spring/summer 2015
Food & Beverage Newsletter
Welcome to our Newsletter!
Welcome to the Spring/Summer 2015 edition of our Food & Beverage newsletter. Private equity firms are acquiring food and beverage firms at a rapid clip. Our first article, “Private Equity Firms Bet on the Food & Beverage Sector” explores what’s driving this interest, favoured segments within this space, and key risks to be aware of when making these investments. The article contains comments from two private equity firms: Investeco, which has a primary focus on fast-growing food companies that promote health and sustainability, and Swander Pace, which specializes in buyouts of growth-oriented consumer products companies. In the Road to Success section of our newsletter, we share the story of how Med Flavour Inc. has successfully branded its new olive oil products from Tunisia into the Canadian marketplace. Successful branding of a new food product is a complex process involving thorough market research of consumer tastes, and then developing packaging and labelling that emulates the brand. The company has excellent growth prospects as it has landed a three-year food distribution agreement to sell its products in Ontario and Quebec and is looking to expand throughout Canada.
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food and beverage Newsletter spring/summer 2015
According to data from Thomson Reuters, the total value of M&A deals in Canada was $203.1 billion (U.S.) in 2014, up from $ 147.2 billion in 2013. The Fast Facts, Trends and Recent News section of our newsletter sets out selected transactions in the Canadian and U.S. markets. One of the more notable Canadian transactions in late 2014 was Hershey’s acquisition of an iconic Canadian candy manufacturer The Allan Candy Company Limited. Interestingly, Allan Candy had been a long-standing manufacturing partner of Hershey’s products prior to the acquisition. Executives at Hershey commented that the acquisition extends Hershey’s Sweets & Refreshment manufacturing capacity and adds famous Canadian confectionery brands to the Hershey portfolio. In late 2014, Pinnacle Foods Inc. agreed to acquire plant-based protein food manufacturer Garden Protein International Inc. from its founder and a private equity firm. The vendor sells its products under the Gardein brand and provides an alternative for traditional animal-based products such as chicken strips, ground beef and fish fillets.
Also in late 2014, Nellson Nutraceutical, LLC acquired Le Groupe Multibar Inc. Both the vendor and the purchaser are in the fast-growing nutritional and snack bars sector and the merger creates a platform for strong growth and manufacturing capabilities. In early 2015, Canada Bread agreed to purchase Saputo Inc.’s bakery division, which makes Joe Louis and May West snack cakes. Saputo, which is primarily a cheese and dairy company, is focused on diversifying its business globally. We appreciate the opportunity to share these articles, best practices, market activity and trends in the food and beverage sector. Thank you for your readership and we hope you enjoy the newsletter!
Wayne Gelb Co-Chair Food & Beverage Practice
Bruce Roher Co-Chair Food & Beverage Practice
PRIVATE EQUITY FIRMS BET ON THE FOOD & BEVERAGE SECTOR Private equity has a significant appetite for the food and beverage sector, and a number of private equity firms have made the food and beverage industry their primary focus. What’s driving their interest? What are the favoured segments within this space? What are the critical risks to be aware of when making these investments? We canvassed these issues and more with two leading private equity firms in the food and beverage sector: Investeco and Swander Pace Capital. Andrew Heintzman, President and C.E.O. of Investeco, says they have a primary focus on fast-growing food companies that promote health and sustainability. Andrew Richards, Managing Director and Valerie Scott, Principal of Swander Pace, say their firm specializes in buyouts of growth-oriented consumer products companies and within that sector, half to two-thirds of the investments are in the food and beverage space. Fuller Landau: What is driving private equity interest in the food and beverage industry? Heintzman: There are many attractive elements within the food and beverage sector. These businesses are reasonably recession-proof. It is a large sector with innovation and the potential for growth in various niches, which makes it a sector that will, over time, continue to attract private capital. What attracts us in particular are the high growth niches focused on health and sustainability. The market for conventional foods has not been growing quickly, but organic foods and health food trends such as gluten-free, anti-oxidants, omega enriched, GMO-free, heritage farming (e.g. grass fed), probiotics, etc., have seen double-digit growth. If you look at other places in the world, like Europe, there are more advanced levels of adoption. This leads investors here to believe that these food areas can become even more significant markets in North America.
