0:00
Good morning everyone and welcome to today's webinar, which is on mergers and acquisitions in the food and drink industry Which is brought to you by our professional affiliate members Grant Thornton.
0:10
First of all, thank you to everyone for coming today We hope that you found the content useful There will be a Q &A at the end of the webinar So please put any questions that you have into the questions box and we'll go through as many as we can at the end of the Webinar.
0:22
We'll also be doing a few polls today So please do put your answers in when the polls pop up on the screen and we will be recording the session as well in the next few working days, you'll receive a full up email with a copy of the recording, the slides, and the contact details of today's presenters.
0:39
So, without any further ado, I'll hand you over to our host today, Doug. Thanks, Luke. Good morning, all.
0:47
Is it all right if we just jump on to the next slide, please? So, thanks for joining today. My name is Doug Bentley.
0:55
I'm a partner in Grant Thornton's consumer M &A team and really excited to be talking about activity in the market today.
1:02
I'll be joined by John, Martin and Matt, who are going to cover various different topics as we go through this, but I will kick things off talking about the M &A outlook and then some of the specific deals that we're seeing and themes in the market. Can we just dive on to the next slide, please?
1:20
So, that's a brief overview of the agenda.
1:23
Obviously, you've got me for about the first 20 minutes, and then, like I say, John, Martin and Matt are going to cover off the topics listed below. So if we kick off into M &A trends on the next slide.
1:37
So following a healthy Q1 in 2025 where M &A activity was driven by ongoing private equity investment and strategic acquisitions from trade buyers aiming to expand their brand portfolios and also strengthen their chain capabilities.
1:55
Deal numbers jumped by about 30 percent quarter-on-quarter into Q2 25, and that was to about 52 transactions.
2:02
And you can see on the chart there, disclosed values rose to about 2.5 billion over that period.
2:08
And this represents a 41 percent increase on the same period in 2024, when just 37 deals were completed.
2:16
So pretty positive momentum as we go into the second quarter.
2:21
Moreover, if we look to discount volumes in Q3 of 2024, which was boosted by owners rushing to get deals done before the anticipated rise in capital gains tax in the autumn budget, and perhaps more of a word on that later from Martin in terms of what's coming down the track, Q2 2025 actually represented the best quarter in M &A activity in the F &B sector since early 2021 and this bounce back in Q2 in our opinion is a combination of pent up demand in the market following the massive disruption caused by COVID and also the volatility caused by Russia's invasion of Ukraine along with ongoing optimization by the consumer packaged goods giants and we'll touch on some of those deals which have been announced shortly.
3:15
If we move now to specifically look at UK activity, Q1 in 2025 marked the strongest quarter for UK to UK domestic M &A since Grant Thornton started tracking activity in this way in early 2017.
3:34
And just note, in this context, I'm thinking about domestic deals referring specifically transactions between UK-based buyers and sellers, and whilst overseas deals include both inbound and outbound transactions, so international buyers acquiring in the UK and UK buyers acquiring businesses overseas.
3:55
This rise has been driven by private equity activity, with funds and family offices still having significant capital to deploy, and also private equity-backed trade transactions.
4:08
So in terms of private equity, sort of primary activity, two of the transactions came from Maven's Regional Fund, and also from the British Business Bank, as minority investments into Tibbetemper, and Wilson's Pet Food, and Yo Ventures, alongside Mercy and others, added to their portfolios with minority investments in Everyday Adventures and Natural Energy Snack Brand.
4:38
Puma Private Equity invested in healthier natural snacking brand Lovecorn, and UK soft drink company and CBD brand Tripp attract the investment from London-based Equity Studio.
4:49
So pretty positive picture in that market.
4:52
We just move on to the next slide, please.
4:55
I've just touched on the increasing activity and number of private equity-backed deals we've seen in 2025 to date, and there are a few factors that are driving this interest.
5:07
As we all know, the food sector in the UK is highly fragmented, both as a result of hangover from when food production was historically more localized, and also the continuous introduction of new and disrupting products and brands as consumer tastes change over time.
5:24
And this has resulted in both opportunity and incentive for investors to consolidate within the sector.
5:30
And as we all know, the more you consolidate, the more economies of scale you can generate, the higher margins you can generate, and the wider audience you can reach, well, in theory at least.
5:42
So in terms of PEPAC grade deals, we're also seeing, which we're seeing as a longer-term trend in this fragmented UK F &B sector.
5:49
Recent examples include Bramble Foods, which is a minority-backed business by Lloyds Development Capital, and they announced a second investment in January 25, acquiring UK-based Whittaker's Chocolates and the Complete Food Group, a PAI-partners-backed business, which acquired the real Yorkshire pudding company, the UK-based Frozen Foods Manufacturer, and that was a deal which completed in March 2025.
6:17
Equally, there is a lot of strong exit activity playing out across the sector, which is likely to catch the eye of private equity firms.
6:24
For example, 3i recently sold NPM, a market-leading premium cat food business, to Partners Group and reportedly made a 3.2 times money multiple return.
6:35
Strong returns like this give private equity investors confidence to enter and expand in the sector, especially as the NPM deal was briefly on hold during the introduction of US tariffs earlier in the year.
6:47
But when this settled down, confidence returned and the deal completed.
6:53
So if we now turn to market outlook in the next slide, the positive outlook which I'm describing is underpinned by activity across a variety of subsectors.
7:09
If we look at the sort of the first box on the left-hand side, while overall receipts from alcohol duty have remained relatively stagnant across the last three years in the UK, there are pockets of growth around innovative businesses and new products.
7:24
In Q1 of 2025, beers and ales accounted for about half of the alcoholic drinks deals that we saw, and that strong subsector activity continued in Q2 of 2025, with spirits also performing well.
7:36
Rutland Square, Neo Spirits, and Soho sent cocktails all offer ready to drink pre-mixed cocktails, and all three were either acquired or sold significant stakes to investors in Q2.
