Food M&A Update – April 2024

Food M&A Market Remains Active, Buyers Focus on Product Volume Growth

Capstone’s latest Food M&A Update reports that the Food sector has showcased significant defensibility amid elevated inflation and interest rates, evidenced by healthy levels of merger and acquisition (M&A) activity through year-to-date (YTD). While heightened food inflation plagued consumers for much of 2023, the sector’s M&A market has persevered as participants’ raised prices in accordance with inflation. Food inflation is forecasted to moderately decelerate in 2024, with the consumer price index for all food products anticipated to increase 2.9% by year end, according to the U.S. Department of Agriculture. The expected price deceleration will likely prompt acquirers in the space to increasingly focus on target companies with product volume-driven earnings growth. The impacts of food price deceleration on company performance and M&A opportunities will heavily depend on the subsector. Notably, M&A activity in the Food Distribution space will likely trail other areas of the sector as distributors lose pricing power.

Public players in the sector have demonstrated significant margin strength, due in part by elevated food prices. As of February 29, average public company last twelve-month (LTM) EBITDA margins either increased or remained the same year-over-year (YOY) in nearly every area of the market barring Grocery Distribution and Protein Processing. Food input costs are also expected to decline throughout 2024, further bolstering public company margins and expanding available acquisition capital. As a result, strategic buyers have continued to control the Food M&A market. Strategics accounted for 65.8% of sector deals in 2023 and have comprised 51.2% of transactions YTD. Private equity firms remained on the sidelines for much of 2023 as an elevated interest rate environment hindered transaction financing. Despite this, financial acquirers have comprised nearly half (48.8%) of Food sector deals in YTD. While it may be too early to categorize this uptick as sponsors’ reentrance into the M&A market, certain pockets of the sector have undoubtedly garnered heightened buyer interest from sponsor-backed acquirers. Of note, private equity add-on engagements in the Branded Food subsector have risen 250% YOY in YTD 2024. Sponsors’ eventual return to the M&A market will likely be catalyzed by limited partner (LP) pressure to generate returns and the significant levels of dry powder left to deploy, totaling $1.5 trillion in 2023. In addition, the majority ($955.7 billion) of dry powder is held in U.S.-domiciled funds, providing a favorable outlook for stateside deals in 2024.

Also included in this report:

• How average sector purchase multiples have fared compared to the broader Consumer industry.
• Why private equity firms have increasingly targeted participants in the Branded Food subsector.
• How food disinflation has impacted M&A volume and buyer interest in the Food Distribution subsector.
• Why the Food Processing subsector has continued to lead sector M&A activity in terms of deal volume.

Capstone Partners’ Consumer Investment Banking Team provides M&A, capital formation, and financial advisory services to the owners of middle market businesses in the consumer and retail industries. Our team partners with leading mid-to-large sized Food businesses that serve growing end-markets. For more information on the Food M&A trends featured in this report or to speak with one of our Consumer Investment Banking Team members about how to grow, value, and/or sell your company, contact us today to start a conversation.