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food and beverage Newsletter spring/summer 2015
Richards/Scott: We’ve invested in food and beverage businesses for a very long time. From an investment standpoint, you have macro characteristics of an enormous market, customer awareness and customer loyalty, all of which says you have a large opportunity of scale to go after. And then you have pockets of fantastic growth as consumers become more educated and more thoughtful about what they’re eating, how they’re eating, and when they’re eating. We like to find small to medium-sized companies that have entrepreneurial spirit and are poised for growth, and we help them accelerate that growth to create a successful business, and for us, create successful returns on our investments. Fuller Landau: What risks do you face when making investments in this sector? Heintzman: We actually judge this sector as less risky than other industries, such as technology. It has real revenue, customers and products. There is always going to be execution risk depending on the abilities of the management team, risks around health and safety issues (e.g. recall issues), and capital risks of building out a supply chain and associated gross margin risk if products are not sold. There are barriers to entry, once you get a decent moat around the business. However, the more you grow, large companies become interested in the segment and will enter the market and compete on price and shelf space. It is a dynamic, competitive environment that can change quite quickly and you have to be prepared for larger competitors to enter the market at any time. The key is to focus on your brand and continue to build it out.
Richards/Scott: The key characteristics for us are: has the company in the consumer space become large enough, or achieved a strong enough market position in its niche, to be able to say it’s ‘established’? It has some barriers to entry, consumer loyalty, growth with accounts and with consumers, so the risk is evaluating that correctly and making sure that they’ve been able to get over that initial hump of the business being successful and established. Once that happens, then it’s a question of execution. Is the company selling in the right places to the right customers? Are they reaching consumers and do they know how to manage a business as it’s going through a growth trajectory? This is really where we come in. We’ve invested in over forty different companies in the consumer space. Our expertise is having seen these companies go through these growth trajectories and helped them figure out how to manage that growth. Sometimes it’s a question of finding growth and sometimes it’s a question of: when you find the growth, can you actually execute on it from a sales perspective, a manufacturing perspective, and a marketing perspective? Fuller Landau: What is your view on branded products vs. private label or non-branded products? Heintzman: Our group has a bias towards brands. We want our companies to have branded offerings because if you don’t, you are exposed to strong retailers. If you are a private label, there are greater risks. In the smaller niches, you have the opportunity to be the best brand.
Richards/Scott: We will invest with branded companies as well as with private label companies or contract manufacturers, and what we really like is to analyze a category and look at it and decide on the better investment opportunity for us: the branded play or the business with the contract manufacturing? I’ll give you a couple of examples: We are investors in a company called Kicking Horse Coffee in British Columbia. Kicking Horse is the largest organic and free trade coffee player in Canada. It’s a fantastic business, not just in the coffee category, but also the natural and organic category. That’s a space where the consumer is very brand-loyal and there’s an element of trust between the branded players and the consumer, because they’re buying the product a) because of taste, so you get loyalty that way, but then also b) for what the company does and what the brand stands for. As a contrasting example, we had a business called Santa Cruz Nutritionals that makes nutritional gummy bears, as a vehicle to provide vitamins and nutritional supplements. That’s a category where the manufacturing of that product is actually quite difficult. And so there the choice that we made early on was to focus on being a best-in-class manufacturer and then we could supply all of the branded players in the category. This category happens to be not as brand-focused, because the consumer tends not to differentiate quite as much between the whole spectrum of brands that they’ll find on the shelf. They just want a vitamin that’s in a gummy form, and they don’t really view the products as particularly different.
Fuller Landau: What is the difference between Canadian and American food company investments? Heintzman: There is huge growth potential is the U.S., both in terms of the market and how quickly a company can grow. You also don’t have the same customer concentration risk in the U.S. Another difference is in the exit strategy. In Canada, it is basically strategic buyers first. In the U.S., there is a whole kind of category that you don’t have in Canada which is family offices. There are some family offices in the U.S. that are large enough that they will buy companies. Then there is private equity. If you can build the company large enough, then you can go IPO. You can also refinance, where some investors stay and others leave. Richards/Scott: There are just as many opportunities in Canada because in many instances the companies are smaller but have better upside potential than some more established companies. If you go back a bit, Canada has been well ahead of the United States in terms of private label penetration, so private label makes it an interesting market. Whether it’s a business in the U.S. or in Canada, the key attribute is you’ve got to have a product that is unique. Or if you have a product that’s not unique, you’ve got to have service levels and manufacturing capabilities to execute better than your competition. On the branded side, similar trends are going on in both countries. We see opportunities in natural and organic, ethnic food, and in more traditional categories like bakery and dairy. The organic and ethnic categories have experienced a lot of innovation because they are relatively new. Similar trends exist in the two countries, and both are very positive. In general the consumer, whether Canadian or American, is getting much more intelligent about what they’re purchasing, where the products are coming from, what are the health benefits, and price points. There’s a lot more label reading than there was ten years ago, even five years ago, and that’s all an opportunity, particularly for smaller companies to take market share from some of the larger brands and players. Clearly the Canadian marketplace is experiencing consolidation. That being said, that point always gets made about mainstream grocery, and the reality is there are other alternatives out there. From a consumer product manufacturer standpoint, there are multiple other channels that you can sell through from club stores to some of the more boutique and niche channels.