7:49
Moving next to the dairy sector, the trend for NaturalisBest seems to be back, with dairy being a key part of this.
7:57
For example, Muller has made two acquisitions since October 2024, firstly completing the acquisition of Utrea Dairy following a CMA investigation, and secondly acquiring functional gut health yoghurt brand, Biotable Gut Health, in a deal the grocer rumoured to be in excess of £100 million.
8:15
Yo Valley has also been active, and we'll have more on these transactions shortly.
8:21
The pet food sector continues to perform strongly, and as the sector continue to experience significant long-term tailwinds.
8:29
Pet ownership and increase in the quality of the pet food that owners are willing to buy and personalisation are all rising trends, giving the sector resilience to macroeconomic effects like the COVID-19 pandemic.
8:43
Other than the partner's acquisition of MPM, which saw the company benefited from these tailwinds, which I've already mentioned, there have been several recent transactions, such as cat food producer Untamed seeing continued investment from Red Rice and Five Season Ventures, and F &B Growth Specialist, and Pooch & Mutz acquisition Biome 9, a dog health diagnostics business.
9:08
This was Pooch and Mutt's first deal under the ownership of Vaffo Group and showcases the ongoing trend of personalisation in the pet food sector.
9:17
Finally, the UK is increasingly focused on health and wellness.
9:21
This is reflected in the rising demand for healthier food and beverages and specifically the popularity of functional foods.
9:29
Functional food and beverages are gaining traction in the UK, with consumers seeking products that support its health needs.
9:37
As a general rule, health trends, and specifically gut health, is leading this sort of functional focus.
9:43
And it's rumoured that a quarter of British consumers are now purchasing gut health or high-end fibre products.
9:49
So what is the outlook?
9:50
Some might say a cocktail for growth for the remainder of 2025.
9:54
Well, there are certainly positive momentum in the market, with M &A activity rallying back to levels not seen for a number of years and some landmark deals in the sector, and again more on this shortly.
10:06
We at Grant Thornton are cautiously optimistic about this sentiment and we believe it will continue as private equity and trade buyers continue to transact in a sector which has always provided very solid returns.
10:18
I guess with that, perhaps it'd be a good time to move to our first poll question.
10:25
And I guess we were keen to get sort of the audience's view on if they were more or less confident in the market than 12 months ago.
10:35
Just give that a few moments to come through.
10:53
It's just move my controller out of the way, but it's sort of a relatively equal split, isn't it?
11:02
I guess, you know, more confidence, 40%.
11:04
Perhaps some of that's coming through some of the deals that I've looked at. Less confident 25%.
11:08
I mean, there's certainly a number of sort of fundamental issues in the market around supply chain and cost inflation that I guess is driving some of that M &A activity, but I can see why that would mean that people sort of got more of a dim view. And I guess 35% with no change will get us a relatively equal split across that.
11:31
Okay.
11:33
I guess it's been interesting to move into buyer insights and private equity appetite as the next piece.
11:41
I guess I've already touched on M &A activity being driven by private equity activity, with funds and family offices still having significant levels of capital deployed.
11:52
We might hear people talking about dry powder in the market, and also private equity-backed deals.
11:58
In half one of 25, ongoing interest from private equity and their portfolio companies and strategic acquisitions demonstrate the strong brands and operational synergies of driving deals.
12:10
So in terms of operational synergies, and specifically supply chain pressures, the ongoing volatility in a number of key commodity prices has been a significant trend in the sector, and that's particularly since Russia's invasion of Ukraine.
12:24
The volatility increased strain on supply chains, with climate risk also a key factor for some of them.
12:30
For example, with coffee and cocoa.
12:33
And this pressure is driving M &A activity as companies seek to reduce their reliance on vulnerable ingredients and explore alternatives.
12:41
Indeed, by making acquisitions in the supply chain, companies have been able to better secure margins. One of the areas we've seen examples of this quarter is with egg production.
12:52
The global market has been disrupted by a variety of factors over the last five years or so, including avian influenza, rising chicken feed costs and incoming legislation from the European Parliament.
13:03
In Q2 this year, we saw Eurovo Group acquire a liquid egg white business and a number of other related businesses in Europe.
13:12
So continued focus on core operations, bolstering supply chain resilience and future proofing for a focus on health and wellness are likely to be priorities for the remainder of the year.
13:23
I've also touched on the sub-sectors driving growth such as alcoholic drinks and functional health.
13:30
However, for trade buyers there remains a laser focus on either diversification close to core trading activities where synergies can be exploited and profitability increased for M &A to take place.
13:44
For example, a significant non-deal development in this period in the sector was Diageo's decision to withdraw from Distill Ventures Accelerator program as part of the company's strategic shift to concentrate on core activities and drive long-term profitable growth.
14:01
Founded in 2013, Distill Ventures has supported several high-profile brands including Seedlip, Tibblesworth and Mr. Black and has invested over $235 million in more than 35 businesses.
14:13
So this move reflects F &B's prioritization of divestment from non-core assets to streamline operations and focus on profitability, as I mentioned earlier.
14:25
If we move to the next slide, please, I want to touch on the fact that there have been a number of strategic UK-centered trade deals so far this year, which has allowed acquirers to strengthen and diversify their brand portfolios and expand into new product categories and enhance their supply chain capabilities.
14:47
One of the most significant completions so far this year was Carlsberg's £3.3 billion acquisition of Britvik, which was originally announced in the summer of 2024 but closed in January 2025 following a CMA investigation.
15:01
The acquisition adds Britvik's extensive soft drinks portfolio on top of the previous acquisition of Marston Breweries to Carlsberg's existing UK operations, and this deal demonstrates a number of things.
15:14
The strategic importance of the UK F &B market now has, as one of Carlsberg's largest markets, the ongoing trend of consolidation in the sector to expand product ranges and generate economies of scale, and also Carlsberg's intention to offer alcohol alternatives.
15:32
Another significant transaction to follow is Bacover's Groups PLC's potential combination Greencore PLC.
