Irish agriculture and food & beverage sector set for M&A uplift in 2018

Richard Duffy, Director at BDO Corporate Finance in Ireland and Head of the firm’s Agri-Food Advisory practice, reflects on the state of Ireland’s food & beverage sector and how it will impact merger & acquisition activity in the coming months. 

The agri-food and beverage sector is Ireland’s most important indigenous industry and has seen a surge in export growth in recent years. 2017 has been another mega year for food and drink exports which rose to a record $15.1 billion in value terms, a 13% increase from 2016 and the eighth year of consecutive growth. As expected, the dairy and meat sectors have been substantial contributors to the overall growth, but the scaling up and internationalisation of prepared/consumer foods and more recently drink companies is a significant development.

It is well known that Ireland is hugely dependant on the UK market for exports. The UK remains a key export destination and accounted for 35% of exports in 2017, which equates to nearly $5.4 billion in value. This is down from 43% in 2015 and 37% in 2016. Ireland’s unique reliance on the UK market is in marked contrast to fellow member states within the EU. In addition, some sectors such as Ireland’s beef industry exports in excess of 50% of its output to the UK and the potential introduction of tariffs and/or quotas when the UK separates from the EU could be devastating for the industry. 

However, improved market reach has been evident over the past 12 months or so, as a greater proportion of Ireland’s exports have gone to other European countries and international markets. The initial depreciation and ongoing volatility of sterling post the Brexit vote in June 2016 and an increasingly competitive UK market environment for Irish products has forced businesses to look beyond the UK. According to the latest Bord Bia export performance and prospectus report (an Irish state agency responsible for promoting sales of food internationally and in Ireland), Irish food and drink exports to the international market increased by 17%. This was driven by increased exports of dairy, prepared foods and drink to the United States, Middle East, Asia and Africa. The United States is now Ireland’s second largest export market with circa $1.2 billion in sales, followed by China. 

The Irish beverage industry continues to thrive, now exporting drinks to 139 markets. There has been growing international demand for premium Irish whiskey (on the back of the ongoing emergence of new distilleries), craft beer and other liquor products, particularly in North America and throughout Asia.

Agritech is another area which has shown potential through a number of emerging companies in this space. Finistere Ventures from the US and ISIF, an Irish sovereign development fund have partnered up, launching a $24 million investment fund to help agritech companies maximise their potential and exploit growth opportunities in international markets. 

Future prospects

There is no doubt that Brexit initially had a slowing effect on M&A transactions, as companies adopted a cautious “wait and see” approach to events. However, despite the ongoing Brexit cloud, the Irish agriculture and food & beverage sector experienced a significant uplift of M&A activity over the last 12 months, with a sizeable proportion of these deals being of the cross-border type.

This has been driven in part by the need for market consolidation in certain industries and by others seeking to diversify and develop an international footprint, looking for new customers and markets. Furthermore, there are more funding options available than any time in the recent past. There is a large pool of uninvested growth capital finance available from equity providers, both locally and internationally, to support ambitious Irish food companies that can demonstrate growth potential in global markets.

In terms of notable deals, there were a significant number of transactions in the protein processing sector. ABP, one of Europe’s leading privately owned beef processors, made acquisitions in Poland and the UK. Another major player in the Irish meat space, Dawn Meats, acquired Dunbia’s beef and lamb processing division in Ireland and entered into a strategic partnership with Dunbia to service the UK market as well. Capvest purchased a leading player in the pork sector, Karo Group, who have operations in Northern Ireland and the UK.

2017 also saw the sale of Irish-based chicken processors Moypark to Pilgrim Pride for $1 billion and Carton Group to Scandi Standard, a Swedish-listed business. There is no doubt that some of the aforementioned deals are seeking to mitigate in part, any post-Brexit impact.  

In the food service, prepared/consumer foods area, Mayfair Equity Partners in the UK acquired a majority stake in Promise Gluten Free, a bakery business based in Donegal, for a reported $120 million. At the back end of the year Musgrave, a leading retail/food distribution group, announced the acquisition of La Rousse Foods and Lily O’Brien’s, the Irish manufacturer of premium chocolate and desserts, agreed to be acquired by Colian Holding, listed on the Warsaw Stock Exchange. Kerry Group, Total Produce, Glanbia and Valeo Foods were all involved in a number of deals throughout the US, UK and Europe. 

The drinks industry saw significant investment by private equity and family office funds alike, along with international trade players. Renegade Waterford Distillery raised $24 million investment, Teelings Whiskey received investment from Bacardi and Spanish drinks group Hijos de Rivera acquired a minority stake in well-known Irish craft beer brand O’Hara, owned by Carlow Brewing company.

In 2018, M&A activity is expected to be buoyant again with a significant portion of cross-border deals. Despite the ongoing challenges faced by certain sub-sectors of the Irish food industry, there is a growing level of confidence amongst Irish companies to scale and diversify beyond the traditional UK market, which they are increasingly doing through M&A activity. Furthermore, Irish food and drink companies will continue to be attractive targets for both UK and international suitors as they seek to maintain free access to EU markets. There is no doubt the uncertainty of Brexit will disrupt M&A transactions. However, it will also create new opportunities for those seeking to adapt.