After very robust deal activity in 2021, the 2022 M&A market has generally seen significant declines in deal volume and deal value, largely because of macroeconomic headwinds. The food and beverage space, however, only saw a very slight dip in first quarter year-over-year activity, a trend Prairie Capital Advisors Managing Director Terrel Bressler expects will continue through the first half of the year, though won't equal the depth of the dip that the overall M&A market has experienced. That's in part because the sector is more recession proof than others.
"It's a very recession resistant and almost like a defensive industry to go into for deals," Bressler says. "If you're going to make acquisitions, it's probably not a bad space to do that today."
For the rest of this year and possibly into the first part of the next, Prairie Capital Advisors Vice President Dan DeLap says he expects to see both strategic companies, which are using strong balance sheets to acquire and grow, and private equity, which sees opportunity in the resilience of the sector, continue to buy food businesses.
However, there could be some choppiness created with the increasing buyer and seller expectation misalignment, which tends to happen more with smaller companies.
"Buyer expectations maybe adjust faster than sellers adjust, for obvious reasons," DeLap says. "It's just a confusing time because we're talking about volume and pricing and what's the new normal? You look at EBITDA for the LTM, and you've got the price and the volume all mixed in and what does that look like for the rest of the year? So, I guess I'm hedging a little bit, but we'll continue to see a relatively strong market compared to other sectors."
Bressler says it's important to note that in the food and beverage space, about 80 percent of the transactions are strategic acquisitions.
"It's very deep-pocket public companies, many public companies, and so therefore they're less affected by some of the issues that we're dealing with," Bressler says. "In fact, maybe through acquisitions they're fixing some of the problems they're having."
CEOs in this sector, then, should recognize that it's still a seller's market and, no matter what industry, there are too few deals for the number of buyers. So, there is built-in lift in the valuations just because of the laws of supply and demand.
The food space has had less decline in volume of transactions than the other spaces. So, there's still a tremendous demand for food companies and not enough supply. Transaction activity is likely to remain healthy because of the recession resistance and the greater demand of the buyers. Therefore, it benefits those who intend to be active in this space to be ready.
"In a market like today, with all the issues, it really pays to be ultra-prepared," Bressler says. "If somebody wants to sell their business, they really have to sit down with their advisers — legal, accounting, investment banking —and really get the story right because I think a properly told story today still will result in a very good outcome for the seller."
Bressler and DeLap spoke on the Smart Business Dealmakers Network's DealTalk program about how the deal market in the food and beverage sector is playing out this year, their expectations for the near-term, and factors that both buyers and sellers should consider ahead of a transaction. Hit play above to catch a clip from the conversation.