15:40
Greencore is a supplier of white label ready meals to major supermarkets and announced its 1.2 billion recommended acquisition of Bacover in May 2025, which will create one of the UK's largest chilled manufacturers with estimated revenues of £4 billion and combining Greencore's food to go strengths with Bacover's ready meal and freshly prepared meals expertise.
16:05
Buckover shareholders overwhelmingly approved the deal in July 25, and the transaction is expected to complete in early 26, following regulatory and further shareholder approvals.
16:15
The deal itself is expected to generate operational efficiencies and enhance innovation capabilities, driving synergies across both the combined businesses with analysts' estimated potential energies in the region of 100 million pounds.
16:31
But turning next to dairy, in March of this year, the Gourmet Yoghurt producer, the Collective Dairy, was acquired by fellow dairy company, Yo Valley, for an undisclosed sum.
16:42
Yo Valley production is a longtime partner of the Collective, whilst also producing yogurt, ice cream, and soup for the Yo Valley organic brand across its five sites in Somerset and Devon.
16:54
The multi-award-winning collective UK business is well known for its gourmet live yogurts and specifically its fast-growing kids' range suckies and dairy-free yogurts.
17:05
The acquisition brings together the broad manufacturing capabilities of Yo Valley production and the innovative taste-led ranges for which the collective is renowned and will enable more opportunities for the collective to grow in the UK and that was actually a private equity exit.
17:22
Continuing on the theme of dairy, Muller's acquisition of Biotiful Guts Health, the market leading producer of career-based drinks and yogurts, is another example of a well-established large corporate acquiring a fast-growing and niche brand.
17:36
In 2024, Biotiful Guts Health was the fastest-growing brand in the dairy products sector in the UK, and has now worked its way to the top 10 British yoghurt manufacturers.
17:47
Biotiful will complement Muller's existing portfolio and will help to enhance its range of healthy and nutritional products.
17:54
And finally, a few weeks ago, Premier Foods continued to live up against its growth strategy of acquiring brands where it can add value and deliver further growth through the acquisition of Merchant Gourmet, a premium, healthy, convenient meals brand with market leading position in pulses and grains.
18:12
A strong track record of profitable sales growth, a broad customer base, was exceptionally strong rates of sale, and specifically repeat rates of sale, and an established track record of category expansion.
18:27
Premier announced that Merchant Gourmet is highly complementary to the existing Premier food portfolio and it expects to unlock significant value through leveraging its proven branded growth model.
18:39
All of these deals were supported by a variety of advisors across their transaction life cycles.
18:45
I'll now hand over to John, Martin and Matt who will talk us through some of the more practical guidance for businesses and shareholders considering a transaction. Thanks Doug, some great insights there, so thank you for that.
19:01
Good morning everyone and thanks for joining the webinar.
19:04
I'm John Throop, I'm a transaction Services Partner here at Grand Thornton and I specialise in financial due diligence with a focus on the food and drink space.
19:15
It's fantastic to see that there's deals of momentum in food and drink at the moment and that's something I'm certainly seeing from a due diligence perspective in terms of the number of proposals and mandates that we're working on and particularly that this number has ramped up over the course of this year which is great to see.
19:33
There's a couple of areas that I'm going to cover today.
19:37
Firstly, a high level overview of trends that I'm seeing in the due diligence space.
19:41
And then secondly, a slightly deeper drill down into the focus areas that you know, typically seeing in financial due diligence in the sector, you know, what are the key areas that buyers are really looking to validate and gain comfort over through due diligence.
19:58
So let's start by looking at some of the key trends we're seeing in due diligence in the food and drink sector.
20:04
So firstly, and I think Doug alluded to this a little bit in what he was talking about is, transactions are taking longer, despite the momentum and due diligence is taking longer.
20:14
And this is a consistent theme that we are seeing.
20:18
Whilst there is momentum, buyers are seeking more robust evidence for the sustainability of performance and the recovery from the headwinds and that the sector has experienced you know, through COVID and into the Ukraine crisis, etc.
20:32
As well as there also being an increased scrutiny of diligence findings by investment committees and banks, which is also leading to fuller scopes of work, particularly on sort of buy side due diligence and acquisitions.
20:47
One of the trends that's impacting overall timetable is a laser focus on current trading.
20:53
You know, buyers may request weekly evidence of performance of the deal completion with any blips in trading requiring explanation followed by further iterations of trading data, which all adds to the timetable.
21:07
As you'd expect, data analytics and AI is increasingly being used in due diligence.
21:15
The tools are being used to accelerate the process and to uncover insights in a way that presents the data to buyers in a more insightful way.
21:29
You know, food and drink is a data rich sector, you know, where dashboards allowing the drill down into revenue and margin by customer, category skew, et cetera, can be very valuable.
21:39
But this also raises expectations, you know, buyers are expected or expecting vendors to come prepared with a clean and structured data set, which lends itself to this type of analysis.
21:50
So as a result, we're seeing an increase in vendor assist, we're seeing an increase in exit readiness on transactions to help sellers get the business and the data ready for a sales process.
22:01
I'm also seeing a lot of processes where the EV is based on a run rate or pro forma EBITDA.
22:06
Vendors are wanting to capitalize on positive revenue, gross margin and profit momentum, which again is why current trading is a particular area of focus to really evidence that run rate.
22:20
Commercial and market due diligence of some form is on the majority of deals that seeing in the sector in particular any deal which has got a private equity element it is increasingly being performed early in its transaction process that's to validate the market fundamentals and opportunities but as well as validating the company's position and brand in the market to uncover any potential red flags before commissioning a wider sales process.
22:44
And finally ESG and regulatory due diligence is increasingly important and growing in the sector the due diligence is not just about ESG compliance and reporting, but it's also about buyers wanting to understand risks and opportunities, and the risks and opportunities that they may need to address post-transaction.
