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Examining M&A Dynamics in the Food Sector

The divergence between global M&A deal value and volume in 2022 merits examination by private equity firms and other acquirers focused on the food sector. Deal value has declined 34% year-to-date, indicating pricing pressure. However, deal count remains near record levels, evidencing continued appetite for transactions.

This bifurcation appears primarily driven by two conflicting forces. First, heightened interest rates have constrained risk appetite and leverage capacity. However, corporates and financial sponsors retain historically high cash reserves and dry powder, estimated at $1.35 trillion for private equity alone as of mid-2022.

The resulting tension has manifested in consistent deal flow at reduced transaction sizes and purchase price multiples. Compared to 2021’s peak, EBITDA and revenue multiples have contracted 16% and 20%, respectively. This signals a buyer’s market, particularly in the private markets that comprise 90% of food sector M&A.

Astute financial sponsors may capitalize on these dynamics by maintaining valuation discipline and thoroughly vetting targets. Capitalizing on discounted quality assets while avoiding overpayment is critical. The acceleration of public market multiples in 2022 could foreshadow an M&A rebound should interest rates moderate in 2023. Still, private market prices have lagged public comps.

Additionally, financial sponsors should prepare for heightened competition from strategics, as corporates pursue consolidation amid discounted asset prices. High-growth subsectors like plant-based foods and functional ingredients may still command healthy premiums.

With M&A a key means of value creation, financial sponsors focused on the food industry must synthesize patience, diligence, and opportunism during the current period of bifurcation. Maintaining dry powder for compelling opportunities while avoiding reactive overpayment is prudent until macroeconomic headwinds abate further.

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