mergers alliance norgestion: "food ingredients m&a update. autumn 2013"

Food IngredientsM&A update

Autumn 2013

“The Food Ingredients Sectorconstitutes an ongoingsource of M&A opportunitiesas large European andAmerican consolidators arein search of niche playerswith strong innovationcapabilites but which lackthe financial resources togrow internationally.”Fernando Fernández de SantaellaPartner, NORGESTION

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The food ingredients sector is characterised by high R&D expenditure, strict regulation andsignificant growth potential. The health and wellbeing trend and consumer demand forconvenience foods are supporting increasing levels of mergers and acquisitions.

The key observations from our research:

Focus is shifting from sensory to functional ingredientsFood ingredients companies seeking to take advantage of increasingconsumer demand for healthier food and drink products is driving M&A.Developers of functional ingredients that have proven nutritional benefitsare attractive acquisition targets.

Innovative companies are being targetedLarge food ingredients companies will continue to target niche suppliersthat have a proven track record of innovation in order to expand theirproduct portfolios into high growth segments, such as specialty proteinsand probiotics.

Many sectors are fragmentedThere is high potential for consolidation in markets such as proteins,fibres, bakery and savoury ingredients. Health and nutrition is currentlyfragmented and highly attractive to investors, with Royal DSM makingacquisitions worth US$3.2 billion in the sector in the last three years.

High multiples are being paidAcquirers are willing to pay high multiples to access high growthsectors, established customer relationships and technological expertise.Acquisitions are a critical means of accessing certain markets due tostringent local regulation and the necessity for technical expertise.

High growth in functional ingredients is driving M&A

Food Ingredients M&A update

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High growth, high margin sectorHigh expenditure on R&D (typically3-8% of revenue), strict regulatoryrequirements and high growth underpinthe estimated US$30 billion foodingredients sector, see Figure 1. Witha range of end markets, including foodand drink processing, cosmetics andpharmaceuticals, the sector isattractive to a range of players.

Major players in the industry (enterprisevalue greater than US$1 billion) includespecialist ingredient and food producers,such as CSM and market leader KerryGroup, and many large corporates suchas Cargill and ADM which havebusinesses in the food, agricultural,cosmetic, fuel, pharmaceutical andindustrial chemicals sectors.

The remainder of the market is predominantlycomprised of smaller firms (enterprise valueless than US$200 million) with innovativeproduct portfolios. Niche suppliers such ascustomised ingredient blend producerFortitech, recently acquired by Royal DSM, areprime acquisition targets for the big players.

Prior to the global financial crisis, the foodingredients sector saw rapid consolidation,with an average of 40 M&A transactionsfrom 2000 to 2007. The focus subsequentlyshifted to organic growth, but since 2010the number and size of deals has continuedto rise as firms compete for higher marketshare, see Figure 2. Major consolidatorsinclude Kerry Group (over 70 deals since2000), Danisco (prior to its acquisition byDuPont), Royal DSM and Frutarom.

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Companies are usingM&A to increase

market share

Sensory 79% Functional 21%

Ingredients that extendshelf life or provide anadditional health benefit(e.g. by lowering cholesterolor increasing fibre levels)

Higher R&D levels andhigher margins

Highly skilled workforce,greater regulation and strictpatent protection

Innovative, niche suppliers

Health and nutrition claimsand the ability to formulateare important drivers

Omega 3 stands outas a high growth,attractive investmentwith projected annualgrowth of 12-15%

Ingredients that improveappearance, colour,flavour or texture

Lower added value,more widely availableand cheaper

Make up the majorityof product portfoliosof the large players

Developing a largeproduct catalogueand the ability toformulate are critical

High growthproducts areenzymes, hydrocolloidsand emulsifiers

Value: US$23.7 billion Value: US$6.3 billion

antioxidantsvitam

ins,

min

erals

,

preb

iotics

, pro

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omeg

afa

ttyac

ids,

plan

t ste

rols

&st

anols

, soy

apr

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s,

isofla

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s

16%

3%

preservatives

2%

bulk sweeteners

2%

enzymes

3%

proteinconcentrates & isolatesfat replacers

3%3%

colours

4%

intense sweeteners

5%

emulsifiers

6%

acid

ulan

ts

7%

flavo

uren

hanc

ers

hydrocolloids

flavours

21%

14%

11%

Figure 1: Food ingredient subsectors by market value share

Source: Rabobank, Mergers Alliance


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Fragmented sectorsupports consolidation