23:03
So as Doug said, you know, on the transactions he discussed, you know, we're seeing a complete suite of due diligence on many of these, which encompasses many of these areas. I could move to the next slide.
23:17
So I'm now going to pick up on the key focus areas we're seeing in diligence in the sector on on transactions.
23:24
And the first one which I've already I guess alluded to is this quality and integrity of data which is really important for good quality diligence. Transactions are increasingly data driven.
23:36
Buyers expect target visitors to have a clean and structured data set.
23:39
Poor quality data results in bottlenecks and delays in the diligence process.
23:44
And in particular buyers want transactional level data you know they want data cubes that set out detailed volume, sales price and gross margin information at customer level, at product category level, at a skew level, as well as dashboards and consistent KPI sets to allow for a deep dive into the underlying drivers of trading performance.
24:00
However, you know, what we see on diligence is this data is not always available in a format that reconciles to the underlying financial information or the management accounts.
24:09
You know, for example, in a data cube, credit notes, returns, volume troops and discounts may not be recorded in the data cube therefore there's differences between that set of information and the underlying financial accounts that needs to be reconciled.
24:22
And understanding and addressing any such data issues is important to maintain confidence in the financials and to maintain momentum in the process.
24:30
So again, as I said before, vendor assist and data analytics can help present this data in a usable format and can be valuable in a process.
24:38
Secondly, underlying profitability, obviously this is always an area focused in any diligence process.
24:44
But actually buyers are really drilling into underlying EBITDA in this sector.
24:48
You know, off the back of COVID, given recent supply chain volatility, staff costs increases, et cetera.
24:54
Buyers are looking for evidence that the actions taken by management to grow margin in EBITDA are sustainable.
24:59
They're skeptical of aggressive sell-side adjustments.
25:01
They want to see robust, supportable adjustments put forward by the vendors.
25:07
And you know, I'm seeing some quite aggressive adjustments at the moment in this space.
25:10
know, for example, we're seeing normalizations for production inefficiencies that have occurred due to supply chain disruption or labor shortages.
25:18
And you know, that those inefficiencies being recognized as fully one off.
25:23
And also, you know, we're seeing beyond the other side where there's been automation or production efficiencies, we're seeing the full benefits being recognized when these may not have fully bedded down or been fully realized.
25:36
And you know, in some of the sub sectors where we're seeing costs inflation start to in respect to ingredients or transportation import costs.
25:44
Vendors are capturing this as a normal go-forward level without but often on limited evidence.
25:49
So this is where we have drill down, do further work to get support for these adjustments.
25:55
And then also promotional spend, for example, in branded goods, we're seeing adjustments to our promotional spend where a benefit has not been fully realized or is expected to be realized in future years.
26:06
And similarly, our spend on new product development where the sales benefit is realised in future years or capturing the full year budgeted sales benefit to the sales uplift from MPD.
26:17
So we are seeing, you know, quite aggressive adjustments to really capture that run rate and that EBITDA, full value of that EBITDA growth.
26:26
And then revenue and gross margin.
26:28
So clearly understanding the drivers of revenue and gross margin is a key focus area, as well as analysis to support the sustainability of current revenue and margin performance and growth rates.
26:39
Key buyer questions that are being asked and need to be answered through due diligence include you know is the revenue growth driven by price or volume and we've seen companies in the sector where revenue growth has primarily been driven by inflationary price increases rather than volume which you know ask questions around this about the sustainability of a revenue growth you know what happens in a deflationary environment where costs may come down, will ultimately revenue also start to come down.
27:08
To what extent can businesses pass cost price increases through to their customers?
27:15
Are there contracted escalation clauses?
27:17
Or is there a track record of having achieved price increases from customers in the past?
27:22
And also to what extent are sales a margin driven by promotional activity?
27:25
And is the level of promotional activity sustainable?
27:29
We could just move to the next slide.
27:35
So supply chain risk, in diligence, buyers wanted to evidence that the supplier base is resilient or any risks in that supplier base, so therefore we're seeing deeper reviews and deeper dives looking at what are the key supplier dependencies and who owns those relationships, how has management responded to commodity and ingredient price volatility, and how has business been impacted by supply chain disruption and what actions did management take to mitigate this impact?
28:04
Evidencing that cost prices have stabilized or successful mitigating actions taken by management is a key question being asked by buyers in a diligence process.
28:17
In terms of net debt and working capital, determining the normal working capital cycle of business in the sector is not straightforward at the moment, especially in the light of inflation, cost pressures, supply disruption, they're all impacting the working capital profile.
28:33
And therefore, there's a real focus on analysis to understand what is truly one-off and non-recurring in a company's working capital profile.
28:40
Now, in particular, we're seeing adjustments to stock where a business may have stocked up historically to mitigate against cost increases or to mitigate against disruption.
28:50
And other risks around stock in food and drink businesses such as slow moving stock, promotional items packaging write-offs are being flagged more often and you know and also prevalent in the sector is seasonality and seasonality in working capital and you know that needs considering and diligence in terms of how the building working capital is managed and funded and that is getting closer attention in diligence processes at the moment and then finally capex so buyers want to investments in automation, diligence is looking at the level of expenditure, asset age, capacity and whether spend is for maintenance or growth and whether there is sufficient spend to support the future growth plans.
29:36
So that was a quick I guess overview of the main areas we're seeing focus on in financial due diligence.
29:42
I'm now going to hand over to Martin who will talk about trends we're seeing on taxing transactions.
29:50
It's John.
29:51
Good morning, everyone.
29:52
Nice to be with you.
29:53
So my name's Martin Burrell.
29:54
I'm a tax partner at Grant Thornton and I lead our sell side transactions tax practice.
29:59
So the team and I spend our entire time helping people go through exits.
30:04
So advising founders and management teams.
30:07
And the key goals are managing the risks around tax, getting to the best after tax proceeds we can get to and trying to keep that transaction timetable as short as possible.
30:20
And tax can be a real impact on a transaction timetable.
