Pub­li­ca­tions

Recent M&A trends in the food distribution industry


In Brief

From their expe­ri­ence work­ing on a num­ber of recent M&A trans­ac­tions in the food dis­tri­b­u­tion sec­tor, Alis­tair Jaque, Part­ner, Andrew Drap­er, Senior Asso­ciate, and Euge Pow­er, Solic­i­tor, high­light some recent trends which have become com­mon themes in M&A trans­ac­tions in this industry.


The Facts

1. Succes­sion plan­ning and staged exits

The food dis­tri­b­u­tion indus­try is char­ac­terised by the pres­ence of a large num­ber of own­er-man­aged and fam­i­ly busi­ness­es. For var­i­ous rea­sons, many of these busi­ness­es are active­ly engaged in suc­ces­sion plan­ning, or con­sid­er­ing exit­ing the industry. 

In fam­i­ly busi­ness­es in par­tic­u­lar, where there is no imme­di­ate suc­ces­sion option, we have recent­ly seen a num­ber of busi­ness­es opt­ing for a par­tial sell-down to a strate­gic part­ner as a way of struc­tur­ing an order­ly, staged and time­ly exit for sell­ers, while assist­ing the buy­er to grow the busi­ness. This engage­ment with a strate­gic part­ner usu­al­ly involves a sale to a trade buy­er, and we have seen an increas­ing num­ber of these trans­ac­tions involv­ing ver­ti­cal inte­gra­tion with­in the sup­ply chain.

In one recent deal, JBS Aus­tralia, the Aus­tralian sub­sidiary of glob­al meat pro­cess­ing busi­ness JBS S.A., ver­ti­cal­ly inte­grat­ed with fam­i­ly-owned Andrews Meats, Australia’s pre­mi­um val­ue-added red meat sup­ply and ready-made meal dis­tri­b­u­tion busi­ness, by acquir­ing a major­i­ty stake. The sell­ers retained a suf­fi­cient minor­i­ty stake in the busi­ness to enable them to con­tin­ue to dri­ve its growth, with­out pre­clud­ing their poten­tial full exit from the busi­ness in sev­er­al years’ time. The sell­ers were extreme­ly care­ful to ensure that the cho­sen buy­er had the abil­i­ty to main­tain a suc­cess­ful work­ing rela­tion­ship with them, because the future of the busi­ness (and there­fore the sell­ers’ ulti­mate exit) will depend on the suc­cess­ful inte­gra­tion of the two owners. 

The suc­cess of such trans­ac­tions is also heav­i­ly influ­enced by how well the sell­ers react to relin­quish­ing ulti­mate con­trol of the busi­ness while remain­ing in the business.

As strate­gic part­ners have a high lev­el of knowl­edge of the indus­try, we have also observed a trend towards short­er deal-nego­ti­a­tion times and increased val­u­a­tions for good busi­ness­es in the sec­tor.

2. Com­bined prop­er­ty and busi­ness sale transactions

Anoth­er trend we have recent­ly observed, par­tic­u­lar­ly in rela­tion to fam­i­ly busi­ness­es in the food dis­tri­b­u­tion indus­try, is sales which com­bine both the busi­ness and the prop­er­ty from which the busi­ness oper­ates. Often the premis­es from which a food dis­tri­b­u­tion busi­ness oper­ates are also owned by the busi­ness own­ers or an enti­ty con­nect­ed to them. 

Where both the busi­ness and the prop­er­ty are being sold, this adds a fur­ther lay­er of com­plex­i­ty to nego­ti­a­tions and the sale doc­u­men­ta­tion, as the two sales must be linked and interdependent.

Where the prop­er­ty is ini­tial­ly retained by the sell­ers, and a new lease is entered into with the busi­ness after it is sold, the par­ties may also nego­ti­ate a sale option in rela­tion to the premis­es, in order to give the sell­ers a guar­an­tee of a future sale.

3. Increased use of earn-outs and deferred consideration

In addi­tion to an increase in the num­ber of par­tial sell-downs, we have also seen greater use of deferred con­sid­er­a­tion and earn-outs in terms of the pur­chase price paid to sell­ers in trans­ac­tions in this indus­try sector.

Apart from the obvi­ous cash­flow advan­tages, the increased use of these arrange­ments allows a buy­er to utilise the seller’s knowl­edge of the busi­ness and the indus­try and gives the buy­er fur­ther secu­ri­ty in rela­tion to its invest­ment in the business. 

These arrange­ments also allow sell­ers to ben­e­fit from the buyer’s cap­i­tal invest­ment in the busi­ness in order to achieve growth and max­imise their earn-out or final exit payment.

Anoth­er recent trans­ac­tion which we worked on involved the sale of the busi­ness and assets of a retail butch­er and whole­sale food dis­tri­b­u­tion busi­ness, as well as the oper­at­ing premis­es. In this trans­ac­tion, a com­po­nent of the con­sid­er­a­tion payable to the sell­ers was paid through the issue of shares in the buy­er. This ensured that the sell­ers had an ongo­ing inter­est in the busi­ness and its suc­cess. The earn-out com­po­nent payable to the sell­ers in this trans­ac­tion relat­ed to the per­for­mance of the busi­ness over a num­ber of years fol­low­ing the sale. The sell­ers will also ben­e­fit from any increase in the val­ue of the shares in the buy­er at the time of their final exit from the busi­ness.

4. Lia­bil­i­ty insurance

Over the last few years, war­ran­ty insur­ance has been used as an effec­tive way to appor­tion risk away from the par­ties to a trans­ac­tion. In par­tic­u­lar, where there are unknown risks which nei­ther the buy­er nor the sell­er wish to accept, war­ran­ty insur­ance can fill this gap.

How­ev­er, in the par­tial sell-down sce­nar­ios which we have been see­ing, the ongo­ing rela­tion­ship between the par­ties gives reas­sur­ance to the buy­er that the sell­er has faith in the busi­ness and will be around to rem­e­dy any breach­es if they occur. This has result­ed in less of a need for war­ran­ty insur­ance in these trans­ac­tions.

5. Pri­va­cy considerations

In sale trans­ac­tions over the last few years, the trans­fer of cus­tomer lists and client data­bas­es has become crit­i­cal to transactions.

In addi­tion to stock, con­tracts, and plant and machin­ery, cus­tomer data rep­re­sents a sig­nif­i­cant asset of a food dis­tri­b­u­tion busi­ness, and the acqui­si­tion of this data can often be a strong incen­tive for the buy­er to enter into the transaction.

Recent amend­ments to pri­va­cy leg­is­la­tion mean that com­pli­ance with require­ments relat­ing to the stor­age of cus­tomer data (includ­ing stor­age off­shore or in the cloud) and the trans­fer of cus­tomer data to the buy­er must be con­sid­ered as part of any transaction.