When one thinks of merger and acquisition action in Canadian business, typically it’s the resource sectors, followed by financial services as the heavy hitters with the most going on, even in tough times. According to PricewaterhouseCoopers Canada, mining has become the No. 1 targeted sector in Ontario and British Columbia. But traditional hotbeds of resource activity such as Alberta are starting to see a shift in M&A activity. Where oil and gas deals once represented 80 per cent of the acquisitions in that province, they have declined to represent 50 per cent of the province’s takeover market. By comparison, a PwC report in October noted that M&A activity in Saskatchewan was 23-per-cent higher in 2011 than in 2010. It is home to uranium, potash, and farmland, which is considered to be among the least expensive in the developed world.
Expectations are that deals in the resource sector will continue to dominate the M&A landscape, but it should be no surprise that the food, beverage, and agri-business sector — a relatively unassuming but critical market to the world’s economy — has been evolving towards a global industry with huge potential for big business in the coming years, especially so in emerging markets as the world’s food supply becomes a larger focus. In developing markets such as China and India, population increases and rising incomes are the reasons for their ever-increasing number of consumers buying branded packaged foods.
Food has always been big business here at home. According to the Conference Board of Canada, the food sector represents more than nine per cent of the country’s gross domestic product and 13 per cent of all employment in Canada. It is also the second largest employer in the manufacturing sector.
While uncertainty coming from the European debt crisis remains the biggest potential damper on the year for M&A activity, the credit crisis has taught companies over the last few years to hang on to cash and, overall, heading into 2012 Canadian companies have stronger balance sheets than they did two years ago. All of which means they can afford to be opportunistic in their pursuits. Experts point to a lot of itchy fingers holding on to private equity cash waiting for the right deal. That is definitely the case in the food industry.
Law firms and other business service sectors have been watching the food industry closely for the last few years. Blake Cassels & Graydon LLP formed its food, beverage, and agri-business practice group in 2009 because it was “seeing a lot of deals getting done,” says Michael Stevenson, a partner in Blakes’ M&A and food, beverage, and agri-business practice groups.
Stevenson says most of the parties in the deals done prior to 2009 were represented by regional law firms and the potential for national and international opportunities was identified. “Obviously, food and agri-business is a large part of the Canadian economy. One of the things we have been looking at is that there were 36 deals done in this sector in Canada in 2009, which was a drop from a high of 56 in 2008, but it was up to 45 in 2010 so the numbers are climbing back up after the economic downturn”, says Stevenson. “As a firm we are seeing transactions in this space and we expect to see a lot more in 2012.”
David Woollcombe, a partner in the business law group with McCarthy Tétrault LLP, says the U.S. food market is ripe for consolidation and that could impact Canada positively. “The key thing in that business that may drive M&A is the world is getting smaller, with shrinking distance between producer and consumer — globalization and world population shifts — think of the food business as a long continuum starting with biotech, leading to seed production, leading to crop inputs and that’s where you see some activity in Canada in fertilizer in terms of potash,” explains Woollcombe.
What follows fertilizer is crop production with private farms, the big “protein producers” including pork and beef, and commodities handling companies. From there you get into food processing with companies such as Kraft, and then retail. “We’ve certainly seen M&A in the crop input sector, commodities handling, and in the food producers,” says Woollcombe.
Agrium Inc., a Calgary-based provider of agriculture products, is a company looking to be a global player and it has been seeking out global acquisitions, says Woollcombe. “Canadian companies like Agrium compete on a global basis. They have continued to extend their international reach with deals like the acquisition of the AWB (Australian Wheat Board) in Australia in late 2010. It’s hard not to feel good about a Canadian company whose mantra is feeding a growing world.”
The company is looking for places to manufacture and sell its product at the lowest cost. “Over the last five years North America has become extremely competitive, it has the best potash in Saskatchewan and cheap natural gas which is changing our dynamic. We see as much growth potential in North America as we do outside,” says Leslie O’Donoghue, executive vide president, operations at Agrium. “The world has changed for us on the manufacturing side in terms of where the next nitrogen or potash facility is going to be. We just announced a $1.5-billion project in Saskatchewan where we’re expanding our potash mine.”