opportunities

Innovation and technology are driving high margins

Technology is the key differentiator of profitmargins between sectors and companies.The development of specialty ingredients(such as high intensity sweeteners withmargins of 8-15%) requires technicalexpertise and significant annual R&Dinvestment. Innovation is vital to the industry

as food processors look to reduce costs inthe face of rising raw materials prices andcheaper competition from Asian suppliers,as well as the fact that consumers aredemanding ever-more healthy, convenientand premium foods.

Consolidation of fragmented markets being driven by a number of factors

Long-term success in the food ingredientsmarket is contingent on constantinnovation, global presence, negotiatingpower and the development of substantialproduction capabilities. The absence ofmid-sized players in the industry thereforeprompts the numerous smaller companies toseek consolidation as they lack the financialresources and economies of scale necessaryto compete with the large corporates.

Smaller enterprises with innovativetechnology or technical expertise, but whichlack the financial resources required forcontinuous R&D investment, are primeacquisition targets.

Consolidation is also triggered by thenecessity for increased negotiation powerswith food producers and commoditysuppliers, or by M&A activity in the food andbeverage industry, as multinationals suchas Nestle and Kraft tend to switch supplycontracts in favour of suppliers withinternational production and supply chains.

Increasing consumer health awarenesshas stimulated growth in the functionalingredients sector, however the rising costsassociated with regulatory compliance(such as recent EU legislation requiringnutrition and health claims to be backed up

by scientific evidence) can be prohibitiveand is therefore bringing about furthermarket consolidation.

Market leader Givaudan holds a 25%share in the global flavours and fragrancessector. The enzymes, vitamins, mineralsand lactic acids segments are also highlyconsolidated. However, the health andnutrition, proteins, fibres, bakery andsavoury ingredients segments remainrelatively fragmented and are displayinghigh-growth potential.

Increasing consumer health awareness and changing lifestylessupporting demand for natural ingredients & nutraceuticals

High profile food scares, increasingretailer power and the need for consumerreassurance are together creatingsignificant opportunities for ingredientmanufacturers who can support clean labelclaims and the growing demand forenhanced natural products.

The market has seen a cut in syntheticingredients, wider use of botanicals, thereplacement of emulsifiers with enzymes andother texturisers and a decline in artificialsweeteners as consumers return to naturalsweeteners. As a result of these trends, thenatural food and drink ingredients market hasgrown 39% over five years to US$12.9 billion.

“Food ingredients manufacturersare at the cutting edge ofresearch and innovation. The EUmust adopt a holistic approachto the development andimplementation of regulationthat engages with the marketrealities of launching newspecialty food ingredients.”Maryse HervéSecretary General, ELC - Federation of European SpecialtyFood Ingredients Industries

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Range of strategicobjectives

supporting M&AFood ingredients companies are usingacquisitions to expand into newproduct categories and markets,strengthen capabilities in existingcategories, access technology andR&D, increase their negotiating powerwith customers and suppliers, accessthe distribution chain and add highermargin products to their portfolio.

Particularly attractive targets are nichespecialists in growth sectors, such asspecialty proteins and probiotics. These areoften SMEs, based in developed countries,with highly skilled staff and a proven trackrecord of innovation.

Broadening capabilities inexisting markets

In November 2012, Netherlands-basedRoyal DSM broadened its capabilities inthe human nutrition and health sectorwith the acquisition of custom foodingredient premixes and blendsbusiness Fortitech for US$634 million,in line with its strategy to become a fullsolutions provider in food ingredientsblends. The transaction will also expandRoyal DSM’s supply chain presence,create cost synergies and accelerateproduct development. This follows thepurchase of long-term US collaboratorMartek Biosciences for aroundUS$1 billion (8.5x EBITDA), whichdevelops nutritional products frommicrobial sources, and is their ninthacquisition in the nutrition sector sinceSeptember 2010, at a total value ofUS$3.2 billion.

