Oghma Partners: UK M&A surge, post-Brexit investments and plant-based resurgence
26 Jan 2024 | Oghma Partners
M&A activity surged last year in the UK F&B sector, according to a report by Oghma Partners. Mark Lynch, partner at the corporate finance house, explores why deal activity doubled versus 2022 and provides an outlook for 2024. Lynch also discusses the level of oversees investments in post-Brexit Britain's F&B sector and why the plant-based space could rebound from a difficult period.
Hello everyone, my name is Josh Chapa, and I'm the editorial team leader at CNS Media, the publisher of Foodie Grins First.
I'm very pleased to be joined today by Mark Lynch, who is partner at Ogma Partners.
The Corporate Finance House has recently released a report highlighting that M&A activity in the UK food and beverage sector doubled last year versus 2022.
We've reported 116 deals recorded.
So Mark, what explains this surge in activity?
So, I, I think you have to look at things in context.
2022 was a very difficult year for the industry, and a lot of the reasons for that was the invasion of Ukraine and then the suddenly sudden spike in a whole series of costs.
And so that created.
Two things really are 22 factors which affected the 23.
1st of all, a massive dislocation in, in, cost base and therefore a, an unsighting as it were of what mirth the turnout for a lot of these businesses was, was going to be.
So it's very difficult to take a business to market if you're not sure what the profitability is.
As we entered the end of the year, and I think it's was clear.
Which companies have managed to get price increases through, basically sort of retain the strength of their business models.
And those businesses that were looking to go to market were then, were then in a better position to go to market in 23.
And equally, it was clear as we entered the year-end, which businesses were really struggling.
And unfortunately, we saw those struggles continue into 23, also exacerbated, I think, by a change in the funding environment.
So it's much more expensive to get funding as interest rates went up and investors were less willing to put money to work.
And so that, that sort of second group of companies struggled and we saw an increase in the number of businesses being bought out of administration, etc.
So the two factors I think really drove activity in 23.
Mm.
OK, and how do you expect M&A activity to develop this year in the F&B UK market?
Will the surge continue?
So, 116 deals, if you look at it in context, is actually pretty close to sort of a, a high, going back over sort of 15 years.
If you look at the deal value versus volume, we're still actually quite a low period and there was, there was an uptick, but we're sort of seeing about a couple of billion, pounds worth of value in terms of deals in 23, and, you know, maybe the average over time is sort of 55 billion or so.
So what I think is gonna happen with a more stable funding environment is, at larger transactions occurring, and I think that's, that's one of the factors is the funding environment.
I think the second factor is that there has been a reduction in multiples being paid for transactions, and that's partly reflective of what's happening in the stock market as.
And I think that sellers are going to.
Be more realistic in the prices that they're accepting for business disposals of these larger transactions, so I think value is gonna go up, I'm not necessarily sure that the volume will go up.
OK, so, so Mark, what were the most active categories for for M&A activity in the UK, in 2023?
So, the beverage sector was really active.
I think about 28% of transactions occurred in beverage, and that was across a whole sort of series of areas.
So, you know, the smaller breweries being bought out, distributor consolidation, wine businesses, as we've seen the sort of the emergence of the UK wine industry, some transactions there, so pretty active sector all round.
OK, and to what extent is this activity being driven by overseas buyers and.
Yeah, sorry, carry on, carry on, Mark.
Yeah, I beg your pardon.
Overseas buyers, historically have been, around about sort of 28% of transactions on average, and, and we classify overseas buyers as being both companies coming from overseas and subsidiaries of overseas companies based in the UK.
This year it is a bit lower, it's only sort of 3% of all transactions, which I think again really reflects the nature.
Of the transactions themselves, so quite a lot of smaller scale transactions, which wouldn't necessarily be the sorts of things that the, the overseas buyers would be interested in, they'd want some, typically I'd say they want more scale activities when they're looking to invest in the UK.
OK, and more generally, you know, to what extent have you noticed a decrease in investments from overseas buyers since Brexit went through?
Actually what we've noted in terms of, the percentage of transactions at least is, is an increase, in, in the level of activity compared to pre-Brexit, which might seem sort of counterintuitive.
And I think, I think the reason for that is, is the.
The want of onshoring, the want of sort of certainty when you've got, , you know, difficulties in terms of or potential difficulties in terms of importing into the UK, then having an onshore facility helps offset that, and we're seeing the opposite happen in Europe, a continental Europe by UK businesses.
Now of course the irony is that the restrictions to, import into UK have been deferred by.
UK government, I think on 5 occasions and are due to start being brought in at the end of this month.
So whether or not that increases onshoring activity, will be, will be interesting to see.
I think there's another factor.
And we've absolutely seen this in terms of anecdotal evidence.
Is it, we're post Brexit.
A number of companies, was, were, were put off the UK, right, because, you know, it's not a market which they saw was of, was of interest anymore because of all the uncertainty with Brexit.
And what I think is that now that we've had a, a more settled period and people realize that actually, you know, this is a, a market with a population of 70 million and things haven't.
Deteriorated as much as they feared perhaps, then I think we'll see another group of people who are saying, let's have a look again at the UK.
This is an important market for us as it was prior to Brexit, and I think we'll see an additional level of interest, picking up in due course.
Yeah, it's very interesting, interesting.
And, of course your report also suggests that the UK plant-based space had a particularly difficult year last year.
What are the reasons behind this, and is there a brighter future ahead for this space?
So, plant-based was a, was a really tough year, I think, and we've seen that with a number of high profile, businesses, , going to administration or going bust completely.
I think we had a number of factors, so.
Plant-based space really benefited during COVID, er, and I think the reasons for that was that COVID made people think a lot more about their health, and plant-based foods were seen er as healthy eating, opportunities.
And so post COVID, I think some of that.
Excitement and personal focus, let's call it this, that has, has diminished, and so I think that just overall demand for healthier based foods has, has, has, has gone off a bit, that's affected plant-based foods.
I think at the same time, there's been a concern around, the.
Ingredients within some of the products.
I think maybe the consumer is also looking at the price issue and these products quite often have been more highly priced than the non-plant alternatives and obviously that's in this current environment, that's a difficult place to be.
So a combination of those factors is reduced demand and at the same time you've had the cost pressures which you mentioned earlier, and that's created a bit of a perfect storm for the sector.
So, a lot of, or a number of casualties, some quite high profile.
Looking forward, I'm actually a bit more, optimistic.
So I think there are a number of things which are worth bearing in mind here.
Firstly, You know, the population is aging and people are more focused on their health.
I think that is a long term trend that, that, you know, apart from the ups and downs we saw through COVID, I think that will, that trend will continue, on an upward trajectory.
And I think secondly, plant-based foods are seen as better for the planet.
And, and unfortunately I think that that whole.
Issue about you know, the, the, the looking after the planet isn't gonna go away and I think those two factors will help drive the longer term trend.
At the same time, I think consolidation of the sector is probably good news because I think you'll get a clearer message from the surviving businesses.
I think they will, having a bigger share and hopefully will be more profitable, we'll be able to invest more behind the category and also we'll be more active in NPD and I think it's that.
Clear message to consumers, NPD activity, and category investment, along with the trends that we've talked about which will, Give the sector a more optimistic future going forward.
That's great, Mark, thanks so much for your time today.
OK, thanks a lot, Josh.
