estate and generate the income from a lease (in this case, $600,000) as a long term investment. Whether you keep it or sell it separately, be sure to get a lease of at least ten years to secure the value of the real estate.

If you own the real estate separately from the company, but you want to sell the real estate, as well, the decision is reversed. Keep the real estate separate and get a good market rate lease, then sell the real estate to a third party, a real estate investor.

One caveat is that some real estate, such as a very special manufacturing facility is very difficult to sell separately, so that may be an important consideration. An appraisal on that property would definitely be in order before you make that decision.

Note that there are real estate investors that will buy even specialty use businesses with good leases. One such company we often call is AIC VENTURES in Austin, Texas.


M&A News From the Food & Beverage Industry

By Terry Fick | Feb 23, 2017

food & beverageOn the public markets the Food & Beverage sector kept pace with the rest of the market experiencing a hefty post-election bounce. Conagra Brands, Inc. (NYSE: CAG) had a topsy turvy quarter taking a precipitous drop in November from $48/share to $34/share, but finished the year on an uptick at $39.14/share.

Faced with slowing sales in grocery stores and discount clubs, snack food manufacturers are looking to grow revenue online. E-commerce has become one of the fastest-growing avenues for purchases of ready-to-eat snacks as major food companies continue to increase their investments in the channel, according to NPD Group. Mondelez International recently launched a holiday-themed website to sell tins of Oreos directly to consumers, marking the first time the company is overseeing its own supply chain and shipping logistics, Bloomberg News reports. The snack food giant established a dedicated e-commerce team in 2016 and hopes to reach $1 billion in online revenue by 2020. The company will occasionally offer special limited-time promotions through its own website, but most of its products will ultimately be sold through third-party online retailers like Amazon. Some manufacturers have leveraged social media buzz to sell rare and premium varieties of snack foods that are unavailable in most brick-and-mortar outlets. Typical online snack food purchasers are households with incomes of $75,000 and above.

Industry Indicators

  • The consumer price index for food, an indicator of food product values, fell 0.2% in December 2016 compared to the same month in 2015.
  • US nondurable goods manufacturers’ shipments of food products, an indicator of demand for food manufacturing, rose 0.4% year-to-date in November 2016 compared to the same period in 2015.
  • US retail sales for food and beverage stores, a potential measure of food demand, increased 2.4% during 2016 compared to 2015.

Posted by Terry Fick.


Read the Entire Food & Beverage 1st Quarter Newsletter Here


M&A Trends in the Food & Beverage Industry

By Terry Fick | Nov 10, 2016

M&A Trends | Food & Beverage IndustryOne of the largest food & beverage deals of the quarter was announced in July when French dairy company Danone SA agreed to buy U.S. organic-foods producer WhiteWave Foods Co. for $10.4 billion. The move is an example of M&A Trends in the Food & Beverage Industry large food companies paying strong multiples to get a footprint in organic product lines.

Food producers may have to spend more for in-house testing to determine whether their products contain GMOs as a result of a new federal labeling law. A new law requiring the USDA to develop a nationwide standard for labeling foods containing genetically modified organisms (GMOs) is expected to result in higher costs for food manufacturers. The law, approved in summer 2016, will require companies to disclose GMOs through text labels, symbols, or digital codes (such as QR codes). The USDA has been given two years to finalize the rules. The USDA is also tasked with determining the amounts of GMO substances present in foods necessary to prompt labeling, according to Food Safety News. The law’s supporters, which include many large food companies, trade groups, and retailers, contend that federal rules will counter a patchwork of state-level GMO labeling legislation. The legislation’s critics argue that the law could make it difficult for consumers to determine if GMOs are present in foods. Despite substantial scientific evidence that GMOs are safe, their presence in the food supply remains controversial.

Industry Indicators

  • US nondurable goods manufacturers’ shipments of food products, an indicator of demand for food manufacturing, rose 0.3% year-to-date in July 2016 compared to the same period in 2015.
  • US retail sales for food and beverage stores, a potential measure of food demand, increased 2.1% in the first eight months of 2016 compared to the same period in 2015.

Posted by Terry Fick.

Read the Entire Food & Beverage 4th Quarter Newsletter Here


Food & Beverage Industry M&A News

By Terry Fick | Sep 01, 2016

food and beverage industryFood & Beverage Industry – A major recall of frozen foods contaminated by listeria bacteria is putting pressure on government regulators to take a closer look at safety practices in the food manufacturing sector. Millions of packages of fruits and vegetables made by Washington-based CRF Frozen Foods were pulled from store shelves in April and May 2016, making the incident one of the largest food recalls in recent history, according to the Associated Press. The company’s recall includes more than 350 product lines under 40 different brand names, and CRF’s retail customers — which include Costco, Target, Trader Joe’s, and Safeway — have imposed secondary recalls of at least 150 additional products, Food Safety News reports. There is evidence that past enforcement of health and safety regulations has been lax at the CRF plant where the listeria outbreak originated: FDA and state agriculture inspectors documented several code violations at the facility since 2014 that were never adequately resolved. The US Justice Department is investigating a similar incident in which Dole Food recalled listeria-contaminated packaged salad products earlier this year, more than a year after federal investigators first found evidence of contamination at one of the company’s production plants.

Commercial water bottlers may face increased opposition from the public and government agencies concerned about water usage and pollution caused by discarded bottles. A recent vote by residents near Portland, Oregon, to halt construction of a commercial water bottling plant could signal growing opposition to the industry. Hood River County voters defeated an eight-year effort by Nestlé Waters North America to build a bottling plant, citing drought and environmental issues. An appeal is possible, according to the Wall Street Journal. A similar fight is underway in Flathead County, Montana.

Industry Indicators

  • US nondurable goods manufacturers’ shipments of food products, an indicator of demand for food manufacturing, rose 0.2% year-to-date in May 2016 compared to the same period in 2015.
  • US retail sales for food and beverage stores, a potential measure of food demand, increased 2.5% in the first six months of 2016 compared to the same period in 2015.

Posted by Terry Fick.

Read the Entire Food & Beverage 3rd Quarter Newsletter Here