Agrium began as a small nitrogen player and as it grew, it grew domestically and into the United States with some major acquisitions over the last few years on the retail side. “We still feel there is lots of room for growth in North America,” says O’Donoghue. “We’re in a fairly volatile time from a macroeconomic perspective with Europe, but when you really look at our industry and the population increasing while arable land is decreasing, we ultimately think that over the medium term there are lots of opportunities.”
Canadians have a huge advantage in this sector equipped with good governance and strong balance sheets, says O’Donoghue. She notes Agrium is looking abroad over the long term to Asia, Brazil, China, and Indonesia. They are selling some products in those countries through distributors, but it doesn’t have boots on the ground there yet. “If you’re not keeping pace with the growth that is happening outside of North America I think the fear is you’ll be left behind.” But going internationally demands a company look at the challenges of doing business abroad.
Agrium has expanded into Argentina, they also went into Egypt four years ago. “It’s not for the faint of heart but it gets us into Europe. We’re doing it in pieces in that we’re in Western Europe looking to get into central Europe and eastern Europe. We really feel with our Australian acquisition last year the next phase is really more expansion within that base and then you’re into the Asia-Pacific market.”
Woollcombe adds that Canadian food and agriculture companies are actually doing more business abroad than people may think. “In various industries you often hear that Canadian companies are getting gobbled up and not buying as much outside Canada to the same degree as non-Canadians are buying in Canada. I’m not sure that’s actually true. We see lots of Canadian companies looking to make acquisitions outside of Canada,” he says.
They may not grab huge headlines, but there are large food and agri-business acquisitions being made by Canadian companies. “There are things Canada is known for and it’s not just oil, gas, and mining — food would fall into that as well,” says Kristian Knibutat, Canadian deals leader with PricewaterhouseCoopers Canada in Toronto. “We’ve certainly seen some transactions in the food space that would fit into that category of areas Canada is known for.”
Knibutat has been following the sector for some time now and says there are good opportunities for Canadian companies to do business abroad in India and China, especially in the fundamental areas of assisting in the development of infrastructure for foreign markets, which could be opportunities for Canadian companies. “We believe Canada is well-developed in the agricultural space — it’s part of our heritage and what we’ve built our economy on, and food is becoming a critical issue particularly for emerging markets. It’s a good opportunity for Canadians to take the expertise we have in the agricultural sectors overseas and help those countries as they are developing their agricultural businesses,” he says. “When I was in India the key issue I saw that they have in the food sector is perishability. They have a lot of food supply but a lot of it rots before it gets to the markets it needs to be in.”
Foreign companies are also looking for opportunities to make acquisitions in Canada that will allow them to take something back to their own markets, whether that’s processes or good brands they can leverage.
But while some see Canada as a leader in food production and innovation, it also risks falling behind, according to experts who follow the sector. “I think there are terrific opportunities in the developing economies that we could be taking advantage of to get in early in the market development,” says Ken Smith, associate dean of executive programs and associate professor in the College of Management and Economics at the University of Guelph.
Smith spoke at a conference in Toronto last November called Growth in the Food Industry, hosted by Blakes. He pointed to countries such as India where distribution and logistics systems need to be developed. “We are a significant net seller of corporate assets and to me it’s a shame and a missed opportunity in this business. We have such fantastic resources to seize the opportunity and go to foreign enterprises and we’re not seeing Canadian companies take advantage of international acquisitions. It’s a trend I’d like to see reversed,” says Smith, noting that Wal-Mart is in India developing a retail business. “Given our experience with logistics over long distances and retailing it would seem there would be some opportunities for Canadian companies.”
Countries like China and India have seen a 10-per-cent increase in personal income over the last few years creating a growing desire for protein products. That demand should be fuelling Canadian investment in providing resources such as grain to fulfil those needs. “We have a high opportunity to grow the export market but we’re not doing a good job of this,” says Larry Martin, a senior research fellow with the George Morris Centre, Canada’s only independent agri-food think-tank. “What have we done to get access to the Asian market? Nothing. We don’t have access to markets where meat consumption is growing.”