Omega Protein, the nutritional ingredientcompany and US leader in Omega 3 fishoil production, acquired WisconsinSpecialty Protein, a producer of organiccow, hormone-free cow and goatwhey products, in February 2013 forUS$27 million (2.3x revenue). The dealallows Omega Protein to expand itspresence in the specialty protein sector,identifying whey protein as a highlysought-after and differentiatedingredient which complements theirexisting line of value-added ingredients.

FMC, the agricultural, industrial andconsumer chemicals producer, predictsrapid growth in the natural coloursmarket to over US$1 billion by 2015as a result of growing demand fromconsumers that favour naturalingredients from renewable andsustainable sources. It strengthenedits position in this sector with theacquisition of UK-based producerPhytone (and its natural colourformulation patent) in June 2013,following the purchase of Chilean firmSouth Pole Biogroup in 2011.

Accessing new marketsand product categories

In February 2012, US energy, grain andfood cooperative CHS completed theUS$133 million acquisition of Solbar, anIsrael-based manufacturer of functionalsoy proteins which supplies the food,beverage and pharmaceutical industries.The transaction will extend CHS’ productportfolio to include specialty soy proteinsand soy isoflavones.

Wild Flavors, a Swiss natural ingredientsproducer, acquired the Brazil-basedfood and beverage flavours, emulsionsand colours manufacturer AmazonFlavors in July 2013, marking the lateststep in the company’s global expansionstrategy. The rationale behind the dealwas to establish a local productioncentre to take advantage of Brazil’sposition as the third largest market in thebeverage sector. With a growing middleclass and increasing consumer demandfor new tastes and flavours, the marketstill has high growth potential.

Acquirers have different M&A objectives

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2008 2009 2010 2011 2012 Sep2013

No.o

fdea

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0

10

20

30

40

50

Figure 2: M&A activity

Source: Mergermarket, Mergers Alliance

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High multiples being paidAverage multiples paid (9.4x EBITDA in2012-13) are among the highest in thefood industry. Strict regulatoryobligations and a research intensiveenvironment create barriers to entrythat make acquisitions vital, withcompanies willing to pay high multiplesto access specific positioning in highgrowth sectors, technical expertise andstrong customer relationships.

An example of a high value deal wasRoyal DSM’s acquisition of OceanNutrition Canada, a manufacturer ofOmega 3 EPA/DHA ingredients, forUS$535 million (9.8x EBITDA). Thistransaction will enhance its productportfolio in the rapidly growing nutritionallipids division. The company has also

acquired the food enzymes and oilseedprocessing division of Verenium, aUS-based developer of highperformance enzymes, for US$37 million(4.9x revenue), which will strengthen itsfood enzymes innovation pipeline.

Puleva Biotech, the Spanish companydedicated to the research andcommercialisation of products based onnatural ingredients, acquired ExxentiaGrupo Fitoterapeutico SA, theSpain-based producer of plant extracts,for US$56 million (19.5x EBITDA). Thetransaction is in line with the company’sstrategy to gain market share in thebiotechnology food market and developnew dietetic, pharmaceutical andnutrition products.

Figure 3: Food ingredients supply chain

In line with its strategy to focus on specialtyingredients and expand its portfolio offibre and wellness products, in May2013 UK ingredient manufacturer Tate& Lyle acquired Biovelop International,the Sweden-based producer of oat betaglucan for use in the food, beverage,supplement, cosmetic and personalcare industries. Tate and Lyle will takecontrol of soluble fibre product PromOat,which is supported by strong scientifichealth claims and has European FoodSafety Authority (EFSA) approval forreducing cholesterol and post-prandialglycaemic response.

