PepsiCo's possible buyout of France-based Danone, which has been churning through the rumor mill for the past week, would follow that pattern in an increasingly consolidating industry.
Both PepsiCo and Danone are PWC clients
The takeover, if it occurs, would mark one of the largest deals so far this year in the food and beverage industry, as companies jockey for position in a highly competitive market characterised by low margins and cost cutting.
Acquisitions in the European food sector abated slightly last year with a small reduction in deal volumes and total disclosed values, PWC stated in its report on the food M&A market.
However, deal sizes increased across the board. Meanwhile dealsalready announced in the first half of 2005 signal the acquisitive trend is back on track.
Recent examples include the €706 million bid by Bakkövor for the remaining 80 per cent stake in Geest, the €1.1bn acquisition of the Chr. Hansen food ingredients business by PAI Partners, the€255m acquisition of Marlow Foods by Premier Foods and the acquisition of HP Food by H.J. Heinz for about €700m.
The food processing market in Europe remains relatively fragmented and the pressure on suppliers is increasing, PWC said.
Although the UK remains the top target for merger and acquisition activity in the food sector, the importance of continental Europe is growing.
"As global competition hots up and as the retailers become increasingly international, we can be in little doubt that food companies will be looking to strengthen their position by furtherconsolidation in their core markets," stated Neil Sutton, the head of PWC's corporate finance food division. "It is reassuring to see that there has been a sharp rise in the value ofdeals and that both trade buyers and private equity houses are active in the market."
PWC UK said M&A deal volumes in the UK fell in 2004 to 56 transactions compared with 69 in 2003, although the average value of these dealsincreased to €98m from €24m in 2003. Activity in Spain has steadily increased and is now ranked second to the UK. The Italian M&A market is starting to rebuild its appeal and confidence,following the putting into receivership of Parmalat and Cirio del Monet.
In central and eastern Europe deal activity dropped by 32 per cent in 2004, to 43 transactions from 63 in 2003. The firm predicts that this is a short-lived fall and does not signal the end of the buying cycle in the regions.
As the economy, infrastructure and political stability in the region continue to improve M&A activity is sure to pick up, Sutton stated.
"The growing appeal of the food sector in Asia will also be an interesting one to watch over the next 12 months, particularly as major retailers are increasingly looking to source food as well as non-food from sources outside the traditional domestic suppliers," he said.
Private equity investors meanwhile continued to have a large appetite for deals in 2004. The number and value of deals in 2004 eclipsed that of 2003. There were 57 deals by private equity firms in2004, which had a disclosed value of €2.6bn, compared with 54 deals totalling €1.1bn in 2003. PWC predicts the level of deals will increase this year. Private equity investors are attracted by thebrands and the food sector's relatively "recession-proof" business and ability to generate cash.