30:25
As John mentioned in the last part of the presentation, we're seeing buyers take longer to do their due diligence and they're taking less of a view on risks than they might have been a few years ago.
30:39
And it's more important than ever therefore to be exit ready, because, you know, buyers really are not wanting to take any risk around tax.
30:48
And they're also wanting to make sure that you know, any planning that you're doing is not affecting them in an adverse way.
30:55
And so, with that in mind, you know, one of the things that we spend a lot of our time with our clients with initially, is, is making sure they are tax exit ready.
31:06
And tax exit ready, I mean, based on the poll that Doug did earlier, a number of you are thinking about, you know, taking your business to market, maybe in the short medium term, you can't be too soon in getting tax exit ready.
31:22
That number, some of the things that are available to you in terms of planning and optimizing your tax position for a successful transaction, have a one maybe even a two year timeframe.
31:32
So the closer you get to a transaction, the less options you'll have available.
31:36
And so therefore, engaging early gives you the full suite of options and hopefully gets you to the best overall answer.
31:43
So we run tax exit readiness clinics and we typically cover the four areas on the slide in front of you and I'll just briefly talk to each of those sections but these are kind of the four pillars if you like of getting yourself ready for a successful transaction event.
32:00
So the first thing is linking back to John's last session, being due diligence ready.
32:08
And tax is an area where we do see potentially significant value lost by vendors on deals, because buyers will take a very pessimistic view to the prospects of historic risks and how they can be or might end up being rectified and played out with HMRC.
32:24
A 100 ,000 pound issue becomes a 200 ,000 pound issue by the time you've added on potential interest penalties defence costs.
32:33
In the worst case scenarios you're talking about purchase price deductions or even abortive processes where the number just simply gets too large and too difficult.
32:43
So what we would strongly recommend and we go through with our clients is a process of just lifting the bonnet, doing a health check, how is your compliance on kind of the key aspects of tax that are going to potentially be the areas of interest and the due diligence.
32:59
So not the 50, 100 pounds kind of problems, but what are those areas that can really be problematic on deals?
33:07
And it's often around off payroll workers, directors remuneration, share incentive schemes, and R &D tax relief.
33:17
Those are kind of the core, the big four topics that we end up debating on quite a lot of transactions at the moment.
33:23
The ones that buyers are particularly interested in and all relevant in sort of food and beverage space.
33:30
So definitely worth having that process sooner rather than later of going through and just checking how are we in terms of our risk on these areas?
33:41
Are there things that we can be doing to deal with, mitigate, rectify historic problems?
33:47
Are there areas where we could be doing better?
33:49
Are we, you know, R &D claims are a risk area, but also potentially an opportunity area?
33:52
Could we be improving the size of those claims and getting more cash back into our business?
33:59
The second area that we look at is equity structure.
34:03
And this might sound quite straightforward, but the vast majority of the transactions we work on, the equity structure doesn't entirely align with what people want key management founders, shareholders to be getting.
34:20
And it doesn't necessarily align with their contribution to the business and perhaps the ongoing business post transaction.
34:27
So it's definitely worth sitting back and having a think about your equity structure and asking two key questions.
34:33
The first is, does everyone hold the right amount of equity?
34:37
And the second is, do they hold the equity in the right way?
34:41
So for a founder, for example, you could hold all of your shares in your own name, you could have some of those shares in trust, perhaps for other family members thinking about passing that wealth on.
34:52
And you could have some of your shares potentially held via a company.
34:57
And you might want to consider that if you don't need all of the money from selling your business, because companies can generally sell tax free, if they structure shareholders correctly.
35:06
So that might be quite a nice way of, you know, reinvesting some of your sales proceeds, and doing something else with them, rather than having paid capital gains tax first before you can reinvest 76p in the pound versus a pound in the pound.
35:20
So, you know, that's kind of a key question.
35:22
And for management teams, you know, EMI is the gold standard when it comes to tax efficiency.
35:27
It allows key members of management to access capital gains tax rates on the disposal of shares, have to pay a very minimal amount to acquire those shares, generally speaking, and only have to pay for those shares out of their proceeds of sale because you generally exercise your options immediately before an exit event.
35:45
So instead of paying PAY and NIC up to 62.5% when you include the employers' aspects, you're talking about 14 or 24% capital gains tax rates.
35:57
And EMI options in particular do allow participants to access what was entrepreneur's relief, now business asset disposal relief.
36:05
And in the current tax year, that could save them up to £100 ,000.
36:08
It gets slightly less valuable going forward, but still makes EMI options very, very attractive.
36:17
The third area we look at is the transaction perimeter.
36:20
And what I mean by that is what you're proposing to sell to the buyer neatly packaged up in one structure.
36:28
Or do you need to put things back?
36:31
Do you separately own things that you need to be putting together to present?
36:34
or perhaps even there are things in your group that a buyer won't want and won't place value on and need to be split out from the group for a sales process.
36:45
And one of the common examples we have in private, privately held businesses is property.
36:51
So, you know, offices, factories, etc, that, you know, are used for the purposes of the business, but a buyer may not want those post transaction.
37:00
And so actually, you'd be better off carving those properties out into separate group which then rents those properties to the target group and negotiating a term of a lease as part of the transaction rather than trying to sell those properties as part of the transaction and not getting value for them.
37:16
So it's quite important to think about what the structure of what you're looking to sell should be, what that corporate structure is and opportunities to make sure that that is in the cleanest possible position because again to John's point you know the buyer is looking for a nice clean thing to acquire.
37:35
And if you've already split out aspects of it that are not within the perimeter of the transaction, they don't have to worry about that as part of their due diligence.
37:43
So you just save them the hassle.
37:46
And finally, on a more positive note, at the other end of the slide and spectrum to the sort of due diligence topics I mentioned are tax assets.
37:54
And what I mean by tax assets are areas where your business is effectively a recipient of a benefit from tax rather than paying it.