M&A volumes for functionalingredients will continue to grow

The shift of emphasis from sensory tofunctional ingredients in line with thehealth and wellbeing trend will continueto drive M&A volumes as large companiestarget innovative small players. An increasein the volume and value of deals will beconcentrated in developed countrieswhere there is a highly skilled workforce,regulation and strict patent protection,but will also be seen in emergingeconomies as consumers become morehealth conscious.

Source: Mergers Alliance

High qualitycompanies achievingattractive valuations

Suppliers Customers Final Consumer

Strong need forconsolidation to cope

with large internationalsuppliers and customers

Large international companiesseeking global suppliers

Few largeinternational

players

High pricefixing capacity

Lower pricepressure

Decreasingmarket

position

Larger poolof players

Naturalraw materials

Syntheticraw materials

Pharmaceuticals

Cosmetics

Food & beverages

Animal feed

Personal care

FoodIngredients

Smaller playersadding value throughconstant innovation

Increasinglystrong market

position

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PE is attracted tohigh margin, high

growth opportunities

CASE STUDY: Iberchem

1999 – 2000: Acquisition of Iberchem by Espiga Capitalfrom its three founding partners, with subsequentreinvestment by the management team and funding fromregional fund InverMurcia for a total value of €9 million.

2002: €1.5 million acquisition of a plant in Guangzhou(China) in line with Iberchem’s expansion strategy.

2005: Financing round of €1.5 million by Espiga Capitaland InverMurcia. The company invested in a newheadquarters in Murcia (Spain) with state-of-the-art R&Dfacilities and a fully automated fragrances production unit,and developed the Indonesian and Tunisian subsidiaries.

2007: Secondary management buy-out (SBO) by CapitalAlianza for €35 million with Espiga exiting with an IRR ofaround 20% and multiple greater than 3x. The company’sstrategic plan included further expansion in the Middle

Eastern and African markets and the opening of newsubsidiaries in India, Colombia and Mexico.

2013: SBO by Magnum Capital, which acquired a majoritystake for €80 million (8x EBITDA) with Capital Alianzaexiting with an IRR greater than28% and multiple of around 4x.Iberchem aims to extend itsinternational scope by enteringthe emerging markets and theUSA, opening new factories inColombia and Dubai andincreasing R&D capacity.

Iberchem is a Spanish manufacturer of flavours and fragrances which has used a series of fundingrounds and acquisitions from PE over 15 years to become a multi-national company and grow turnoverfrom €5.9 million to €57 million.

Ramón FernándezChief Executive Officer, Iberchem

Private equity (PE) is targeting foodingredients companies due to their highmargins and potential for growth, andcan offer financial support to organicgrowth and buy-and-build strategies.

AXA Private Equity bought Diana Group,a French natural sensory ingredientsproducer, for US$960 million to supportthe company’s growth throughacquisitions. Since then, Diana Grouphas made four acquisitions, includingUK-based Map Technologies and thevegetables, wine and vinegar extractsbusiness of Switzerland-based Givaudanin order to strengthen its position in thenatural flavours market.

USA-based Arlon Capital Partnersacquired a majority stake in WholesomeSweeteners, the US producer of naturaland unrefined sweeteners, forUS$178 million. The company has astrong track record of innovation and isthe leading organic sweetener supplierin North America. The deal will enableproduct portfolio expansion.

In 2011, European-based IK Investmentacquired Savena, a French manufacturerof aromatic, functional and dieteticingredients, for US$224 million with theintention of doubling its size over fiveyears through new product innovation.Savena subsequently merged with Belgianfood ingredients manufacturer Sfinc in atransaction that was backed by AXA PrivateEquity and IK Investment and will enablethe companies to enter the nutraceuticalsmarket and expand internationally.

