The same consumer and marketplace trends buffeting food and beverage manufacturers are challenging investors seeking to identify acquisition targets. A rapidly changing marketplace combined with high valuations created by competition between private equity, multinational and institutional investors is raising the stakes on conducting effective due diligence and executing a strategy once a deal is completed.
“The race to the acquisition finish line is getting faster,” said Jamil Satchu, partner and practice leader for growth consulting and strategic analytics for Information Resources, Inc. (I.R.I.), April 17 during an education session at the company’s annual Growth Summit. “People don’t want to miss out and valuations are going up on trends that are sustainable. We are seeing corporate development partners getting into uncharted territory and the imperative to de-risk is more important than ever.”
Much of the session discussion revolved around using data to not only identify pockets of growth in the market, but also assess the potential growth curve post-acquisition.
“A shift we have seen is prices have gone through the roof,” said Joe Lawler, a principal with Wind Point Partners, a private equity company based in Chicago. “Going after some of these brands is tough. It’s a big bet and you better be spot on or the investment will be more risky.”
Interest in smaller food and beverage companies has intensified during the past 10 years, because a lot of innovation in the category is coming from start-ups, said Adam Filkin, managing director of William Blair & Co., a privately held financial services company in Chicago.
“We have seen meaningful development in research contract firms that partner on innovation,” he said. “Many of these businesses are driving innovation and reducing barriers to entry. We are now seeing smaller brands emerge and get big quickly, more than we have seen in the past.”
Pockets of growth may come in many forms. An example discussed during the session was Hearthside Food Solutions, Downers Grove, Ill., which was acquired April 17 by an investment group led by Charlesbank Capital Partners and Partners Group.
“Hearthside was a business we bought in 2009,” Mr. Lawler said. “It had less than $200 million in sales and five facilities.
“The vision was to take advantage of the trend to outsource innovation; to outsource innovation to C.P.G. (consumer-packaged goods) brands. When we concluded, the company had made five acquisitions and had a billion dollars in sales.”
Mr. Filkin said an additional challenge for investors considering a start-up acquisition is expanding distribution and maintaining what he called a brand’s “hero” status.
“We’ve done a lot of work with this,” he said. “Brands that have success in wholesale e-commerce look a lot different than brands in traditional F.D.&M. When you have a business that is successful at e-tail and you bring it to the traditional channels, how do you preserve that status, that following? The opportunity is driving the brand to traditional retail, but also retaining the integrity of the product and not alienating that consumer base. That last part is hard.”