There are some common misconceptions when it comes to the effect of foreign investment in Australia's food manufacturing industry. Grant Thornton Australia's Tony Pittitto demystifies some of the big ones.
As Australian food and beverage companies assume larger roles on the world stage, the focus on innovation of products, processes and customer service becomes increasingly important in order to remain competitive.
As you well know, trends emerge quickly, requiring companies to rapidly develop new products or risk missing out on profiting from hot new markets. But innovation requires investment, and we're seeing many Australian companies with limited access to capital feeling constrained in their ability to meet the needs of the changing market.
Many Australian companies are unable to access appropriate capital domestically to fund their growth plans. The recent Hunger for Growth survey indicated that more than half (53 percent) of Australian food and beverage executives believed their organisations would need additional funding within 12 months, with 16 percent noting sourcing capital as a constraint on their ability to grow their business.
Demystifying a sense of lost identity – a sector starved of capital
For some, mergers and acquisitions in the Australian food and beverage industry conjure up images of overseas buyers swallowing the heart and soul of iconic Australian food brands; when in fact, overseas buyers make up a very small portion of the deal activity across the entire sector. What's more, these investors are looking to capitalise on iconic brands, in order to market quality products in new regions, as opposed to eradicating the brand's identity.
Whilst international interest is undoubtedly strong, the sector still sees most acquisitions made by local buyers. Grant Thornton's Food & Beverage Deal Tracker report highlights that 80 percent of Australian businesses sold during the period January 2011 to June 2014 were to domestic acquirers. Overseas buyers accounted for only 20 percent of total deals over the same period.
In some cases, private equity firms and overseas buyers provided the best option for the required level of capital to grow a company through product innovation. This is because private equity firms and overseas buyers have greater access to debt funding and equity investment and are known to look for Australian food and beverage companies with growth potential.
So is the perception fair that new owners destroy Australian brands? There's little evidence to suggest Australian brands are eroded when they're purchased by overseas buyers (think Vegemite, Fosters, Arnott's Biscuits and Uncle Toby's). In most instances, these brands are the primary reason for the transaction, and there is little incentive for buyers to destroy them. In these examples, there has been little observable impact on the brand or product subsequent to the change in ownership.
An analysis of the deals in the Deal Tracker report shows most transactions involving overseas acquirers were heavily motivated by the target's strong brands and quality products. Subsequent analysis suggests these brands and products remain a key focus after acquisition.
Opportunities to service the refining palates of the Asian market
Despite the perception of Australia "selling the food bowl", foreign investment continues to play an important role in the food and beverage industry. It provides capital for growth and innovation, as well as access to expertise and the scale required to take advantage of the growing demand in Asia.
International buyers have demonstrated their capacity to provide the appropriate expertise for Australian companies to expand into overseas markets. They achieve this through their size, their established distribution and marketing channels and the existing network of people on the ground throughout Asia.
The capital employed by private equity firms and other investors (both domestic and foreign) stimulates innovation and efficiency. This creates a flow-on of benefits for the sector, including employment and growth throughout the economy. Farmers, suppliers and other services all benefit from growth and increased demand for Australian food and beverage products.
What it all means for Australian food producers
Many of the strategies that will help Australian food and beverage companies grow and succeed – from developing overseas distributions channels to expanding product portfolios – can be achieved through organic growth or through mergers and acquisitions.
Particularly for mid-size and large companies, mergers and acquisitions offer opportunities that may not be available through domestic funding.
Ownership succession is also a consideration for many privately owned food and beverage businesses who may be contemplating sale. Many successful Australian food and beverage businesses are family owned. For the family owned businesses, with founders reaching retirement age, or having grown their business to the limit of their capabilities or desired involvement, the sector is in a prime position to service Asia's growing demand for high quality food products, which creates opportunities for such businesses to capitalise on when exiting their investment.
The international interest in Australian companies continues to provide healthy competition in the sale process, allowing Australian owners to realise higher returns upon exit. Our research highlights that higher multiples are consistently achieved by those businesses with strong brands in premium segments. We're seeing a trend that shows overseas buyers and private equity firms are willing to pay more for companies that are operating in the packaged food segment, and particularly those companies with strong brands, or those with innovative, organic and healthy products within their portfolio.
Whilst the majority of merger and acquisition transactions continue to involve domestic buyers, the competitive tension introduced by international suitors has been a benefit for many Australian owners.
If Australian companies are to take advantage of the current market opportunities, they must have a growth strategy that ensures their business is well positioned to capitalise (either through organic growth or mergers and acquisitions) on the increasing demand from Asia for high quality food products. This strategy should address the company's ability to access capital, focus on strong brands, quality products within their portfolio, customer relationships and access to distribution and marketing channels throughout Asia.
Many Australian companies will feel confident that they have the expertise and means to grow organically. For others, external capital provides a viable and attractive option, either to grow their business or as a lucrative exit strategy.
Recent transactions including those of iconic Australian brands such as Inghams Enterprises and Peters Ice Cream, together with the interest in Australia's biggest wine producer, Treasury Estates, show that overseas private equity firms – in particular – continue to focus on growing Australia's food and beverage sector. Their continued interest represents bright future prospects for the sector.
Tony Pittito is national head of food & beverage at Grant Thornton.