June 2022 Food and Beverage Review: Mergers & Acquisitions
After a pause in the early days of the pandemic, M&A activity in the food and beverage industry rebounded in 2021. Speculation around a potential capital gains tax rate increase, owner fatigue due to the difficulty of managing through the pandemic, continuing pandemic-related business challenges, and other factors often fueled sellers, while buyers frequently sought opportunities in light of low interest rates, sizable cash holdings, and the potential for significant growth as the world emerged into a new normal.
In general, the business of companies operating in the grocery and food distribution channels was positively affected by the pandemic. Similarly, many companies in the beverage sector, including the off-premise beer, wine, and spirit sector, experienced significant growth. As a result, the pandemic frequently presented opportunity for an attractive exit for owners of these types of companies in 2021. By comparison, restaurants and similar hospitality companies often experienced considerable challenge due to the pandemic, and while many owners sought an exit, M&A transactions proved difficult in these sectors.
In both environments – M&A activity involving thriving food and beverage companies and M&A activity involving struggling food and beverage companies – certain general themes arose in 2021. In many cases, buyers and sellers experienced difficulty in assessing valuations. In the case of thriving companies, buyers experienced challenges with determining the long-term viability of the growth driven by the pandemic. In the case of struggling companies, sellers often sought to convince buyers to look past short-term struggles with an eye toward long-term forecasts after the pandemic impacts ease. In addition, novel pandemic EBITDA adjustments required discussion. Often, the resulting valuation gaps required lawyers to help companies identify a deal structure solution, including, at times, the implementation of complex earn-out and similar mechanisms.
The growing use of representation and warranty insurance as a means of mitigating post-transaction liability risk aided sellers in 2021. However, insurers were mindful of the novelty of the ever-changing pandemic environment. As a result, many policies involved pandemic-related exclusions from coverage. At times, that circumstance resulted in extensive negotiations between buyers and sellers with respect to the allocation of pandemic-related risk. While many buyers accepted the risk of the unknown presented by the fluid environment, the topic often involved significant dialogue.