Sponsors sitting on huge sums of dry powder remain interested in food and beverage companies as demand for staples rapidly climbs, but only those that withstand inventory pressures amid the covid-19 outbreak are likely to garner investment when the dust settles.
“Staples are getting attention, but it won’t last,” David Solomon, managing director of Financo, a global investment bank focused on the consumer & retail sector, told PE Hub.
Solomon pointed to the stockpile of paper products and canned foods that will eventually gather dust on consumers’ storage shelves, which will result in softer demand for these companies once the crisis ebbs.
Simply put, the short-term spike in demand for staples is drawing attention from investors eager to put huge sums of capital to work, but firms are waiting to see which keep their inventory levels in check. The private equity industry hit an unprecedented sum of $1.45 trillion in dry powder at the end of 2019, according to data from Preqin.
Last year, the overall deal value for food and beverage manufacturing fell to below half a billion – the lowest level of capital deployed since 2015, according to the data provided by Pitchbook.
In Solomon’s view, “investors will be most interested in businesses that were only moderately impacted by the crisis.”
Certain enthusiast brands that do well through the crisis will retain the interest of investors, while other strong segments are likely to include e-commerce retailers of non-discretionary items, health & wellness products and remote fitness, he said.
In the meantime, private equity investors and bankers remain enticed by an uptick in demand for certain products and continue to have conversations around potential opportunities as they look months out.
“We are staying in touch with folks we’ve had a conversation with in the past six months,” Steven Flyer, a partner at AUA Private Equity Partners, told PE Hub. Flyer, whose firm backs consumer-packaged food companies such as Desi Dahi, Associated Foods and TruFood, clarified that his lower-middle-market firm has no immediate plans to jump into any new investments.
“We have a lot of buyers looking for a lot of these [food & beverage] companies,” added Emery Ellinger, founder of Aberdeen Advisors, an M&A advisory firm based in Florida.
The food and manufacturing industry has produced four deals in 2020, as of March 23, with none crossing the $22.5 billion deal value that Keurig did when it acquired beverage giant Dr Pepper Snapple Group in 2018, Pitchbook said.
Beyond the inventory issues facing many consumer products companies, labor shortages are making it even more difficult for some to stay afloat.
It’s critical to monitor companies’ balance sheets and cash levels, said Brian H. Choi, CEO and managing partner of The Food Institute, a market research organization that tracks M&A in food, beverage and agriculture industry.
“People [companies] have not been taking into account these events [virus outbreak],” said Choi, pointing to Kraft Heinz. “We may see bankruptcies if funding levels fall.”
Kraft Heinz, created when 3G Capital and Warren Buffett’s Berkshire Hathaway facilitated the mega-merger of Kraft and Heinz back in 2013, recently announced its factories have shifted to working on a three-shifts-per-day schedule to meet consumer demand. The private-turned-public company also drew down $4 billion from its revolving credit facility as a precautionary measure.
The impact of the pandemic on public companies trickles down to the private markets, and thus uncertainty around the financial health of companies such as Kraft Heinz could weigh on PE-backed companies, said Ellinger.
Solomon believes this impact will likely make investors sit on the sidelines until market conditions and valuation levels recover. “How do you sell your company knowing you could have gotten a higher purchase multiple?”
Action item: View more PE Hub’s coverage on coronavirus.