Private Equity supports global expansion

“We are actively looking fortargets in the food ingredientssector; the investments requiredto develop these companiesare often not very high incomparison to the growthand cash generation potential.”Nicola ZambonPartner, Ergon Capital Advisors - Spain

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Figure 4: Selected recent M&A transactionsTarget Acquirer Deal Value

Date Target company Country Target activities Acquirer Country (US$m)

Jul-13 Amazon Flavors Brazil Flavours, emulsifiers and colours manufacturer Wild Flavors Switzerland nd

Jun-13 Phytone UK Natural colour ingredients producer FMC USA nd

May-13 Iberchem Spain Manufacturer of flavours and fragrances Magnum Capital Spain 104

May-13 Biovelop Sweden Oat beta glucan producer Tate & Lyle UK nd

Feb-13 Wisconsin Specialty Protein USA Producer of whey products Omega Protein USA 27

Nov-12 Fortitech USA Custom food ingredient premixes and blends producer Royal DSM Netherlands 634

Nov-12 Givaudan Switz. Wine and vinegar extracts business Diana Group France nd

May-12 Ocean Nutrition Canada Canada Omega 3 manufacturer Royal DSM Netherlands 535

Mar-12 Wholesome Sweeteners USA Natural and unrefined sweeteners producer Arlon Capital USA 178

Mar-12 Verenium USA Food enzymes and oilseed processing business Royal DSM Netherlands 37

Feb-12 Solbar Israel Functional soy proteins manufacturer CHS USA 133

Oct-11 South Pole Biogroup Chile Manufacturer of natural colours and functional ingredients FMC USA nd

Sep-11 Map Technologies UK Food flavours manufacturer Diana Group France nd

Jul-11 Savena France Aromatic, functional and dietetic ingredients producer IK Investment Europe 224

Source: Mergers AllianceFigures denote food ingredients revenue, except Frutarom which includes fragrances sales.

Source: Mergermarket, Mergers Alliance

Figure 5: Selected food ingredients companies worldwideAssociated British FoodsUS$1.8 billionFood ingredients, grocery, retail,sugar & agriculture2nd largest global player in yeast & bakeryingredients and operations in 5 other segments

FrutaromUS$598.1 millionFlavours & fine ingredientsNine acquisitions since 2011

Royal DSMUS$4.9 billionHealth, nutrition & materials productsNine acquisitions in health & nutrition sector since 2010

GivaudanUS$2.4 billionFlavours & fragrancesMarket leader with 25% share

NovozymesUS$509.9 millionEnzymes for a range of end marketsStrong scientific backing for enzymessuch as Acrylaway, which reduceshealth risks in foodKerry Group

US$5.5 billionFood & beverage ingredients & groceryOver 70 acquisitions since 2000

IngredionUS$3.8 billionIngredients for food & beverages,brewing, pharmaceuticals & industrialsCompanies of EV US$50 – 200 million areacquisition targets to broaden product range

NaturexUS$375.3 millionNatural ingredientsSeeking acquisitions to increaserevenue to $700 million by 2015

www.mergers-alliance.com

ContactsSpecialist advice on call…For information on food ingredients sector trends

Simon PeacockDirector, UK

Telephone: +44 115 957 8230Email: [email protected]

Jose MoranchelPartner, Mexico


Sujay KotakVice President, India

Telephone: + 91 226 634 6666Email: [email protected]

David WolfeSenior Partner, Russia


Mariusz PiskorskiVice President, Poland


Doug UsiferManaging Director, USA

Telephone: +1 (802) 658 7733Email: [email protected]

Uwe KrögerManaging Director, Germany


Eric KleinPartner, Canada

Telephone: +1 (416) 496 3075Email: [email protected]

Owen HultmanGeneral Manager, Japan


Leonardo AntunesManaging Director, Brazil


Fernando Fernández de SantaellaPartner, Spain


Jan Willem JonkmanPartner, Netherlands


Michel DegryckPartner, France


Massimiliano BrionPartner, Italy


With a food ingredients sector team, the Mergers Alliance partners are expertlyplaced to offer advice.

In particular, we offer:

Advice on structuring and completing deals in the food ingredients market

Identifying acquisition opportunities around the world

Information on sector trends and valuations

Access to corporate decision-makers and owners

Join in the mergers and acquisitions discussionM

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Hakan PerssonManaging Partner, Sweden

Telephone: +46 831 8050Email: [email protected]

mergers alliance norgestion: "food ingredients m&a update. autumn 2013"

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