Food 100: The shadow of private equity
Large scale investment by private equity firms has resulted in mergers that have changed the order of the top 100 ranking food and drink suppliers. With food and drink sales worth more than US$73 billion in 2005, Nestlé remains the global leader with PepsiCo retaining its second place. A takeover by Pernod Ricard of the UK´s Allied Breweries has moved Pernod Ricard up 29 places in the ranking. New entries towards the bottom of the list include Dairy Crest of the UK and US-based winemaker E & J Gallo.
Food Top 100 
Corporate developments in the global food and drink industry within the last year have been overshadowed by the growing influence of the private equity sector. With many of the leading groups selling off various parts of their business in a bid to become more profitable, private equity firms have in some instances acquired the divested units, thereby increasing their presence within the world food and drink industry. Private equity firms operate by using borrowed or client’s money to acquire businesses, after which they hope to turn them around.
In Europe, around €118 billion was spent on takeovers by private equity firms in 2006, up by more than 40 per cent compared with the previous year. During the first part of 2007, the US$45 billion acquisition of the Texan energy company TXU represented the largest takeover by a private equity firm in monetary terms. This trend has led to concern from trade unions that such takeovers very often lead to job losses on a large scale. In response, private equity firms have said that they often improve the performance of the businesses they acquire. However, the sector has recently agreed to form a voluntary code to improve disclosure.
As far as the food and drink industry is concerned, this trend has been most apparent in the acquisitions of the frozen foods business formerly owned by Unilever, as well as the recent deal involving United Biscuits. In the summer of 2006, Unilever ended months of speculation by selling off its frozen foods unit (which included the Birds Eye and Iglo brands) to private equity group Permira, in a deal worth over €1.72 billion. However, Unilever retained control over its business in Italy, which included the Findus brand.
A few months after the deal was completed, new owner Permira announced the closure of the fish processing site in Hull, blaming capacity in the supply chain. This has been a problem for a number of global food groups in recent years, some of which have closed down manufacturing operations and moved production elsewhere. In the case of Birds Eye, Permira is switching production to other sites in the UK and Germany, a move resulting in the loss of up to 500 jobs.
During the autumn of 2006, United Biscuits was acquired by private equity groups Blackstone and PAI Partners, in a deal worth around £1.6 billion. This followed on from the £575 million acquisition of the company’s Spanish and Portuguese operations by Kraft Foods, which had occurred a few months previously. This was followed in early 2007 with Blackstone’s acquisition of the US-based Pinnacle Foods for around US$1.3 billion. Pinnacle owns a number of leading US brands, such as Swanson frozen foods and Vlasic Pickles. It should also be noted that the UK grocery retailer, Sainsbury’s, has been mentioned as a possible takeover target by private equity groups (which have included Texas Pacific, CVC and Blackstone) in recent months.
More recently, Cadbury Schweppes has announced it is to split by divesting its American Beverages business. It remains a possibility that this unit may experience the same outcome as the company’s former European Beverages division, which was sold to a private equity buyer for around £1.2 billion during the early part of 2006. The Americas Beverages division has been valued at up to £7 billion, whilst some sources have been speculating that Cadbury’s remaining confectionery interests may represent an attractive takeover target in the future. The decision to sell Americas Beverages followed the acquisition of a stake in the company by the US businessman Nelson Peltz.
Moving up the ranks
Mergers and acquisitions remain a notable feature of the global food and drink industry. Although it does not yet feature on the top 100 ranking, one of the most active in recent years has been the UK-based Premier Foods. In recent years, the company’s strategy has centred on the purchase of iconic British brands, after which it has often extended them with new varieties or flavours. Premier’s largest acquisition in recent years was the £1.2 billion purchase of RHM, which occurred in the latter part of 2006. This created a new entity with annual revenue worth up to £2.6 billion, and therefore now represents one of the UK’s largest food manufacturers. The deal added brands such as Hovis bread, Bisto gravy and Mr Kipling cakes to Premier’s portfolio, which had already contained such icons as Ambrosia, Branston, Quorn and Bird’s.