In the last year, notable mergers and acquisitions in the food industry in Canada have included Canadian companies selling to foreign buyers. In December 2010, Liberté Inc. of Quebec was purchased by Paris-based Yoplait SAS, the second-largest brand of fresh dairy products in the world. Founded in 1936, Liberté offers more than 100 products, including various types of yogurt, kefir, cheese, sour cream, and tofu distributed in Canada and the northeastern United States. The company posted $175 million in sales in 2009, and had been owned by the U.S-based Swander Pace Capital private equity firm since 2003. “It ticked a lot of boxes that people were looking at in the categories of diet foods, natural foods,” says Valerie Scott, principal with Swander Pace Capital.
Knibutat disagrees that there are more acquisitions of Canadian companies happening than foreign buys being made. “There’s a notion of hollowing out whenever someone buys what is thought to be a gem, but when you consider that since 2008 the ratio of buy/sells into the U.S. has been in favour of Canadian companies buying more companies than U.S. companies have bought as it relates to volume and we’re also seeing the value of Canadian deals exceeding that of the U.S.,” he says.
Across the board, he says Canadian companies tend to acquire abroad more as opposed to other countries’ companies coming here to buy, and there have been a number of large transactions recently in the food industry to prove that. For example, in November 2011 Lunenburg, N.S.-based High Liner Foods Inc. bought Icelandic Group’s U.S. and Asian operations for US$230.6 million, making it the biggest supplier of frozen seafood to North American restaurants, hospitals, and schools. It is also acquiring a plant in China and companies that buy fish from other Asian countries. Another example is Montreal-based cheese manufacturer Saputo Inc., which also made a large acquisition in early 2011 of DCI Cheese Co. of Richfield, Wis. for US$270.5 million. Saputo sells cheese products to more than 40 countries around the world.
“We certainly have a small share of the overall capital global market but we have large pension funds looking to do more in the area of direct investing. They are starting to go abroad more and do more acquisitions and deals,” says Knibutat, who notes there are some large Canadian players such as McCain Foods Ltd., who are not just doing direct acquisitions either — one strategy is to follow the customer. “So for McCain — one of its big customers is McDonald’s for their french fries. They’ve been in places like Russia and China as their customers have gone into those emerging markets as well.”
Even during lean times, the food industry in Canada saw five-per-cent growth last year. Scott says over the last few years, she has seen a lot of resilience within Canadian companies even in periods of economic slowdown, but cracks are starting to appear in the sector. “The strength of the Canadian dollar is an important trend for buyers and producers in the industry. Commodity prices and how that affects the bounty and profitability of Canadian food companies is also becoming more of an issue than it has been in the past,” she says.
Looking back 10 years, says Scott, buyers were looking at Canadian companies as leaders of private label manufacturers, but what they’re looking at now is Canada as home to innovative manufacturers of premium products. “We’ve moved up the scale to more of a premium product and also seen a lot of strategic acquirers looking to buy companies that are leaders in niche markets.”
An example is Toronto-based artisan bread maker ACE Bakery, which was bought by Weston Foods (Canada) Inc., in November 2010 for $110 million. “These companies have all traded at a very high premium almost reflecting it will be the last time they will be sold because now they are in a big strategic company and no longer a smaller entrepreneurial company,” says Scott.
On the flipside, she says, there have been a number of companies over the last few years that were brought to market but not sold and are coming back again to the market. “In my mind these companies will be sold again because if they aren’t they will be viewed in the market that they are damaged goods and will put lower valuations on the industry.”
