Undoubtedly, the global outbreak of the coronavirus has had a dramatic and negative impact on the daily lives of all people. COVID-19 has also had a significant effect M&A activity in the United States. Another outstanding year of M&A volume through February quickly deteriorated into an inefficient market with ever-changing conditions that caused a drop-off in deal activity. But in some sectors, such as packaged food and beverages, activity is rebounding.
However, even with the disruption from the pandemic, M&A and investing activity in the food and beverage industry experienced less of a decline than other industries. The reason for this is that as strategic buyers generated cash, private equity funds looked for safe categories, and venture capital investors distilled their target sub-categories.
Operators in the packaged food, beverage, and nutrition category have addressed new challenges in recent months, including issues such as maintaining their supply chains, making certain that their employees are healthy and safe, generating working capital, and securing adequate access to capital.
This confusion caused many business owners to accelerate their liquidity timelines and seek sale transactions this year. This option is available for businesses that sustained or expanded during the pandemic. many of these businesses sell mainly into the retail and direct-to-consumer channels.
Analysts believe that there will be additional deal flow from auction processes that were stalled or placed on hold in March due to coronavirus-related disruptions. Like other industries, many acquiring companies shifted their focus to managing their businesses. In addition, private equity funds prioritized supporting their portfolio companies, and lenders were more conservative. Analysts say that such pressures have abated will more distance way from the beginning of the pandemic, and the uncertainty surrounding its effects starts to diminish.
Normalized EBITDA, and any adjustments for the coronavirus that can be supported, should become a critical area of negotiation among buyers, sellers, and lenders. Strategic and financial buyers are apt to put higher valuations on businesses in categories that are expected to grow in the coming years. These include private label, center store staples, produce, and other healthy foods, immunity supplements, and plant-based products.
The foodservice channel has continued to contend with difficulties, as consumers continue to be hesitant to return to dining out as a whole. Recent increases in infection rates have stymied the recovery of most restaurant operators and foodservice suppliers. A recent survey by Acosta Inc. showed that 12% of consumers plan to dine in a restaurant immediately, and nearly 70% say they plan to wait a month or longer.
At the start of the pandemic, most lenders, landlords, and vendors to restaurant companies were helpful concerning restaurants’ inability to service their obligations. However, more than a few of these creditors have now not been paid in full for several months and are not willing to negotiate payment plans with restaurants. This could mean additional restaurant operators and foodservice suppliers considering bankruptcy in an effort to gain leverage in these negotiations.
A number of debtors will come out of bankruptcy with restructured obligations, but certain businesses will pursue sale transactions as part of their cases to provide creditors with maximum recovery. This situation may create acquisition opportunities for strategics and distressed financial buyers at appealing prices.
Small brands in the packaged food, beverage, and nutrition category have experienced issues in the pandemic. For example, several of these small brands struggled with delayed launches for new products, extensive supply chain disruptions, and challenges in supporting online sales. This resulted in companies needing a greater amount of capital to make up for lost sales and increased expenses.
On the bright side, many of these companies were able to leverage the Paycheck Protection Program and other temporary government assistance programs to stay afloat in the past several months.
But companies must repay some of these funds, and additional capital will be needed to fuel growth. Analysts say that these conditions could lead to the completion of a growing number of venture capital and growth equity rounds later in 2020. Investors have been closely watching changes in consumer behavior through the pandemic and adjusted their investment in several categories, including packaged food, online grocery, plant-based foods, novel ingredients, agriculture technology, and immunity supplements. Companies in these categories are likely to see healthy valuations.
Unlike the months before COVID-19 hit, investor diligence will have an increased emphasis on supply chain strength, direct-to-consumer presence or capabilities, sell-through data over the past few months, and profitability.
Analysts believe that corporate venture funds should be active players in investment rounds, especially for direct-to-consumer concepts, due to the cash they accumulated in the past few months.