Catalyst Corporate Finance Heritage & Independent Brands Autumn 2013

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Autumn 2013

Heritage and Independent Food and Drink BrandsM&A update

M&A at record levels for heritage and independent brands

“ We understand the complicated dynamics involved in valuing heritage and independent brands given their higher growth characteristics and potential future profitability.”

Simon Peacock, Director

Demand for British heritage and independent food and drink brands is rising as UK consumers prioritise brands defined by innovation, provenance and trust, and international consumers are increasingly attracted to the values these brands represent. This is supporting M&A with both trade and financial acquirers driving the level of M&A activity to a post-2007 record high.

The key observations from our research:

Heritage and independent brands (“H&I brands”) are outperforming their global competitors through innovation

H&I brands have a track record of reinventing product categories and being highly responsive to consumers’ needs. This allows them to dominate a product category and expand distribution whilst simultaneously using high levels of customer loyalty to stretch an elastic brand into new categories. This is attractive to large corporates which struggle to replicate such flexible innovation with customer loyalty in new high-growth sectors.

Challenging economy and food scandals are pushing consumersto trusted brands The challenging economic environment has caused a flight to quality or value by consumers. At the same time, scandals such as horsemeat mean consumers are prioritising provenance and the traceability of ingredients. This is putting pressure on brands in the middle ground and leading to investment or disposal by their large corporate owners.

British brands and brand values are highly exportable British brands are trusted internationally and the values associated with

“Britishness” are well understood, making H&I brands internationally competitive. Acquirers and investors are attracted by the potential for significant sales growth through international roll-out.

High level of family ownership supports strong long-termdeal pipeline

Difficulties accessing significant funding and succession issues mean many family-owned brands will use M&A to support further growth. Both PE and trade buyers will be active, with PE using its skills to grow those brands that are earlier in the investment cycle whilst trade buyers target plug-in acquisitions of more established brands.

Heritage and Independent Food and Drink Brands M&A update

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The UK food and drink sector is

outperforming the broader UK economy

2

The rising demand for higher quality foods, premium taste experiences and the impact of recent high profile food scandals are increasing the appeal of H&I food and drink brands relative to the big brands owned by large corporate competitors.

The brand values which H&I brands exemplify – authenticity, quality, provenance, nostalgia, freshness and innovation – are even more attractive to consumers in the current environment. Such characteristics increase consumer confidence and generate loyalty in the brand values.

At a macro level, the UK food and drink sector is enjoying strong growth with 6.5% CAGR for the last three years compared to below one percent GDP growth, and exports have increased by 38% since 2009 to £18 billion in 2012. The UK grocery market is worth over £163 billion and forecast to grow by 18% over the next five years to £193 billion, with internet food shopping representing an increasingly important share of the market. Growth in these markets is underpinned by developing trends such as innovation, consumer polarisation and provenance, which in turn are favourable to the strong growth of H&I brands.

Heritage and independent brands are outperforming their global competitors

Heritage and independent brands are achieving brand leadership through innovation

plastic pouches rather than traditional glass jars. It now has an 18% share of the UK baby-food market.

Innocent’s use of non-concentrated fruits allowed them to communicate a “better tasting” smoothie with higher nutrition than its competitors. It now has an 80% market share in the UK and sells in 15 countries worldwide. Innocent has successfully leveraged its strong market position and brand elasticity to extend into the broader fruit-based drinks sector, flavoured water and has developed products in vegetable and noodle pots.

H&I brands have a proven track record of innovation and therefore are capable of transforming product categories through their creative use of ingredients, packaging and responsiveness to consumers’ needs and behaviours. This allows even very young companies to build consumer loyalty quickly, leverage brand elasticity and consumer trends in new product development (NPD) and grow rapidly, see Figure 1.

Organic baby food manufacturer Ella’s Kitchen was a leader in packaging by offering its food in convenient, flexible

Figure 1: 2 year CAGR (turnover) of selected heritage and independent brands

16%

Fiddes Payne

0%

20%

40%

60%60%

Ella’s Kitchen

33%

Tyrrells

25%

Innocent

18%

Soreen

14%

Bottlegreen

11%

Wilkin & SonsLimited(Tiptree)

10%

Nairn’sOatcakes

9%

WalkersShortbread

Brands are capable of dominating their product categories

Source: Fame, calculated using latest publicly available turnover

Heritage and Independent Food and Drink Brands M&A update

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Consumers have higher levels of

trust in heritage and independent brands

Polarisation between quality and value retailersThe prolonged challenging economic environment and pressure on household incomes has influenced consumers’ behaviour, creating a polarisation away from the “middle-ground” grocery retailers and brands with a flight to quality or value. Aldi, Lidl and Waitrose are achieving record market share at the expense of the big four supermarkets, despite the ‘premium’ of Waitrose being a very different proposition

to the discounters. The flight to value or quality is putting increasing pressure on the middle ground brands. Typically owned by large corporates, they are struggling to respond quickly to this environment and owners such as Unilever and chilled food manufacturer Bakkavor are divesting non-core businesses from their food portfolios.