38:05
A really good example of this is, again, linked to EMI options, not only are they fantastically tax efficient for the participants, but the employing company can and often does receive a deduction for the cost of the shares that the employee acquires.
38:24
So that option gain that the employee makes.
38:26
So if I gave an For example, let's say your options exercise price that you give to your set to your employees is 100 ,000 pounds, and they end up exercising those options and acquiring shares worth 1.1 million pounds.
38:41
That billion pound option gain that they've made could, you know, in this potentially corporation tax deductible that's 250 ,000 pounds of corporation tax you might save.
38:52
As a result, there's being those options being exercised and that improves the balance sheet of your group, your company at the date you sell your business.
39:02
And so then there's a commercial negotiation to be had there with a buyer around whether they're paying for that benefit or not.
39:09
And we have some very good experience recently of success on on that front in terms of getting that priced into a deal.
39:19
So be your diligence ready, get your equity structure right, get your corporate structure right, and think about whether there's any assets that you should be pricing into a deal and presenting those to a buyer are kind of the key messages for a successful getting exit ready for a successful exit from a tax perspective.
39:37
I think I have another slide now, which is a poll slide to come on to and it's just interesting your thoughts from the changes from the last budget in terms of which of those changes has had the most impact on your business.
39:53
So I'll just give sort of 10, 15 seconds for everyone to make a selection there.
40:00
I appreciate it's probably one of those things of which is the least worst when it comes these changes, but we're very interested to hear your your views and thoughts as a sector.
40:24
Okay, I think we've got a result and the clear favourite there is the employee, the increases employer NIC.
40:33
National minimum wage coming second, business rates not so much for the participants on this webinar today.
40:40
So I mean, in terms of Doug mentioned earlier, sort of speculation around the impending autumn statement 26th of November.
40:47
I mean, I'm sure a lot are hearing the speculation in the press about what might change.
40:52
I mean, we don't have any more insider information than anyone else on this call. It's a difficult position to be in.
40:59
There's a lot of pressure on the public finances.
41:02
I think they're going to have to break some manifesto pledges, if I'm honest.
41:06
I don't think there's much to be gained in raiding capital gains tax for very more. It's not a particularly big tax yield.
41:12
I think they've already done what they're going to be able to do in raising the rate to 24%.
41:19
So yeah, I mean, I think just watch this space, unfortunately, but I think the news is, I don't think that that budget can avoid revenue raising measures.
41:30
I don't think it can all be down to cost savings.
41:34
And on that slightly pessimistic note, I should probably hand over to Matt to take us through the final section of the presentation before Q &A.
41:44
Thanks, Martin. Right, yeah, I'll try and be a little bit more upbeat from that.
41:49
Good morning, everybody. Matthew Woodgate.
41:52
I'm a partner in GT, and I lead our operational support around transactions.
41:57
So basically, my day job is helping clients to plan and execute integrations.
42:03
We also do a lot of work with clients who are divesting non-core assets and have to disentangle that from their business.
42:10
But generally, everything operational around the trade, so not finance and not tax.
42:16
So I think I'm just going to cover basically integrations, and I'm going to be fairly quick so we have time for Q &A also at the end as well, and I'm going to be a little bit of a grim reaper here and actually focus on the things that can go wrong, and this is based on experience of working in both the food and beverage sector, but also a wide range of other sectors as well.
42:36
All of those transactions that Doug outlines at the beginning were for one sole purpose and that was to create value in some shape or form, whether through product diversification such as the Carlsberg and Britvik or through market entry such as Muller and Biotiful or simply a transaction just to grow market share.
42:56
But all of them is about creating value and actually I guess there's going to be a level integration for every acquisition that you and others in the industry do and regardless of that I guess the degree of integration actually and the degree of change there are some fundamentals that need to be done properly to make sure that you do actually create value and you don't actually undermine the businesses at all.
43:21
So what are some of the things that can go wrong and this is in four categories which is kind of how we think about actually approaching an integration.
43:30
So firstly, in terms of the vision, so I think that an integration can mean different things to different people.
43:39
So what is really, really important is to be very clear as early as possible on actually what are you trying to achieve from the transaction?
43:49
What type of integration is it? Is it a takeover? Is it a best of both? Or is it slightly different?
43:56
And fundamentally, what are those goals?
43:58
What are you actually trying to achieve from the transaction?
44:03
And actually, if you don't set those goals up front, actually, how do you know if you've even been successful?
44:07
And we see that an awful lot, actually, with businesses where, quite frankly, they just don't know.
44:13
They don't know because they didn't actually define goals up front.
44:17
So setting a blueprint for the integration and starting to work on that due diligence is really important, and that can really be helpful to lay the foundations, to kind of outline broadly what would a combined business look like, how will it be managed, and what are some of those financial and non-financial targets you're going to set.
44:37
Getting key stakeholders aligned is critical, because I say everyone will have a different opinion, but I think early alignment of key stakeholders, so everyone's on the same page, really, really important. I guess probably just another point on the vision is around governance.
44:57
We see very often, particularly on when we're working for large corporates especially, where they have quite complex change management approaches and kind of programmes, they quite often just try to apply their standard way of managing a change programme to an integration In our experience, that does not work very well.
45:20
An integration needs to be far more nimble.
45:22
The decision-making generally needs to be really quite rapid.
45:26
I think if you try and just apply your standard way, your standard governance, your standard risk and control approach to an integration, it's going to be very tricky, and it probably won't be.
45:36
It won't probably have the pace of change that is needed to extract the value from the merger as quickly as you probably want.
45:46
Secondly, if you can just move on to the next one, thank you, people.
45:52
So, if there are no people aspects and no people impacts for a transaction or any type of change, actually it would be quite straightforward because, ironically, managing the people aspects, getting people on board is without doubt the hardest part of an integration.
46:09
Yes, there's lots of technical aspects to combining systems and supply chains, but that can all be worked it's the people aspects that typically make things a success or not.