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food and beverage Newsletter spring/summer 2015
When we invest in Canada, we’re looking for ways to expand in the different distribution channels and into different geographies. And so specifically in Canada, that’s moving east to west usually, or north to south. And both have been great opportunities. With Kicking Horse, that’s a Western-Canadian business, we’re moving west to east. When we owned Liberté, the organic yogurt company that was based in Québec, that was about taking a fantastic business and moving that east to west. For both businesses, we were also looking to distribute north to south. These are good brands with good market positions. Both the American consumer and the Canadian consumer like trying new products and the retailers in both markets like showing a diversity of products on their shelves. So there’s always an opportunity to bring in new products, and then hopefully if it’s a good enough product that catches consumer attention. Then you’re often running on a growth strategy. Fuller Landau: How do you time your exit from your investment? Heintzman: It is case-specific. You come to gates along the way where key decisions have to be made involving investment. For example, you may have to decide whether you are going to do your own manufacturing or not. The answer to this question may lead you to deciding that you are better off selling to a larger group. Strategic purchasers are coming downstream in the market. It used to be that they were not interested in making acquisitions unless a company’s sales were at least $50 million. Now, they are coming in at just $20 million. It generally comes down to whether you have a leading brand or not. If you have a leading brand, you can hold off competition. Richards/Scott: We look to typically have a five year hold for our investments and that can be longer or shorter, depending on our goal of taking a business through the next chapter. Sometimes that next chapter is geographic growth, and sometimes that next chapter is the transition of an entrepreneur who wants to retire. Sometimes it is bringing on new capabilities, moving into new products, moving into new markets. And if you think about all those things, we should be able to get through that chapter within a five year time horizon.
Most of what we do is working with families and entrepreneurs who are going through that transition. They either want to retire, bring in professional management, or they want to keep running the business and to bring in a partner who has some perspective that they don’t have. For example, in the Liberté transaction, no strategic buyer would have invested when we bought it. There was a lot of heavy lifting to do, professionalising the management group and upgrading the plants. We did all that heavy lifting and only then were strategic purchasers interested when the time came to exit. Fuller Landau: What advice would you give to entrepreneurs selling their business to maximize price? Heintzman: Ultimately, you want to build a great business that has significant competitive advantages, high margins, a strong brand and high calibre management team. You want to invest in what makes you different. It is the brand, customer growth and the sticky connection with consumers that gets you that special price. Richards/Scott: I have two pieces of advice. The most important one, is choose your partner well. There are many possible food and beverage private equity players and other investors out there. You need to find someone who is compatible with what you’re trying to do with your business, and that’s compatible both in terms of understanding the space, but maybe more importantly, just compatible in terms of your business ethics and how you want to operate your business, and how you want to be perceived in the marketplace. And make sure that your partner shares the same sense of how you want to treat your employees and your customers. Beyond that, does your partner provide a value-add? Are they bringing something to the table, have they done it before? Do they understand the different distribution channels that you’re selling into and do they understand what drives the successful growth of a company in your industry?