Acquisition and divestment activity has played a prominent role in the top 100 ranking of the world’s leading suppliers of food and drink. One of the most significant movers was the French drinks group Pernod Ricard, which made a successful bid for the UK-based Allied Domecq in 2005. As a result of the deal, Pernod Ricard became the world’s second largest supplier of wine and spirits and moved up from 64th in the list to 35th, with a turnover worth more than €6 billion.
In the confectionery industry, Wrigley has advanced up the ranking. During the year ending December 2006, its turnover increased by almost 13 per cent, due in part to recent acquisition activity such as Joyco and the sugar confectionery business formerly owned by Kraft Foods. Elsewhere, the French company Lactalis has acquired Galbani, thereby consolidating its position as one of Europe’s leading dairy groups. As a result of the deal, the company’s turnover is projected to increase to around €7 billion, which would make Lactalis one of the top 30 food groups worldwide.
In the alcoholic drinks market, acquisition activity has continued as companies strive to gain a foothold in emerging markets. The Belgian brewer InBev has recently acquired Fujian Sedrin brewery Co. Ltd, in a move worth over €600 million. This has increased its presence in the south-eastern region of China, which has become one of the world’s most significant markets for beer in terms of growth. InBev now lies in 12th position on the ranking, having seen its revenues increase by more than 14 per cent within the last year.
Elsewhere, the Baltic Beverages Holding (BBH) joint venture owned by Carlsberg and Scottish & Newcastle has acquired a stake in Olivaria Brewery, which is based in Belarus. Within the last year, Carlsberg has also made major investments in the beer markets of both India and Vietnam. However, Scottish & Newcastle and Carlsberg still trail Heineken by some margin, with the Dutch brewer occupying 15th slot with annual sales worth more than US$14.84 billion.
Further down the list, the Dutch-based Vion Food Group (which was formerly known as Bestmeat) now ranks as one of Europe’s leading suppliers of meat-based products, with all its Dutch and German companies having combined into one entity. Vion now forms part of the Sovion Group, which also includes Sobel, a manufacturer of ingredients. The world’s leading supplier of meat-based products is Tyson Foods, which occupies seventh place in the ranking with annual sales worth almost US$26 billion.
Top and bottom
Nestlé remains the global leader, with food and drink sales worth more than US$73 billion in the year ending December 2005. This represents an increase of nearly seven per cent compared with the previous year. Within the last 12 months, Nestlé has also increased its revenues via acquisition activity, in particular within the health and wellness arena. In the middle of 2006, the company acquired Jenny Craig, a supplier of weight management products, for around US$600 million. This business was subsequently incorporated into its Nutrition, Health & Wellness division. Earlier in the year, Nestlé had also acquired the Australian-based Uncle Toby’s business, which now forms part of its Cereal Partners Worldwide (CPW) joint venture.
PepsiCo remains in second place in the ranking, although its sales have dipped by almost four per cent within the last year. In third position is Kraft, slightly ahead of Archer Daniels Midland (ADM). In spite of its recent divestment activity (the most recent example of which was the Cream of Wheat range of hot cereals, sold at the start of 2007), Kraft still appears keen to expand in selected channels, an example of which is the acquisition of the Iberian operations of United Biscuits, as a result of which it gained control of the Oreo and Ritz brands in Spain and Portugal.
Towards the bottom of the list, some of the more recent entrants include Dairy Crest of the UK, which acquired Express Dairies in the summer of 2006 and thereby became the leading deliverer of doorstep milk in England and Wales. With annual sales worth around US$2.7 billion, the US-based winemaker E & J Gallo has also entered the ranking, and now lies in 90th position. In contrast, the Dutch company Royal Wessanen (which experienced a 15 per cent decline in sales) and the Japanese firm Snow Brand Milk Products have slipped out of the top 100.
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