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Food and Beverage Industry Outlook - H1 2024

Executive Summary

The food and beverage industry showed resilience despite economic challenges in 2022. Deal activity declined 17% year-over-year in the 12 months ending September 2023, with 283 deals announced compared to 322 in the prior period. Strategic acquisitions continued to dominate, representing 78% of deals. Privately owned buyers accounted for 84% of transactions.

We expect the following key trends to shape M&A activity and industry growth in H1 2024:

1. Continued focus on defensive categories like staples and affordable indulgences as consumers manage spend

2. Ongoing fragmentation in the alcoholic beverage segment driving deal activity

3. Private equity remaining active while strategic buyers turned cautious amidst uncertainty

4. Valuations stabilizing but unlikely to reach pandemic highs in the near term

5. Plant-based alternatives, functional ingredients, and sustainability as key investment themes

Defensive Food and Beverage Categories in Focus

The high inflationary environment will continue to put pressure on discretionary spending in 2024. As per Statista, US grocery food prices are projected to increase 9-10% in 2023. Food and beverage companies will double down on affordable indulgences and consumer staples.

Categories like confectionery, snacks, non-alcoholic beverages, dairy, bakery, and shelf-stable foods are expected to see steady consumer demand. Companies like Hostess Brands, Sovos Brands, and Sahale Snacks which play in these categories witnessed continued deal activity and corporate interest in H2 2023 despite the downturn.

Alcoholic Beverage Segment Consolidation

The alcoholic beverage segment saw over 75 deals in the 12 months ending September 2023. Established beverage corporations made notable moves - Anheuser Busch divested select craft beer assets to cannabis giant Tilray Brands, while The Boston Beer Company acquired Wachusett Brewing and Espolòn Tequila.

These deals exemplify the ongoing fragmentation and consolidation of the alcoholic beverage market. Craft beers, specialty spirits, and ready-to-drink products are high-growth areas attracting corporate and PE interest. Continued activity is expected as valuations get more reasonable.

Cautious Strategics, Active Private Equity

Strategic acquirers turned more risk-averse in evaluating M&A opportunities because of negative economic sentiments in H2 2022. On the flip side, private equity funds were flush with over $2 trillion in dry powder globally as per Bain & Co. PE firms remained active in consumable food sectors, with over 30% of food and beverage deals PE-backed.

Select transactions like JAB Holdings acquiring Krispy Kreme, Stellex Capital’s stake in Hostess Brands, and Rhône Group’s acquisition of Eat The Ball demonstrate private equity’s sustained appetite for the space. This dichotomy between corporate caution and private capital availability may lead to valuation gaps and more minority stake transactions.

Stabilizing Valuations, Gradual Recovery

Valuation multiples peaked in 2021, reaching over 15x EBITDA on average for food businesses as record capital availability chased growth. Multiples contracted through 2022 but remain elevated vs historical levels. The median LTM multiple was 12.8x as of September 2023 per Pitchbook.

Assuming stable interest rates and inflation improvement by end of 2023, lower cost of capital should gradually improve valuations. However overall valuation recovery to prior peaks is unlikely in the first half of 2024 given broader economic uncertainty. Downside protection on valuations will remain important for buyers.

Investment Themes: Plant-Based, Clean Labels, Sustainability

Despite some pullbacks in 2022, plant-based foods attracted $2.6B in capital per GFI, demonstrating continued enthusiasm for the category. Non-dairy milk brand NotCo secured $170 million in Series D funding in April 2022 amidst the funding slowdown. Plant-based brands position well with shifting consumer preferences.

“Clean label” products emphasizing short ingredients lists, ethical sourcing and sustainability also draw investor attention. Kraft Heinz’s acquisition of Just Spices in Q1 2023 and Mars Inc.’s acquisition of KIND Snacks in Q4 2022 reflect this interest.

Sustainability-marketed brands like Partake Foods and Misfit Foods also successfully closed new funding rounds in 2022, benefiting from the alignment with shifting consumer values. Interest should hold up despite rocky public market performance of disruptor brands like Oatly and Beyond Meat, especially for strategics playing the long game.

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