Canada is seen as a leader in food production and innovation but risks falling behind by not pursuing opportunities in international markets, according to a panel of experts from the sector.
“It seems in this industry that most of the outbound acquisitions are just across the border, however 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 was speaking at a conference in Toronto on Nov. 22 called Growth in the Food Industry, sponsored by Blake Cassels & Graydon LLP. He pointed to countries such as India where distribution and logistics systems need to be developed. He named McCain Foods Ltd. as one example of Canadian food companies succeeding overseas.
“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 10-per-cent increases 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.”
For the most part, mergers and acquisitions in the food industry in Canada involve Canadian companies selling to foreign buyers. Last December 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 who spoke on M&A trends in the food sector.
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, says Scott, 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, large 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 Galante says there has been 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.
Smith says Canada’s future in the food sector could also be stunted if it does not become more competitive on the regulatory front.
“The focus in Canada has been on managing supply,” he says.
“It seems in this industry that most of the outbound acquisitions are just across the border, however 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 was speaking at a conference in Toronto on Nov. 22 called Growth in the Food Industry, sponsored by Blake Cassels & Graydon LLP. He pointed to countries such as India where distribution and logistics systems need to be developed. He named McCain Foods Ltd. as one example of Canadian food companies succeeding overseas.
“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 10-per-cent increases 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.”
For the most part, mergers and acquisitions in the food industry in Canada involve Canadian companies selling to foreign buyers. Last December 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 who spoke on M&A trends in the food sector.
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, says Scott, 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, large 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 Galante says there has been 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.
Smith says Canada’s future in the food sector could also be stunted if it does not become more competitive on the regulatory front.
“The focus in Canada has been on managing supply,” he says.
