Signs of recovery in food and drink sector M&A following sharp downturn in 2009

This contrasts with 2007 when in a buoyant market there were 132 reported deals. Nevertheless, there are signs of a recovery in mergers and acquisitions and Grant Thornton are cautiously optimistic for 2010. Phil Jackson, head of food sector at Grant Thornton explained more: "M&A activity in the food and drink sector was extremely depressed in 2009 both in terms of volume and value. Compared to the buoyant market conditions in 2007, deal volumes were down by 47% and over half of the transactions completed related to acquisitions from insolvent companies or businesses in distress." Excluding the sale of alcohol brands Tennents Lager and Tia Maria for £180m and €125m respectively, there were no other reported deals in excess of £70m and in most cases values were not reported. Underlying a growing optimism, share prices for UK food companies have rallied through 2009 and on average have recovered half of their losses incurred since the end of 2007. "Many food businesses are reporting significantly improved profits in 2009 as the impact of food price inflation has reduced and the benefits of cost and efficiency savings have come through. The increase in share prices of the quoted companies reflects this," Jackson explained. "The recovery in profitability is bringing buyers back and encouraging potential sellers to test the market". The ongoing takeover battle for Cadbury and the anticipated sales of Gü and Kettle Chips reinforce this view. Another factor influencing privately owned businesses to consider selling is the concern that the rate of Capital Gains Tax might be aligned to income tax. Whilst valuation multiples will be lower than 2007, the prospect of returns being decimated by up to 50% tax instead of the current 18% is a major driver for a sale. "As M&A levels pick up, it is likely that consolidation in private label dominant categories such as bakery, fresh produce and dairy will predominate. Highly leveraged groups may also gauge that the timing is now right to sell some assets to reduce debt. In addition foreign buyers will be attracted by the relative weakness of sterling," Jackson concludes.