The role of private equity
Private equity is set to add further seasoning to the food and drink sector in 2006.
Competition amongst retailers, led by the likes of Carrefour, Metro, Wal-Mart and Tesco, is so intense that manufacturers have no choice but to become ever more innovative and focused in their approach.
Companies that need to compete to prosper are looking for smart investment from private equity firms. In 2004, the value of private equity investments in European food and drink companies was more than €6.6bn, according to data from Initiative Europe. A survey by Mergermarket found that executives expecting to raise capital through private equity funding outnumber those expecting to raise money from public markets five to one, with 49% expecting to see more private equity activity, compared to just 7% who
expected to see less.
In Europe’s benign economy – in which interest rates and inflation are generally low – the emphasis on organic growth in business is huge, at a time when pressure on margins is high. Accessing the funds and expertise to support growth is the smart recipe for food and drink manufacturers, if they want to add value to their businesses.
Mutual attraction
Despite the widespread perception of food and drink as a mature industry, there are a number of reasons why private equity firms are attracted to the sector – and why private equity is a funding model that suits food and drink companies. First is the innovation imperative, with manufacturers and retailers seeking innovative products, from healthier and functional foods for the booming market for ready meals. Private equity investors are experts at matching innovative businesses with networks of suppliers, partners and customers, and this can create real value in the food and drink sector.
Second is the ongoing consolidation in the industry. This creates opportunities for firms to grow through buy-and-build strategies and for companies, supported by private equity capital, to pick up the unwanted – and often undervalued – assets being sold by the large, multinational producers.
Third is the evolution of continental Europe’s food market, which remains highly-fragmented. The take-up of convenience products, for example, is far below the levels seen in the UK or the US. Historically, the bulk of private equity investment in the food and drink sector has been in the UK. But now the centre of gravity is shifting to the continent. In 2000, 80% of the value of private equity deals in the sector was in the UK. In 2004, by contrast, 83% of deals were in continental European countries, according to Initiative Europe.
A perfect partnership
Frans Barèl, CEO of Netherlands-based private label drinks company Refresco, decided that private equity backing would help him grow his business: “We saw that a buy-and-build strategy was possible. We looked for a partner with a presence in all the countries we were looking to expand into that had great access to the financing world and a passion for food and the consumer business.” 3i was that partner. It has supported Refresco’s expansion into new markets, including Central and Eastern Europe (CEE) and contributed to flourishing sales figures – from €219m in 2000 to €650m in 2005. Sales are expected to top €1bn within the next few years. Innovation and flexibility are at the heart of Refresco’s strategy. “In 2005, following means you are already one day late,” says Barèl. “You don’t start your thinking from today’s position to the future, you define the future and think what you have to do to get there.” Agile and innovative Europe is home to a host of small and medium-sized companies that are becoming increasingly focused in their approach. The type of knowledge an investor such as 3i can bring to a company with growth ambitions is invaluable. Businesses like Senoble turn to private equity capital to fund ambitious growth strategies. The French dairy business was able to buy a state-of-the-art factory in Slovakia – a platform for growth in CEE
and a low-cost base to service the German market.
Being big will always have its advantages. “When you get pressure for cheap prices, there is inevitably consolidation,” says Daniel Bernard, president of Provestis and former president and CEO of Carrefour. “On the other hand, when you speak to more customers than before, new needs are identified. There is a lot of room for new companies.”
Agile and innovative
Europe is home to a host of small and medium-sized companies that are becoming increasingly focused in their approach. The type of knowledge an investor such as 3i can bring to a company with growth ambitions is invaluable.
Businesses like Senoble turn to private equity capital to fund ambitious growth strategies. The French dairy business was able to buy a state-of-the-art factory in Slovakia – a platform for growth in CEE and a low-cost base to service the German market.
Being big will always have its advantages. “When you get pressure for cheap prices, there is inevitably consolidation,” says Daniel Bernard, president of Provestis and former president and CEO of Carrefour. “On the other hand, when you speak to more customers than before, new needs are identified. There is a lot of room for new companies.”
Final thought
The food and drink industry is set for a period of dramatic transformation. While sub-sectors such as health and wellness are driving change in the Western economies, emerging markets are becoming the new battleground for the more established manufacturers and retailers. “Companies in this industry have a great opportunity to grow, but only those with energy, ambition and focus will build the strong international relationships that are necessary to succeed,” says Michael Queen, head of growth capital at 3i.
Private equity can help companies realise these ambitions – and few private equity firms within this sector rival 3i’s expertise.