Despite the volatility in the equity markets, corporations are sitting on cash reserves looking to enhance their growth strategies, says Marco Galante, principal with the J.H. Chapman Group LLC, an investment bank in the food industry. Overall, he says M&A activity from 2010 to 2011 for Canada and the United States has increased appreciably since 2008. In 2008 and 2009, the number of transactions in the food sector in the U.S. dropped by 50 per cent. However, from 2009 to 2010 it increased by 36 per cent. In the Canadian market between 2008 and 2009 the market dropped by 36 per cent, yet from 2009 to 2010 and into 2011 the increase of activity has been as high as 25 per cent.
“The market is still fairly robust and there is cash at corporate levels and pent-up cash in the private equity area. The combination of that means there are acquirers looking at good opportunities both strategic and non-strategic. But equally, there are fewer sellers coming to market and part of the reason is the sellers are asking if it is the right time to sell today given the environment,” says Galante. While he says there was continued growth of M&A in 2011 in the food sector, one of the constraints is increasing commodity prices and the impact on gross margin and cash flow.
On the dollar side, Knibutat agrees a strong Canadian dollar does increase the costs of inputs, which can put downward pressure on profitability. “It really depends on the nature of the underlying business and where they are getting their inputs. The positive side of the Canadian dollar is it gives you more purchasing power and puts you in a fairly attractive position to be an acquirer,” says Knubitat, who adds that when the dollar goes above parity there is a strong correlation with deals that get done. “Canadian companies are doing a good job targeting, and when the dollar goes above parity it allows them to close the price gaps between buyer and seller, which allows them to close the deal.”
The Canadian Pension Plan Investment Board has also been building its interest in the food sector, demonstrating that it is seen as a strategic investment area, says Knibutat. The deregulation of the Canadian Wheat Board could also be a catalyst for deals, he adds.
The federal government has said it will move forward with a proposed deregulation of grain marketing in Canada. With a targeted implementation date of August 2012, the change would give western Canadian farmers the ability to sell their wheat and barley to whomever they choose. Currently, farmers are required to sell directly to the CWB, which, in turn, sells to the market. Last year, the CWB posted $5.1 billion in sales.
At the end of the day, all M&A activity in 2012 will ultimately depend on how buyers and sellers view the overall health of the market. “The fundamentals are there to do deals, but the risk is that the global economy is still uncertain enough and negative views are still being expressed by the central banks and various governments that it will have a depressive impact on activity for a little while. We need some more clarity and stability but the food sector will continue to be one that is interesting and attractive overall,” Knibutat says. “It will come, but right now I think it will be far more opportunistic a play for people because of the other macro factors impacting things.”
Expectations are that deals in the resource sector will continue to dominate the M&A landscape, but it should be no surprise that the food, beverage, and agri-business sector — a relatively unassuming but critical market to the world’s economy — has been evolving towards a global industry with huge potential for big business in the coming years, especially so in emerging markets as the world’s food supply becomes a larger focus. In developing markets such as China and India, population increases and rising incomes are the reasons for their ever-increasing number of consumers buying branded packaged foods.
Food has always been big business here at home. According to the Conference Board of Canada, the food sector represents more than nine per cent of the country’s gross domestic product and 13 per cent of all employment in Canada. It is also the second largest employer in the manufacturing sector.
While uncertainty coming from the European debt crisis remains the biggest potential damper on the year for M&A activity, the credit crisis has taught companies over the last few years to hang on to cash and, overall, heading into 2012 Canadian companies have stronger balance sheets than they did two years ago. All of which means they can afford to be opportunistic in their pursuits. Experts point to a lot of itchy fingers holding on to private equity cash waiting for the right deal. That is definitely the case in the food industry.
Law firms and other business service sectors have been watching the food industry closely for the last few years. Blake Cassels & Graydon LLP formed its food, beverage, and agri-business practice group in 2009 because it was “seeing a lot of deals getting done,” says Michael Stevenson, a partner in Blakes’ M&A and food, beverage, and agri-business practice groups.
Stevenson says most of the parties in the deals done prior to 2009 were represented by regional law firms and the potential for national and international opportunities was identified. “Obviously, food and agri-business is a large part of the Canadian economy. One of the things we have been looking at is that there were 36 deals done in this sector in Canada in 2009, which was a drop from a high of 56 in 2008, but it was up to 45 in 2010 so the numbers are climbing back up after the economic downturn”, says Stevenson. “As a firm we are seeing transactions in this space and we expect to see a lot more in 2012.”