ROAD TO SUCCESS MED FLAVOUR INC.: THE IMPORTANCE OF BRANDING When one thinks of bottled olive oil, Italy probably comes to mind. Since 2013, Brahim Slama, General Manager of Med Flavour Inc., has been working to change this perception by importing olive oil from his homeland of Tunisia to Canada. Slama’s family in Tunisia has been in the olive oil business since 1930. It is a third-generation olive oil business. Interestingly, in 2015 Tunisia is second in the world in olive oil production, after Spain and just ahead of Italy. Slama moved to Toronto in 2013 and studied the olive oil market in Canada. He held meetings with supermarket reps, tracked prices and gathered samples to take home to Tunisia for lab testing. He discovered that a smooth-tasting olive oil appealed more to Canadian palates than the sharper- tasting olive oil used in Tunisia. Armed with his research, passion, and attention to detail, the next step was to work on the branding. Slama explained: “First we developed a single brand Oleiva, and from there we identified two separate products: Oleiva Traditional, which was tailor-made for the Canadian market, and Oleiva Premium for the niche market, which is closer to the classic Tunisian olive oil. We worked on the bottles and the labels. Oleiva Traditional has a dark square bottle and label with gold rim. Oleiva Premium’s bottle is reminiscent of a wine bottle. I wanted a classy bottle for gourmet shops and speciality stores. Once we had the bottles and the labels designed, we conducted quality control on the oils in Tunisia.” The Oleiva Traditional brand is produced with carefully handpicked olives, which are cold pressed resulting in a rich taste. The Traditional brand, geared specifically toward Canadian tastes, is the one carried in supermarkets. The Oleiva “Premium” brand is geared towards the connoisseur, and is sold in boutique stores such as Cheese Boutique, Pusateri’s and Fiesta Farms. Slama said, “In Tunisia we grew up with olive oil, and we use it daily for cooking, eating and medicinal purposes. And we like the bitter taste. Households in Tunisia usually have a large olive oil dispenser in the kitchen. It was actually puzzling for my mom when she saw small bottles on grocery shelves when she came to visit Canada!” 8
food and beverage Newsletter spring/summer 2015
To create brand awareness, Slama entered Med Flavour’s Oleiva Traditional olive oil in a SIAL food trade show competition, which included 110 olive oils from 14 different countries. The company’s olive oil won the silver “Olive d’Or 2014, Goutte d’Argent” award. This confirmed to Slama that Med Flavour had succeeded in producing a flavourable olive oil for Canadian tastes. Next, Slama met with a food distribution company, I-D Foods Corporation, and signed a three-year distribution deal to distribute products in Ontario and Quebec, and then throughout Canada. Slama discussed the next step of securing shelf space in supermarkets: “Some retailers will allow its vendors to test their products to evaluate their consumer appeal before suppliers must invest in listing fees, which can be tens of thousands of dollars per SKU. Sobeys was sceptical about another olive oil, however, the rep liked our story, that it was a family business, and was impressed with our marketing campaign. The test was to have his mother try it first and approve the product. A few days later, he said he liked the pricing and his mother loved the olive oil. She said it was an amazing product.” Slama explained that one of the most effective marketing methods was to offer samples in stores, which increased retail sales. Elliot Richmond, Audit & Assurance Partner with Fuller Landau, says the growth outlook is bright for his client Med Flavour Inc. The company has started selling on vitarock.com (an online Canadian store for natural health, beauty and household products),and is planning to expand out west, and then into the US. The product will also be sold at Highland Farms and Longos. Slama’s plan is to continue expanding its customer base and to diversify into other Mediterranean products including tuna, dates and antipastos.
FAST FACTS, TRENDS AND RECENT Transactions (AS AT APRIL 30, 2015)
Enterprise value/EBITDA multiples of selected food manufacturers, distributors, grocery and super centres ranged from 8.2 to 14.7 with a median of 12.3 as at April 30, 2015. Selected Food Manufacturers, Distributors, Grocery and Super Centres
Industry Classification
Last 12 Months Revenue (Millions)*
Enterprise Value (Millions)*
Loblaw Companies Limited (TSX:L)
Grocery Stores (Primary)
45,367.0
36,747.6
CAD
12.3
Alimentation Couche-Tard Inc. (TSX:ATD.B)
Grocery Stores (Primary)
45,931.0
28,098.3
CAD
12.2
Saputo, Inc. (TSX:SAP)
Food Products (Primary)
10,629.8
16,032.1
CAD
14.5
Empire Company Limited (TSX:EMP.A)
Grocery Stores (Primary)
24,222.5
10,577.0
CAD
8.3
Metro Inc. (TSX:MRU)
Grocery Stores (Primary)
11,881.9
9,951.1
CAD
11.5
Lassonde Industries Inc. (TSX:LAS.A)
Food Products (Primary)
1,264.5
1,388.1
CAD
10.8
High Liner Foods Inc. (TSX:HLF)
Food Products (Primary)
1,319.3
1,155.3
CAD
12.3
Premium Brands Holdings Corporation (TSX:PBH)
Food Products (Primary)
1,307.4
1,122.8
CAD
14.7
SunOpta Inc. (TSX:SOY)
Food Products (Primary)
1,524.1
1,000.7
CAD
12.9
Clearwater Seafoods Incorporated (TSX:CLR)
Food Products (Primary)
442.3
934.7
CAD
11.2
Whole Foods Market, Inc (NasdaqGS:WFM)**
Food Retail
14,952.0
16,556.0
USD
12.3
Costco Wholesale Corporation (NasdaqGS:COST)**
Hypermarkets and Super Centers
115,637.0
60,734.3
USD
13.4
Wal-Mart Stores Inc. (NYSE:WMT)**
Hypermarkets and Super Centers
485,517.0
298,149.5
USD
8.2
Median *Source: Capital IQ
EV/ EBITDA*
12.3 **U.S. Public Company
Disclaimer: The information in this section has been provided by external sources and is subject to change. Fuller Landau LLP is not responsible for the accuracy, reliability or timeliness of the information supplied by external sources. Readers wishing to rely upon this information should consult directly with the source of the information.
