M&A and capital markets update: Food and beverage - Third quarter 2015

Public company performance

The third quarter of 2015 saw global equity markets experience a bit of a sell-off relative to prior quarters. Developed equities saw turbulence resulting from expectations that the U.S. Federal Reserve would begin to unwind their economic stimulating policies. News from the emerging markets contributed to the market unrest as concerns about the Chinese slowing economic growth rate and private sector debt levels dominated headlines.

The middle-market food and beverage sector was not immune to the selling pressure of global equities, returning much of the gains they experienced throughout the year. The packaged food, alcoholic beverages, and non-alcoholic beverages sub-sectors experienced returns of 0.36 percent, -6.37 percent, and -38.08 percent respectively, relative to the S&P 500 return of -1.34 percent for the period.

Despite the poor price performance of global equity markets, deal making activity has remained robust. M&A activity continues to be driven by the availability of low cost debt financing, attractive valuations, and industry consolidation plays.

Table 1 – Food and beverage price indices: One-year stock performance (September 2014 = Base)

Source: S&P Capital IQ.
Note: All indices are market weighted

Commodity prices

Commodity pricing fluctuations depend on supply and demand. Supply factors include subsidies, trade barriers, and weather, while demand is impacted by population growth, economic expansion, improved living standards, speculators, and the strength/weakness of the U.S. dollar. As shown in Table 2, Food and Beverage Commodity Pricing Indices trended upwards from 2009 to 2011. The Food and Beverage Indices stabilized before diverging from each other in 2014.

Interestingly, the one year and two year correlation coefficient (a statistical measurement that determines the degree to which two variables movements are associated) between the Food Price Index and the Fuel (Energy) Index is 71 percent and 91 percent, respectively. This implies that much of the movement in the price of food is explainable by the changes in the costs of fuel, which makes sense intuitively given that fuel/energy is a large input in food production.

Unlike the downward price pressure on the Food and Fuel Indices, the Beverage Index has remained in the same general range since the 3rd quarter of 2010. As detailed graphically in the table below, it appears that the Beverage Price Index and the Fuel (Energy) Index are not moving together, implying that the correlation is low or not present. This in turn implies that the harvesting of raw material for the beverage industry is less dependent on fuel cost than the raw materials of the food industry.

The one year and two year correlation coefficient between the Beverage Price Index and the U.S. import price of sugar is 77 percent and 85 percent, respectively. One possible explanation of this high degree of statistical significance could be that the raw goods that comprise the Beverage Price Index grow in the same geographic location as sugar and therefore would experience the same growing condition, affecting the overall supply of the raw materials. Another possible explanation of the statistical significance is that sugar is a complementary product of the goods that comprise the Beverage Price Index, and therefore the demand of both commodities would move in tandem (holding all other variables constant).

Table 2 – Commodity indices value trend (May 2005 = Base)

Source: International Monetary Fund
Commodity Food Price Index includes Cereal, Vegetable Oils, Meat, Seafood, Sugar, Bananas and Oranges Price Indices
Commodity Beverage Price Index includes Coffee, Tea and Cocoa Price Indices
Commodity Fuel (Energy) Index includes Crude Oil (Petroleum), Natural Gas and Coal Price Indices

Mergers and acquisition activity

As shown in Table 3, merger and acquisition activity during the first nine months of 2015 was weaker than the first nine months of 2014, as measured by the number of transactions announced, while the median reported transaction value increased significantly when comparing the two time periods. As detailed in Table 4 and Table 5 during the first nine months of 2015, the reported median EV/Revenue multiple was higher than the multiple for the same period of 2014, while the 2015 median EV/EBITDA multiple was lower than the 2014 median multiple.

Table 3 – US announced food and beverage M&A activity

Source: S&P Capital IQ and Baker Tilly research.
Note: Food and beverage data does not include food distributors or food retailers.
EV= Enterprise Value.
YTD= Year to date ended September 30, 2015.

Table 4 – Median TEV / revenue multiples

Source: S&P Capital IQ and Baker Tilly research.  
Note: Food and beverage data does not include food distributors or food retailers.
EV= Enterprise Value.
YTD= Year to date ended September 30, 2015.

Table 5 – TEV / EBITDA multiples

Source: S&P Capital IQ and Baker Tilly research.  
Note: Food and beverage data does not include food distributors or food retailers.
EV= Enterprise Value.
YTD= Year to date ended September 30, 2015.

Interesting food and beverage developments

On September 17, 2015, Anheuser-Busch InBev SA/NV (ENXTBR:ABI) made a proposal to acquire SABMiller (LSE:SAB). Although there are several hurdles that need to be cleared in order for the transaction to transpire, a deal of this magnitude would irrevocably change the business landscape of the beer brewing and distribution industries. We will continue to monitor the progress of this proposed transaction with an eye towards the impact that such a transaction would have on our clients.

Download the complete report including additional tables and charts >

For more information on this deal, or to learn how Baker Tilly Capital specialists can help, contact our team.

Baker Tilly Capital, LLC disclosure >
Baker Tilly Capital, LLC privacy policy >