David Woollcombe, a partner in the business law group with McCarthy Tétrault LLP, says the U.S. food market is ripe for consolidation and that could impact Canada positively. “The key thing in that business that may drive M&A is the world is getting smaller, with shrinking distance between producer and consumer — globalization and world population shifts — think of the food business as a long continuum starting with biotech, leading to seed production, leading to crop inputs and that’s where you see some activity in Canada in fertilizer in terms of potash,” explains Woollcombe.
What follows fertilizer is crop production with private farms, the big “protein producers” including pork and beef, and commodities handling companies. From there you get into food processing with companies such as Kraft, and then retail. “We’ve certainly seen M&A in the crop input sector, commodities handling, and in the food producers,” says Woollcombe.
Agrium Inc., a Calgary-based provider of agriculture products, is a company looking to be a global player and it has been seeking out global acquisitions, says Woollcombe. “Canadian companies like Agrium compete on a global basis. They have continued to extend their international reach with deals like the acquisition of the AWB (Australian Wheat Board) in Australia in late 2010. It’s hard not to feel good about a Canadian company whose mantra is feeding a growing world.”
The company is looking for places to manufacture and sell its product at the lowest cost. “Over the last five years North America has become extremely competitive, it has the best potash in Saskatchewan and cheap natural gas which is changing our dynamic. We see as much growth potential in North America as we do outside,” says Leslie O’Donoghue, executive vide president, operations at Agrium. “The world has changed for us on the manufacturing side in terms of where the next nitrogen or potash facility is going to be. We just announced a $1.5-billion project in Saskatchewan where we’re expanding our potash mine.”
Agrium began as a small nitrogen player and as it grew, it grew domestically and into the United States with some major acquisitions over the last few years on the retail side. “We still feel there is lots of room for growth in North America,” says O’Donoghue. “We’re in a fairly volatile time from a macroeconomic perspective with Europe, but when you really look at our industry and the population increasing while arable land is decreasing, we ultimately think that over the medium term there are lots of opportunities.”
Canadians have a huge advantage in this sector equipped with good governance and strong balance sheets, says O’Donoghue. She notes Agrium is looking abroad over the long term to Asia, Brazil, China, and Indonesia. They are selling some products in those countries through distributors, but it doesn’t have boots on the ground there yet. “If you’re not keeping pace with the growth that is happening outside of North America I think the fear is you’ll be left behind.” But going internationally demands a company look at the challenges of doing business abroad.
Agrium has expanded into Argentina, they also went into Egypt four years ago. “It’s not for the faint of heart but it gets us into Europe. We’re doing it in pieces in that we’re in Western Europe looking to get into central Europe and eastern Europe. We really feel with our Australian acquisition last year the next phase is really more expansion within that base and then you’re into the Asia-Pacific market.”
Woollcombe adds that Canadian food and agriculture companies are actually doing more business abroad than people may think. “In various industries you often hear that Canadian companies are getting gobbled up and not buying as much outside Canada to the same degree as non-Canadians are buying in Canada. I’m not sure that’s actually true. We see lots of Canadian companies looking to make acquisitions outside of Canada,” he says.
They may not grab huge headlines, but there are large food and agri-business acquisitions being made by Canadian companies. “There are things Canada is known for and it’s not just oil, gas, and mining — food would fall into that as well,” says Kristian Knibutat, Canadian deals leader with PricewaterhouseCoopers Canada in Toronto. “We’ve certainly seen some transactions in the food space that would fit into that category of areas Canada is known for.”