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food and beverage Newsletter spring/summer 2015
Selected Canadian Transactions Total Transaction Buyers/Investors Value ($ millions)
Announced Date
Target/Issuer
October 31, 2014
The Allan Candy Company Limited
28.00 CAD
November 14, 2014
Garden Protein International, Inc.
170.00 CAD
November 24, 2014
Multibar, Inc.
December 18, 2014
Saputo Bakery Group, Inc.
January 9, 2015
Le Veau Charlevoix
January 12, 2015 February 3, 2015
Sellers
Hershey Canada Inc.
ReichmannHauer Capital Partners Inc.
Pinnacle Foods Inc. (NYSE:PF)
TSG Consumer Partners
Nellson Nutraceutical, LLC
Multibar, Inc.
Canada Bread Company Ltd.
Saputo Inc. (TSX:SAP)
Not disclosed
Ecolait LtĂŠe
Le Veau Charlevoix
J.L. Freeman S.E.C., Cheese Business
Not disclosed
Emmi International AG
J.L. Freeman S.E.C.
Gambles Ontario Produce Inc.
Not disclosed
Total Produce plc (ISE:T7O)
Gambles Ontario Produce Inc.
Not disclosed 120.00 CAD
Selected US Transactions September 2, 2014
Archer Daniels Midland Company, Global Chocolate Business
440.00 USD
Cargill, Incorporated
Archer-Daniels-Midland Company (NYSE:ADM)
September 10, 2014
Windsor Quality Food Company, Ltd
800.00 USD
Ajinomoto North America, Inc.
Windsor Quality Food Company, Ltd
November 6, 2014
DSS Group, Inc.
Cott Corporation (TSX:BCB)
Crestview Partners, L.P.
November 17, 2014
Dean & DeLuca, Inc.
Pace Food Retail Co., Ltd.
Leslie Rudd Investment Company
December 18, 2014
The Pantry, Inc.
1,807.00 USD
Mac's Convenience Stores, LLC
Various venture capital firms
January 26, 2015
MOM Brands Company
1,164.38 USD
Post Holdings, Inc. (NYSE:POST)
MOM Brands Company
January 29, 2015
Krave Pure Foods, Inc.
The Hershey Company (NYSE:HSY)
Alliance Consumer Growth
March 4, 2015
Empire Kosher Poultry, Inc.
The Hain Celestial Group, Inc. (NasdaqGS:HAIN)
Palisades Associates, Inc.
March 25, 2015
Kraft Foods Group, Inc. (NasdaqGS:KRFT)
H.J. Heinz Holding Corporation
State Street Global Advisors, Inc.
1,246.50 USD
140.00 USD
315.00 USD
57.60 USD
55,032.00 USD
food and beverage Newsletter spring/summer 2015
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Questions? Comments? Please contact our Marketing Director: Marla Chang 416-645-6572 mchang@fullerllp.com
Our Food & Beverage Team Jonas Cohen 416-645-6574 jcohen@fullerllp.com David Filice 416-645-6506 dfilice@fullerllp.com Wayne Gelb 416-645-6546 wgelb@fullerllp.com Gordon Jessup 416-645-6508 gjessup@fullerllp.com Jeffrey Mandell 416-645-6509 jmandell@fullerllp.com
Our Food & Beverage Practice
Ellis Orlan 416-645-6568 eorlan@fullerllp.com
Fuller Landau LLP is a leading mid-sized accounting, tax and advisory firm. We are committed to helping owner-managers and entrepreneurs build value and grow their business. We are uniquely positioned to do just that because, as business advisors and entrepreneurs ourselves, we know first-hand what it takes to meet those challenges and succeed in any business environment.
Monika Pizon 416-645-6537 mpizon@fullerllp.com
We know that being in business within the food & beverage industry presents a unique set of challenges: customers’ tastes and needs are constantly changing, margins are under pressure, and inventory and logistics need to be managed effectively. Our team has the expertise and experience to advise on a wide range of business issues.
Bruce Roher 416-645-6526 broher@fullerllp.com Andy Yap 416-645-6536 ayap@fullerllp.com
Fuller Landau LLP 151 Bloor Street West 12th Floor Toronto, Ontario Canada M5S 1S4 www.fullerllp.com