46:20
So I think a couple of key call-outs, having senior leadership on board and actually really promoting and sponsoring consistently from the beginning, the benefits of the integration is really important, otherwise it's likely to fail.
46:35
Understanding the culture, the different cultures of the two businesses, again, can be really important, especially if there's an international element, if you're acquiring overseas.
46:45
I've seen deals derailed because actually the culture was so misaligned.
46:53
Actually, buyers at times actually have walked away because of such different practices and ways of doing things.
47:01
That's also really key.
47:02
I think fundamentally, just trying to be as open and honest to the employees who are impacted by the merger and being consistent with your communications and being as open as possible, also really, really, really critical.
47:19
Thirdly, so the next block is around the taking control and actually delivering the integration.
47:29
One really key thing is, that is not always the case, remarkably, but is to make sure that the people or certainly some of the individuals in your teams who are involved in due diligence to really understand the target business, they need to be involved in the merger planning to some degree, so there is a level of continuity.
47:49
We often see a due diligence team parachute in and literally as soon as due diligence is completed, then a whole new team comes in and starts doing integration planning.
47:59
That will just put you on your back foot very quickly and I think there's a major risk of misalignment as well in terms of the goals also.
48:07
So try and keep some of the key people from due diligence through to the integration planning work, both pre and post still really, really helps.
48:17
And also I think in terms of thinking about the people and your resources that you'll put onto the integration, they need to be ideally people that have actually been through that type of change event before.
48:27
If you're using lots of general project managers that have never done an integration, that definitely doesn't work very well, in my experience.
48:34
if there is no muscle memory in your business for having done past integrations, then get help, right?
48:41
No, get help from somebody that has got experience that can partner with you and complement your team.
48:48
And I think also a resource planning, I think is just to actually spend time up front and update it as you go quite regularly that the resource planning needs.
48:57
So really what resource is needed at what point?
49:01
And that should be a very dynamic piece of thinking which is repeated.
49:07
So you've got the right balance as the programme ebbs and flows quite often over many months or multiple years as well.
49:16
If the programme takes too long, if it's not managed quickly enough, it risks losing momentum. And again, we do see that quite a lot.
49:26
If decision is not getting made quickly, then you can lose momentum and lose value.
49:30
Final part, I guess to crux of this around capturing the value.
49:35
This is what it's all about really.
49:38
Regardless of the type of integration, there will be both revenue and there will be cost synergy considerations.
49:43
They should be assessed in as rigorously as you can given data limitations during due diligence and they should then be validated as soon as possible post-deal.
49:54
The whole value chain clearly should be considered and obviously this is, I won't teach you guys to suck heads because this is your business and your sector, you know very well, but I think as Doug alluded to that we know there are industry pressures, inflationary pressures, so from a cost perspective there's procurement strategies and efficiencies, supply chain and manufacturing and processing efficiencies, there's clearly support functions for the whole technology landscape.
50:19
There's a lot to go after, there's a lot to look at, you know, anything if think about the likes of some of the big mergers like Carlsberg, Rick, Ferreiro, Kellogg, they have significant tens or hundreds of millions of cost synergies.
50:35
But those companies should be very clear on what the value drivers are and they will focus the integration on those value drivers to deliver.
50:44
And obviously don't discount revenue synergies, which I know is harder, but those cross-signing opportunities can be really significant.
50:50
So, overall, the integration, it should generally be a catalyst for change, but I think, yeah, it's worth investing the time up front.
50:58
It's worth certainly doing that blueprinting work during due diligence and then soon after completion to get all the stakeholders on board, lay the foundations for more detailed planning.
51:10
And I think I will pause it there, given the time that we have.
51:16
I think at this point, we have a final poll question.
51:18
Okay, so this is a fairly simple one here. If you could just have a quick think.
51:23
And this is to get your outlook on whether you're likely to undertake a transaction in the next 12 months or not.
51:28
A very simple yes, no, or in the future, but not in the next 12 months, please.
51:41
Okay, a little bit of movement, but I think it's settling. I think it's settling down.
51:46
I think we should be able to show the poll, can we? Yeah, perfect. Great. Thank you. Okay, so okay, that looks reasonably positive.
51:54
So a majority, 46%, and then, yep, like to deal with in the next 12 months. So that's good.
51:59
I think hopefully that's positive for all of us and it will keep us all busy.
52:03
But clearly a little bit of uncertainty is there as well.
52:06
I think about a third of you, just over a third, actually probably not likely to be transacting in the next 12 months. Thank you.
52:15
I think at this stage we have Q &A for the time that's remaining.
52:19
I appreciate we don't a whole lot of time.
52:24
We'll look at, I think Doug actually is going to facilitate, so maybe, I think everyone, if some speakers can all come back on camera.
52:32
I think Doug was going to facilitate this and we'll see what questions have come in.
52:38
Thanks, Matt. And actually, I'll just say thanks to all the speakers.
52:41
I thought that was some really fascinating insights that were shared from very different viewpoints into sector, so I certainly enjoyed listening to you all.
52:50
I guess some of my takeaways were, you know, more, all pretty more positive at the moment than we were 12 months ago around the market, deals taking longer, John, planning is key, Martin, and we're thinking about, you know, carve out some future planning, make sure you think about your blueprint early and leadership alignment being key, so really interesting.
53:11
We haven't had too many questions come through, but a couple which did come through that really caught my eye, the first was around our views on sort of where are valuations and multiples, sort of how are they stacking up in the sector at the moment, and perhaps that's one for me to have a stab at first up.
53:32
And actually, some of the deals that I've sort of talked through, I think some of the valuations that we've seen have been pretty strong, actually, sort of the Brit bit, Carlsberg, back of our core transactions.
53:43
I gave the headline figure on the Muller biotech transaction and if you sort of look at Companies House and then work through the implied multiple it looks like kind of valuations are holding up pretty well actually.