Knibutat has been following the sector for some time now and says there are good opportunities for Canadian companies to do business abroad in India and China, especially in the fundamental areas of assisting in the development of infrastructure for foreign markets, which could be opportunities for Canadian companies. “We believe Canada is well-developed in the agricultural space — it’s part of our heritage and what we’ve built our economy on, and food is becoming a critical issue particularly for emerging markets. It’s a good opportunity for Canadians to take the expertise we have in the agricultural sectors overseas and help those countries as they are developing their agricultural businesses,” he says. “When I was in India the key issue I saw that they have in the food sector is perishability. They have a lot of food supply but a lot of it rots before it gets to the markets it needs to be in.”
Foreign companies are also looking for opportunities to make acquisitions in Canada that will allow them to take something back to their own markets, whether that’s processes or good brands they can leverage.
But while some see Canada as a leader in food production and innovation, it also risks falling behind, according to experts who follow the sector. “I think there are terrific opportunities in the developing economies that we could be taking advantage of to get in early in the market development,” says Ken Smith, associate dean of executive programs and associate professor in the College of Management and Economics at the University of Guelph.
Smith spoke at a conference in Toronto last November called Growth in the Food Industry, hosted by Blakes. He pointed to countries such as India where distribution and logistics systems need to be developed. “We are a significant net seller of corporate assets and to me it’s a shame and a missed opportunity in this business. We have such fantastic resources to seize the opportunity and go to foreign enterprises and we’re not seeing Canadian companies take advantage of international acquisitions. It’s a trend I’d like to see reversed,” says Smith, noting that Wal-Mart is in India developing a retail business. “Given our experience with logistics over long distances and retailing it would seem there would be some opportunities for Canadian companies.”
Countries like China and India have seen a 10-per-cent increase in personal income over the last few years creating a growing desire for protein products. That demand should be fuelling Canadian investment in providing resources such as grain to fulfil those needs. “We have a high opportunity to grow the export market but we’re not doing a good job of this,” says Larry Martin, a senior research fellow with the George Morris Centre, Canada’s only independent agri-food think-tank. “What have we done to get access to the Asian market? Nothing. We don’t have access to markets where meat consumption is growing.”
In the last year, notable mergers and acquisitions in the food industry in Canada have included Canadian companies selling to foreign buyers. In December 2010, Liberté Inc. of Quebec was purchased by Paris-based Yoplait SAS, the second-largest brand of fresh dairy products in the world. Founded in 1936, Liberté offers more than 100 products, including various types of yogurt, kefir, cheese, sour cream, and tofu distributed in Canada and the northeastern United States. The company posted $175 million in sales in 2009, and had been owned by the U.S-based Swander Pace Capital private equity firm since 2003. “It ticked a lot of boxes that people were looking at in the categories of diet foods, natural foods,” says Valerie Scott, principal with Swander Pace Capital.
Knibutat disagrees that there are more acquisitions of Canadian companies happening than foreign buys being made. “There’s a notion of hollowing out whenever someone buys what is thought to be a gem, but when you consider that since 2008 the ratio of buy/sells into the U.S. has been in favour of Canadian companies buying more companies than U.S. companies have bought as it relates to volume and we’re also seeing the value of Canadian deals exceeding that of the U.S.,” he says.
Across the board, he says Canadian companies tend to acquire abroad more as opposed to other countries’ companies coming here to buy, and there have been a number of large transactions recently in the food industry to prove that. For example, in November 2011 Lunenburg, N.S.-based High Liner Foods Inc. bought Icelandic Group’s U.S. and Asian operations for US$230.6 million, making it the biggest supplier of frozen seafood to North American restaurants, hospitals, and schools. It is also acquiring a plant in China and companies that buy fish from other Asian countries. Another example is Montreal-based cheese manufacturer Saputo Inc., which also made a large acquisition in early 2011 of DCI Cheese Co. of Richfield, Wis. for US$270.5 million. Saputo sells cheese products to more than 40 countries around the world.
“We certainly have a small share of the overall capital global market but we have large pension funds looking to do more in the area of direct investing. They are starting to go abroad more and do more acquisitions and deals,” says Knibutat, who notes there are some large Canadian players such as McCain Foods Ltd., who are not just doing direct acquisitions either — one strategy is to follow the customer. “So for McCain — one of its big customers is McDonald’s for their french fries. They’ve been in places like Russia and China as their customers have gone into those emerging markets as well.”
