Hard Brexit threatens to bite food and drink sector investment

10 August 2017 Consultancy.uk

The food and beverage manufacturing sector remains a key aspect of the UK's manufacturing industry, generating around 16% of the sector's GVA. A new report highlights the continued M&A and PE interest in the sector, however the paper also raises concerns relating to Brexit, and its impact on labour and trade in the advent of a no-deal scenario.

The production of food and drink remains a key component of the UK’s wider manufacturing base. The sector remains an important part of the wider UK economy, and so to explore current challenges and outlooks faced by the industry, particularly in light of Brexit, Grant Thronton has released the ‘Food and beverage insights: Sector activity’ report. The document, which investigates M&A and private equity (PE) interest within the segment, is the result of industry analysis and interviews with industry leaders across Britain.

The food and beverage sector is still the largest in terms of GVA for the sector, at 16% of total UK manufacturing GVA, transport equipment comes second at 14%, followed by metals at 12%. The segment too has seen steady growth in recent years, up 27% in the decade prior to 2015. However, uncertainties surrounding the fine-print of the UK’s 2019 secession from the EU mean the industry could see those levels falter in the future.

M&A activity

M&A activity in the segment saw an upswing in the most recent quarter, up from 41 deals in Q1 to almost 57 in the second quarter. Deal activity in the most recent quarter was the fourth highest in the past four years, and well above the previous four quarters. The value of the deal stood at around £2 billion, up significantly on the £650 million worth of deals in Q1, although somewhat below the £2.5 billion on the final quarter of 2016. However, the high deal value in Q2 was in part the result of a mega deal, the sale of Weetabix to Post Holdings valued at £1.4 billion in Q2.

In the PE sector, the number of deals in the most recent quarter jumped from 7 to 16, although value remained relatively low at around £400 million. Private equity interest in the segment has picked up, the firm notes, with an increase in PE from overseas in the UK market. The firm notes increased activity from mid-market PE firm LDC in Q2, investing in savoury pastry product manufacturer Addo Group in a £100 million transaction, and backing the management buyout of Hill Biscuits. In addition, the firm writes, MML Capital supported investee company CH&CO in its bolt-on acquisition of upmarket caterer Harbour & Jones, and CapVest further bolstered Valeo Food Group by bringing Italian cake producer Dolciaria Val d’Enza SpA into the group.

The biggest deals in Q2 were the acquisition of Casamigos Tequila by Diageo, for £792 million, and the aforementioned sale of Weetabix for £1.4 billion. The former deal included

Biggest deals

Smaller deals include the sale of Manor Farm to Swedish meat producer Scandi Standard, for £60.8 million; the sale of Charles Wells, a brewer, to Marston’s, for £55 million, and the £213 million deal by US-based TSG Consumer Partners for a 22.3% stake in brewing industry heavyweight, BrewDog. Other delas involving international entry into UK-based companies include Charoen Pokphand Foods’ acquisition of Westbridge Food Group for a tidy £60 million.

In demand skills

One of the key challenges faced by the industry in the coming years will be the need for employees, many of whom previously stemmed from EU member states. Any restrictions to freedom of movement within the Eurozone resulting from Brexit could dramatically impact on this, and the issue remains one of the major talking points from businesses about the ongoing Brexit negotiations. The sector faces considerable uncertainties, with around 140,000 people needed by the sector by 2024, as an ageing population means between 10-20% of the current workforce are in fact due retire within the decade.

Overseas worker dependent

The research notes that around 40,000 people working in the sector – many of whom are from outside the UK – have no qualifications. The largest number of people from the EUAB plus, which includes Romania, Bulgaria, Cyprus, Malta & Croatia, have ‘other qualifications’, with the total number working in the sector with such qualifications, at around 100,000. Those with higher level qualifications, tend to be from the UK, while those with the equivalent of GCE and A-level and GCSE are also UK citizens.

Interestingly, the study found that many foreign workers, around 19% of total, have high-skill roles within the industry. The likely effect of Brexit, and an uncertain future for these groups, mean that the industry may find itself out of luck on both sides of the divide, while UK workers continue to see the sector in a negative light – offering low pay, for long hours in poor conditions. Finally, the firm notes that automoation is making itself felt in the sector – lowering the number of lower skilled labour required to meet production quotas.

UK trade

The firm also looked at the current import/export balance of the UK, in light of the effect of Brexit as well as wider concerns around supply. As it stands, around 50% of the food consumed in the UK is produced in the UK, while around 30% comes from the EU, with smaller shares of 4% from other key geographical regions. The UK has, in recent years, seen growth in its trade balance, becoming increasingly reliant on imports to meet key needs.

Trade deficit

The UK however, is also seen as a key go to for export for the global markets. EU food standards are some of the best in the world, with the perceived high quality of UK safety and quality throughout the manufacturing process and finished products, putting a premium on what the country produces for overseas markets. As such, around 2.2% of the global food export market flows from the UK. The effect of Brexit on British market share, remains unknown.

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