Hunger grows for food and drink deals

Innovation and consolidation are the two major trends driving private equity investment in the European food and drink sector, according to a new survey.

Driven by innovation and consolidation, food and drink is one of Europe’s most attractive industry sectors for private equity investment. 

That is one of the conclusions of a new report entitled “Feeding Growth: The role of private equity in the food and drink industry” by 3i and the Economist Intelligence Unit. In Europe, the sector has 29,000 companies employing 2.7m people and saw private equity investment increase from E2.7bn in 2001 to E 4.5bn last year. This was despite overall investment volume falling over the same period.

So why is the industry proving attractive to venture capitalists? The report highlights four main reasons:

  • The innovation imperative: The need for innovation stems from the absence of volume growth and declining price increases. Hence, firms are seeking to exploit niches such as the ready-meal market and functional foods for the health conscious.
  • The consolidation movement: The industry is fragmented outside the UK, particularly in the food service market. Concentration offers huge economies of scale and can be exploited by private equity firms through buy-and-build strategies.
  • Untapped potential in continental Europe: The UK has traditionally accounted for the vast majority of private equity investment in the sector but that is changing thanks to the greater scope for consolidation in countries like Italy and Spain as well as the room for growth in ready meals, which have yet to catch on outside the UK.
  • The evolving nature of the food economy: The new food economy demands increasing cross-fertilisation between food and areas such as biotechnology and information technology. In addition, a global and highly flexible supply chain requires greater economies of scale and improved responsiveness to customer demand. “Navigating the new food economy takes knowledgeable, networked partners with a clear understanding of the industry’s dynamics,” says Keith Ellis, 3i’s global head of food and drink.

The report focuses on the promise offered by continental Europe. The UK accounted for 57 per cent of all private equity food and drink investment from 1995-2001 but only 25 per cent of the total in 2002. Over the same time periods, investment in French firms has increased from 20 per cent of the total to 32 per cent and in Italian companies from just 1 per cent to 26 per cent.

Food and drink was second only to telecommunications and technology with E24.1bn of investment from 1995-2002, surpassing other popular sectors such as pharmaceuticals and chemicals, publishing and retailing. Private equity investments in the sector have also been popular with trade buyers and secondary buyout investors. According to figures from PricewaterhouseCoopers, the European food sector delivered exits worth E1.2bn in 2002.

Commenting on the abiding appeal of the sector for private equity firms, Ellis said: “Since the European food and drink sector is not going to experience much volume growth unless population trends reverse or society starts eating significantly more, the food and drink sector must either innovate or consolidate.”