Even during lean times, the food industry in Canada saw five-per-cent growth last year. Scott says over the last few years, she has seen a lot of resilience within Canadian companies even in periods of economic slowdown, but cracks are starting to appear in the sector. “The strength of the Canadian dollar is an important trend for buyers and producers in the industry. Commodity prices and how that affects the bounty and profitability of Canadian food companies is also becoming more of an issue than it has been in the past,” she says.
Looking back 10 years, says Scott, buyers were looking at Canadian companies as leaders of private label manufacturers, but what they’re looking at now is Canada as home to innovative manufacturers of premium products. “We’ve moved up the scale to more of a premium product and also seen a lot of strategic acquirers looking to buy companies that are leaders in niche markets.”
An example is Toronto-based artisan bread maker ACE Bakery, which was bought by Weston Foods (Canada) Inc., in November 2010 for $110 million. “These companies have all traded at a very high premium almost reflecting it will be the last time they will be sold because now they are in a big strategic company and no longer a smaller entrepreneurial company,” says Scott.
On the flipside, she says, there have been a number of companies over the last few years that were brought to market but not sold and are coming back again to the market. “In my mind these companies will be sold again because if they aren’t they will be viewed in the market that they are damaged goods and will put lower valuations on the industry.”
Despite the volatility in the equity markets, corporations are sitting on cash reserves looking to enhance their growth strategies, says Marco Galante, principal with the J.H. Chapman Group LLC, an investment bank in the food industry. Overall, he says M&A activity from 2010 to 2011 for Canada and the United States has increased appreciably since 2008. In 2008 and 2009, the number of transactions in the food sector in the U.S. dropped by 50 per cent. However, from 2009 to 2010 it increased by 36 per cent. In the Canadian market between 2008 and 2009 the market dropped by 36 per cent, yet from 2009 to 2010 and into 2011 the increase of activity has been as high as 25 per cent.
“The market is still fairly robust and there is cash at corporate levels and pent-up cash in the private equity area. The combination of that means there are acquirers looking at good opportunities both strategic and non-strategic. But equally, there are fewer sellers coming to market and part of the reason is the sellers are asking if it is the right time to sell today given the environment,” says Galante. While he says there was continued growth of M&A in 2011 in the food sector, one of the constraints is increasing commodity prices and the impact on gross margin and cash flow.
On the dollar side, Knibutat agrees a strong Canadian dollar does increase the costs of inputs, which can put downward pressure on profitability. “It really depends on the nature of the underlying business and where they are getting their inputs. The positive side of the Canadian dollar is it gives you more purchasing power and puts you in a fairly attractive position to be an acquirer,” says Knubitat, who adds that when the dollar goes above parity there is a strong correlation with deals that get done. “Canadian companies are doing a good job targeting, and when the dollar goes above parity it allows them to close the price gaps between buyer and seller, which allows them to close the deal.”
The Canadian Pension Plan Investment Board has also been building its interest in the food sector, demonstrating that it is seen as a strategic investment area, says Knibutat. The deregulation of the Canadian Wheat Board could also be a catalyst for deals, he adds.
The federal government has said it will move forward with a proposed deregulation of grain marketing in Canada. With a targeted implementation date of August 2012, the change would give western Canadian farmers the ability to sell their wheat and barley to whomever they choose. Currently, farmers are required to sell directly to the CWB, which, in turn, sells to the market. Last year, the CWB posted $5.1 billion in sales.
At the end of the day, all M&A activity in 2012 will ultimately depend on how buyers and sellers view the overall health of the market. “The fundamentals are there to do deals, but the risk is that the global economy is still uncertain enough and negative views are still being expressed by the central banks and various governments that it will have a depressive impact on activity for a little while. We need some more clarity and stability but the food sector will continue to be one that is interesting and attractive overall,” Knibutat says. “It will come, but right now I think it will be far more opportunistic a play for people because of the other macro factors impacting things.”
