Key factors expected to attract future global investment 7 min read
2021 was a record-breaking year for M&A transactions in Australia across almost all markets, and despite major disruptions caused by the pandemic and international supply shortages, deals within the food and beverage sector remained plentiful.
With ESG front of mind, we take a deep dive into some of the M&A trends within the food and beverage sector and outline some key factors that we expect will attract global investment in the years to come.
Key takeaways
- 2021 was a record year for M&A deals in Australia and the food and beverage sector played a key role despite international disruption.
- A target's ESG-related risks, opportunities and practices continue to be a keen area of focus for potential bidders, especially within the food and beverage sector.
- Australian craft breweries and companies specialising in innovative agriculture continue to attract interest from foreign bidders.
Who in your organisation needs to know about this?
Legal counsel; strategic management
The 2021 M&A boom
2021 was a record-breaking year for M&A deals in Australia and that momentum certainly continued into 2022, including due to low funding costs, increased deal making demand after the pandemic and a strong economic rebound. Allens has been involved in some of Australia's largest and most complex M&A deals in the first half of 2022 – read more here. Whilst activity levels will likely moderate over the remainder of the year as the market adjusts to higher interest rates and global inflationary pressures, we expect the Australasian M&A market will continue to perform strongly relative to global markets.
The food and beverage sector was also in the crosshairs for M&A in 2021Headlined by the A$9.65 billion acquisition of ASX listed Coca-Cola Amatil (ASX:CCL) by Coca-Cola Europacific Partners creating the world's largest Coca-Cola bottler, the sector saw immense growth across a variety of industries. Despite Russia's invasion of Ukraine hindering global grain and agricultural markets, we expect investment within the food and beverage sector to continue due to several growth opportunities, including the introduction of new free trade agreements between Australia and various countries, government and regulatory interest and investment in the sector (for example, the new ASX agribusiness index) and further easing of global pandemic related travel and employment restrictions. |
ESG-related pressures impacting M&A deals
A target's environmental, social and governance (ESG) credentials continue to be an important consideration for M&A transactions around the globe, as investors gain a greater appreciation for how robust ESG practices can create and drive sustainable value. In 2021, it is reported that global M&A transactions involving sustainable companies more than tripled 2020 levels. Broad ESG themes relevant for companies include climate-related risks, transparency of supply chains and ethical sourcing, animal welfare, as well as broader issues including social inequality and biodiversity.
International and private capital investors in particular have quoted ESG as a major driver in food and beverage related M&A deals. Allens recently advised an Equilibrium Capital led consortium on their strategic investment in Perfection Fresh, one of Australia's largest privately owned fresh produce businesses. The consortium understood that as the impact of climate change strengthens, consumers are demanding that agriculture companies shift away from reliance on land-based industry, where produce is too heavily weather and season dependant. Perfection Fresh's intentions to grow its controlled environmental agriculture into Asia (which reportedly produces 70% of the world's total vegetable production) was an important consideration in the consortium's investment. With this new strategic partnership by its side, Perfection Fresh recently acquired sustainable banana business, Pacific Coast Produce Marketing, another ESG-conscious acquisition. Perfection Fresh CEO Michael Simonetta stated the acquisition was innovation driven and 'very much in line with [their] sustainability approach'.
ESG stakeholder activism is also impacting M&A deals within the sector. For example, when JBS Australia sought to acquire Australia's second largest salmon producer, Huon Aquaculture, by way of scheme of arrangement, Tattarang (which at that stage held an 18% interest in Huon) publicly stated that it would vote against the scheme unless JBS 'declare[d] its unequivocal commitment to animal welfare and environmental sustainability'. Given the voting thresholds required to approve a scheme of arrangement (which includes 75% of the votes cast), Tattarang's opposition to the scheme put pressure on JBS Australia to launch a parallel off market takeover bid with a 50.1% minimum acceptance condition, circumventing the need for Tattarang's approval of the transaction.
ESG considerations are also relevant to regulatory bodies when assessing the character of foreign bidders. In the above JBS/Huon deal, Tattarang publicly urged the Foreign Investment Review Board (FIRB) to closely examine JBS, citing bribery and corruption concerns and alleged animal mistreatment. The same issues were also relevant for FIRB when JBS recently acquired integrated pork producers Rivalea Holdings Pty Ltd and Oxdale Dairy Enterprise Pty Ltd. We are also aware that FIRB has imposed ESG-related compliance conditions on foreign bidders. However, such compliance conditions tend to be imposed on targets who have had incidents in the past, rather than pro-active conditions requiring wholesale changes to be made to an industry or asset.