53:59
I think with a slightly more uncertain tax regime I think there's probably more of a desire to want to transact which probably leads into some of the poll questions that you know the answers to the poll questions that we've seen as So, yeah, I guess that comes back to the point I raised at the start, you know, we've probably got cautious optimism around sort of, you know, the sector more broadly, but specifically M &A.
54:21
The second question which sort of came through that caught my eye was in relation to, you know, what if one was contemplating a transaction in the next 12 months?
54:32
And actually, you know, what should that as an individual be doing or that company be doing to kind of get ready and perhaps Martin you talked about sort of that from a tax perspective.
54:44
John, you know, what are your views on that from a diligence perspective?
54:47
How would you be wanting to get ready if you're contemplating a transaction? Yeah, thanks. Thanks, Doug.
54:53
Well, definitely, I think 12 months out is the right time to start planning, if not earlier.
54:58
I think from my perspective, you've got to put yourself in the mindset of, let's say it's a sell-side transaction, You've got to put yourself in the mindset of a buyer and look at what data is available in the business and is it available in a consistent format?
55:15
Do you have data available for the full kind of period that you expect somebody to do diligence on the business, typically three years, three years back and also forecasts?
55:27
And what are the key sales attributes and discuss this in conjunction with your sales advisors but what you know what the key sales attributes and what's the equity story of the business that you're looking to present and do you have the data to support that and I guess if not where are those gaps identifying the gaps and then working out whether you know that's something you can rectify in-house or whether you need third-party support be it some form of vendor assist or data analytics or modeling it might be that both are viable but if it's in-house you've got to also I guess trade that off against how much management time does that take away when you're trying to manage the business day-to-day so I think it's just looking at that suite of data and is it in a diligent support format and obviously there are people you know your sales advisors other people that can give you a give you a view on that.
56:20
Thanks John, we've had another question come in around EOTs and specifically, what is our view of companies selling to EOTs?
56:31
Do we have any successful sort of case studies that we can reference?
56:36
So I guess sort of I'll still have a stab at that.
56:39
I mean, I think they're a really good route to exit where you have employees within your business that you're really keen to incentivize and engage with.
56:48
I think they can work very well with that regard.
56:51
I can't think of any specific EOTs within the F &B sector off the top of my head.
56:55
I can think of some that have worked very, very well outside of the sector and consumer more broadly.
57:02
And a good example of that might have been Richer Sounds is one of the first that went into an EOT type structure.
57:09
So there are, I think, some interesting case studies, and there's obviously an element of tax efficiency which goes with them.
57:17
I think where we've seen them being less successful is where valuations have probably been too aggressive, and the debt structure or the funding structure going forwards hasn't quite mirrored the cash generation of the business.
57:36
Like all these things, I do think they need to be very carefully planned if you're considering it, and I think it needs to be thought about in the right way more broadly.
57:50
We've also got a question around, it's quite an interesting question, which sort of subsectors within the food and drink industry is providing the biggest opportunities and steadiness in terms of geopolitical events? So I don't know whether we've got any takers for that.
58:12
I've certainly got a couple of views.
58:16
I'll go first.
58:18
So, I mean, I think if you look at all of the transactions that I raised at the sort of start of the call, I don't think anything is completely isolated.
58:27
We live in a very connected world at the moment, and that could either be through how people are looking to take their brands beyond their domestic basis internationally, but also when think about supply chains and how raw materials, ingredients, etc.
58:44
are sourced from all over the world.
58:46
So I don't think that anything has complete resilience anymore, unfortunately, but where I do think that you're seeing the strongest element of success is where businesses have strong management teams, strong financial performance, as much supply chain resilience as I guess they can muster.
59:07
And also, you know, they're capitalizing on market sentiment within their niche and really sort of, you know, taking that forward.
59:16
And we already touched on the fact that the pet food and the pet sector more broadly continues to be highly resilient.
59:23
So I guess that would be my sort of take on it.
59:31
How are we doing for time, Luke?
59:33
I'm conscious that it looks like we've gone past 11 o 'clock.
59:37
Yeah, we can probably have time for one more question if you guys want to answer any more.
59:46
And then, I guess, the final question is, are we seeing an increase in a full suite of exit options, trade, PE, MVOs, EOTs, et cetera, and any deal types which we're seeing an uptick in and any which are less so?
1:00:05
Perhaps I can sort of start on that one, and then, John, I'd be interested in your views as well.
1:00:10
But I guess my view is that probably being less the EOT or MBO type transactions, and I guess they do have some similarities.
1:00:21
The two strongest ones that we're seeing with the types of transactions I was mentioning at the start, private equity is a really strong driver of activity in the sector more broadly.
1:00:32
And they really like, I guess, the resilience of it.
1:00:37
And then trade buyers certainly seem to be back and are a really driver of activity.
1:00:41
I talked about the uptick in strategic trade making acquisitions in the sector in Q2 and our view is that we expect to see that continue as we go into the remainder of the year and we also have some insights into the transactions that we're working on which would support that.
1:00:58
I'll back that up, typically on the trade side, I think where trade can have an advantage over PE years, you know, they understand the sector can get up to speed more quickly and sometimes might take a view on some of the diligence they're doing and have some of that in-house and, you know, I think that's right, we're seeing that, you know, particularly what I'm seeing is I'm seeing, you know, an increase in the number of trade deals and work we're doing for trade parties. Great, thanks John.
1:01:32
Cool, well thank you very much guys and for anyone whose questions you weren't able to answer, feel free to get in touch afterwards and I'm sure the team will be happy to answer your questions.
1:01:41
Thanks very much to Grant Thornton for putting together the webinar. I hope everybody found the content useful.
1:01:46
As mentioned at the start, we have been recording, so we'll be sending you a copy of the recording along with the slides and the contact details of the stage centres.
1:01:55
But yeah, unless there's anything else from you guys, we can wrap things up there.
1:02:00
Brilliant, thanks Luke.
1:02:02
Cool, thanks very much everybody.
1:02:04
Thanks Luke, thanks everybody.
1:02:05
All right, bye.
