Dealmaking set for comeback in North America’s food industry

M&A is proving popular with companies looking to reinvigorate their portfolios and adapt to shifting consumer demands

The North American food sector is experiencing a period of transition. Large food producers benefited from the boost in demand seen during the pandemic, but this trend is starting to fade, leaving companies to deliberate over their next steps.

Dealmakers return to the table

Major global brands such as Kraft Heinz and Campbell’s have seen sales fall for at least the past six quarters, with post-pandemic demand waning and consumers reacting to higher prices by cutting back on non-staple foods.

These trends, along with moderating inflation, are driving global food players to look for new ways to secure growth.

M&A activity in the North American food sector was slow to build in the first half of 2023, with persistent, albeit slowly diminishing, inflation and macroeconomic uncertainty deterring dealmaking. A total of 97 consumer foods deals, valued at US$4.2 billion, were announced in H1—a 17.8 percent decrease in volume and a 48.5 percent drop in value compared to the same period in 2022.

Big brands diversify to stay relevant

The need to revamp portfolios to cater to shifting consumer demands nonetheless looks set to trigger a wave of M&A across the industry, with some big-ticket deals having come on the market in Q3. The largest deal of 2023 so far—J.M. Smucker’s pending US$5.6 billion acquisition of sweet snacks giant and Twinkie owner Hostess Brands, which was announced mid-September—is a prime example of the trend.

The second-largest deal of the year is another: Campbell Soup’s takeover of rival food manufacturer Sovos Brands. The deal, valued at approximately US$2.7 billion and announced in August, sees the iconic US company snap up Sovos’ best-selling soups and sauces brand Rao’s as it looks to add new concepts and flavor profiles to its product offering.

Campbell’s is one of many US food producers contending with slowing growth post-pandemic. Diversifying its portfolio with this acquisition will allow the brand to position itself for strong future growth.

Food producers and PE firms target health foods space

Mars’ purchase of Kevin’s Natural Foods, announced in early July, was another deal by a household brand using M&A as a tool to future-proof growth. The company paid US$800 million for the healthy ready-meal and sauce producer. 

The deal is another example of Mars pivoting from confectionery toward healthier food options. It follows the company’s purchase of healthy snacks brand Trü Frü last year and its 2020 acquisition of protein bar maker Kind, as it looks to take advantage of the “food as medicine” trend sweeping the US. 

The North American health and wellness food market looks set to grow further as consumers reassess their attitude to health and diet post-COVID-19. The trend was clearly in evidence last year, with private equity players eager to be involved as well. In June 2022, HighPost Capital, which focuses on the global consumer sector, led an US$85 million investment in high-protein, zero-sugar breakfast cereal company Magic Spoon. At the same time, three of Magic Spoon’s brands moved from being direct-to-consumer-only products to being available at retail giant Target.

Given the troubled macroeconomic climate, 2023 has not been as buoyant for PE, with many buyout firms unable to meet ambitious fundraising goals. But the health food and nutrition subsector has demonstrated more resilience than others.

For instance, in March 2023 PE firm Riveter Capital, which focuses on investments in women- and minority-led companies, acquired Texas-based Twelve Oaks Catering Company, which provides nutritious meals to schools in Dallas. This follows its 2021 acquisition of The Healthy Lunchbox, also based in Texas and serving healthy food to schools and daycares in the Houston area. Besides the growing interest in healthy foods generally, these deals also reflect increased government funding for education-linked programs such as these.

The long-term wellness trend will provide plenty of opportunities for food companies looking to realign their portfolios and safeguard future growth.

SPACs circle plant-based potential

Special purpose acquisition companies (SPACs)—vehicles designed to take companies public without going through the traditional IPO process—rose to prominence during the pandemic. While the global SPAC boom has largely faded, blank-check firms still target high-growth sectors.

A growing number of SPACs focused on the North American food sector, and on the US$200 billion plant-based market in particular, have sprung up in recent years. Investment in the subsector is being driven by multiple macroeconomic factors, including food insecurity, global supply-chain disruption, and sustainability concerns.

One such example is the merger of Bite Acquisition Corp, a New York-based SPAC, with plant-based food company Above Food in May. The deal, valued at US$319 million, is expected to close in H2 2023 and will take Above Food public on the New York Stock Exchange.

As the global IPO market slows on the back of macroeconomic challenges, SPACs still provide a valuable alternative route to public markets. In November last year, food-tech company Moolec Science listed on Nasdaq following a merger with blank-check company LightJump Acquisition Corp. The bid valued Moolec—the first molecular farming food-tech company to go public—at US$504 million, underscoring the investment potential of innovative and sustainable food solutions.

Investors wait in the wings 

A host of other US-listed SPACs are raising funds and waiting to seize the right opportunity. In November last year, the Natural Order Acquisition Corp raised an estimated US$230 million as it seeks out companies in the plant-based and alternative proteins space. The FAST Acquisition Corp, meanwhile, plans to raise up to US$200 million to combine with hospitality or restaurant businesses in North America. 

If the flurry of deals announced by big-name brands in Q3 is any indication, M&A in North America’s food sector is poised to increase even further in the near and medium term.

The need to diversify and maintain relevance is a key motivating factor for global players, while heightened demand for nutritious and plant-based foods is exciting investors. These factors, along with gradually improving macroeconomic conditions, all point to a healthier dealmaking outlook through the rest of 2023.

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