M&A activity in the food and drink sector expected to rise

A recovery in mergers and acquisitions has been forecast for the UK's food and drink sector in 2010, after last year witnessed a drop to just 70 deals compared to 132 in 2007.

Figures analysed by Grant Thornton UK LLP reveals that over half of completed transactions related to acquisitions from insolvent companies or businesses in distress.

Interestingly, share prices for UK food firms rallied through 2009 and have recovered, on average, half of the losses they incurred since the end of 2007. Phil Jackson, partner and national head of Grant Thornton's Food, Drink and Agriculture sector, points to the reduced impact of food price inflation and the benefits of cost and efficiency savings as reasons for many food businesses reporting "significantly improved profits" last year.

"M&A activity in the food and drink sector was extremely depressed in 2009 both in terms of volume and value," he confirms. Apart from the sale of alcohol brands Tennents Lager and Tia Maria for £180 million and €125 million respectively, he is reported as saying in the press, there were no further reported deals in excess of £70 million and values were not reported in the majority of instances.

However, a recovery in profitability is bringing buyers back and encouraging potential sellers to test the market, he continues - a view reinforced by the sale of Cadbury and the anticipated sales of Gu and Kettle Chips.

Another factor Jackson identifies as influencing privately owned enterprises to consider selling is the view that Capital Gains Tax might be aligned to income tax in the upcoming Budget. The Business Sale Report does not believe that this is likely as it would be very anti-entrepreneurial and both major political parties are apparently keen to foster enterprise. "As M&A levels pick up, it is likely that consolidation in private label dominant categories such as bakery, fresh produce and dairy will predominate," Jackson concludes. "Highly leveraged groups may also gauge that the timing is now right to sell some assets to reduce debt."

The relative weakness of pound sterling has also been singled out as a draw to UK businesses for foreign buyers in 2010.

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