It is expected that ESG will continue to drive and impact deals, including as investors become better equipped to benchmark ESG performance between companies worldwide.
What do innovative agriculture, plant-based food and craft beer have in common?
Whilst M&A deals continued to surge in various food and beverage industries including dairy, fresh produce and ready-made meals – there are three particular subsectors that have continued to attract local and foreign investment and we expect will continue to do so in years to come.
As a result of (among other things) supply shortages during the pandemic and ESG considerations, Australian food and beverage companies are increasingly turning to innovative operational and production processes. These innovative agriculture initiatives are catching the eye of investors. Key movements in this subsector include:
- Flavorite, the largest hydroponic grower of tomatoes in Victoria, merging with Murphy Fresh and Tatura Fresh in March 2021, who together are a leading tomato grower in Victoria operating a 15 hectare state-of-the-art hydroponic farm in Mansfield, Victoria;
- Costa Group acquiring leading fruit and vegetable wholesaler, Select Fresh, in June 2021, who specialise in the supply of fresh produce to Western Australia; and
- Sydney-based start-up, Vow Foods, raising US$6 million to expand its portfolio of cultured meats in January 2021. Vow Foods specialises in lab-grown meat from the cells eleven different animals.
With the introduction of the ASX agribusiness index in July 2022, increased consumer demand alongside supply difficulties exacerbated by Russia's invasion of Ukraine, it is expected the market will continue to see value in investing in innovative agriculture.
The last few years have also seen a consumer uptake in plant-based alternatives. For example, it is reported that in the last three years alone the number of vegan products listed on Woolworths' website has more than tripled. The rise in plant-based alternatives has not gone unnoticed by investors, leading to some major transactions in the last year, including:
- Pure Foods Tasmania acquiring both Lauds Plant Based Foods and plant-based ice cream business, The Cashew Creamery, in February 2021;
- Australian Plant Proteins, manufacturer of high protein plant-based powders from Australian grown legumes, receiving A$45.7 million from Bunge for a minority stake in its company in May 2021; and
- plant-based meat company, Fable Foods, who uses shitake mushroom stems as a base ingredient, raising A$6.5 million in seed funding from investors led by Blackbird Ventures in August 2021.
The Australian beer market has always been dominated by popular brands like VB, Carlton Draft and XXXX – but reportedly in the last decade alone the number of craft breweries has multiplied to almost 300 brands attracting plenty of local and foreign interest. It is reported that this year saw a 17.7% growth in total Australian craft beer revenue. Key deals in this subsector include:
- brewery investor, Fermentum, acquiring popular Melbourne-based brewery Two Birds in January 2021; and
- subsequently, big time beverage player, Lion, acquiring Fermentum in September 2021 in one of Australia's largest ever craft beer acquisitions, with industry experts estimating the deal was worth upwards of A$300 million.
Actions you can take now
For companies within the food and beverage sector
- We recommend ensuring your ESG practices are in line with stakeholder expectations and legal requirements. For example, ensuring your board oversees ESG-related matters, complying with ESG reporting requirements, putting in place appropriate training for employees, managing ESG risks within your supply chain, considering the ESG practices of business partners and contractual obligations that you may impose on those third parties, engaging clearly and often with stakeholders regarding ESG risks and opportunities and ensuring any public ESG claims are accurate and well-founded.
- Learn more about ESG strategies, establishing an appropriate ESG policy and how to embed ESG best practice into your business on the Allens ESG Hub.
For investors
- We recommend you undertake ESG-related due diligence on targets sitting within the food and beverage industry. For example, assessing the degree of alignment between the target and the bidder's ESG objectives, considering what value the target might bring to the bidder in terms of established ESG credentials and stakeholder sentiment towards the proposed target.
- In addition, undertaking due diligence regarding the target's climate-related risks, supply chains and ethical sourcing, animal rights risks, work health and safety risks and governance practices, as well as broader issues including social inequality and biodiversity.
- Learn more about ESG due diligence and things to consider with ESG-related investing on the Allens ESG Hub.