Consumers are prioritising provenance following food scandalsThe recent horsemeat scandal has influenced consumers’ shopping habits, increasing the importance they attribute to the traceability and provenance of ingredients and undermining their trust in some retailers, as demonstrated by the fall in sales of chilled and frozen convenience meals containing meat reported by the largest supermarkets. Consumers are showing higher levels of trust in locally-sourced and authentic ingredients, and low levels of processing typical of H&I brands.

Spotlight: British brand values are highly exportableBritish brands are trusted internationally. “Britishness” is strongly associated with heritage and continuous innovation. The appeal of these values to consumers internationally is supporting the growth of those H&I brands that also appeal to consumers’ taste preferences in different countries, see Figure 2. The potential to achieve significant sales growth outside the UK is driving M&A.

Tyrrells The £40 million acquisition of premium crisps brand Tyrrells in 2008 by Langholm Capital enabled significant investment to be made in capacity to enable broader distribution in the UK and overseas, new product development and brand management. Overseas sales increased from 12% of total sales in 2009 to 17% in 2012. Tyrrells has recently been acquired by Investcorp for £100 million.

Fever-Tree LDC’s £98 million investment in premium tonic water and mixers brand Fever-Tree will help to strengthen the brand’s presence in the UK and Spain, accelerate expansion into the US and help drive international growth.

Clipper Teas Royal Wessanen acquired Clipper Teasin 2012. Whilst Clipper is the UK leader in organic and fair trade teas, it successfully stretches its brand across tea, coffee and hot chocolate. Wessanen is leveraging its European network to grow Clipper, with roll outs in France, Netherlands and Germany in 2013. Clipper has contributed over h1 million in revenue in year one.

TyrrellsElla’sKitchen

ThomasTunnock

ClipperTeas

17% 16%

19%

13%

17%

8%

13%42%

2010 2012

“ In today’s difficult economic climate, Fiddes Payne’s 5 year CAGR of 16% reflects the powerful combination of high product quality, excellent packaging innovation and an ambitious management team. International business represents 25% of sales reflecting British skills in quality, packaging design and the importance of strong brands.”Iain Macpherson, Managing Director, Fiddes Payne

Figure 2: Overseas sales as a proportion of total sales is rising for heritage and independent brands

Source: Fame

Heritage and Independent Food and Drink Brands M&A update

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Large corporates using M&A to

access high growth opportunities

High levels of innovation by H&I brands, consumer polarisation and the importance of provenance are supporting rising levels of M&A. Acquiring these brands enables buyers to access higher growth opportunities, new sectors and new geographies.

Gain access to pioneering brands

Large corporates often struggle to replicate the product and marketing innovation and associated brand loyalty that H&I brands such as Innocent, Gu and Bottlegreen Drinks achieve. Large corporate brands can lack credibility with consumers looking for a more dynamic or trusted brand. As such, some large corporates are keen to acquire leading brands with established heritage, which use authentic ingredients with provenance, and which have a loyal customer base in order to access high-growth opportunities.

Coca-Cola has made a number of strategic acquisitions to capitalise on health and wellness trends. In 2007, the company made the £2.1 billion acquisition of Glaceau to increase its presence in the fast-growing enhanced-water and energy-drink markets. This was followed by the £100 million acquisition of Innocent in 2013. Entrepreneurial brands can leverage the resources of their large corporate owners to scale their brands in their domestic markets and expand internationally. The challenge for owners like Coca-Cola is to continue new product development which maintains the core aspirational brand values customers are willing to buy in to.

US natural and organic food manufacturer Hain Celestial recently acquired Ella’s Kitchen. The acquisition complements their Earth’s Best line of organic foods for infants. In conjunction with Ella’s Kitchen’s founder, Hain will use its distribution platform to grow the brand in the US and EU, and leverage Ella’s Kitchen’s brand elasticity to expand in the UK with new feeding and personal care products.

Bright Food, one of China’s largest food groups, acquired 60% of Weetabix for £1.2 billion in 2012 from Lion Capital. Increasing urbanisation and higher disposable incomes are creating demand for Western-style breakfast diets and brands in China.

Extend product range

Acquisitions are being driven by the strategic need to increase the consumer offering and broaden portfolios of H&I brands.

Blackstone-owned Tangerine Confectionary, the largest UK-owned sugar confectionary and popcorn manufacturer, has been a serial acquirer of privately-owned heritage brands. The company has made four acquisitions since 2006, including the acquisition of two of the UK’s oldest brands, Smith Kendon Travel Sweets and York Fruits.

In 2012, Hain Celestial made the£202 million tactical acquisition of heritage jam brand Hartley’s from Premier Foods to complement its wider condiments portfolio. Hartley’s has a heritage which dates back to 1871.

Associated British Food plc’s 2012£34 million acquisition of Elephant Atta, the UK’s largest ethnic flour brand, will complement its other ethnic brands including Patak’s pastes and sauces, acquired in 2007.

SHS Group, the FMCG holding company and owner of sparkling juice brand Shloer, acquired Bottlegreen Drinks from Piper Private Equity in 2011. SHS was attracted to the brand’s strength, international growth potential and brand elasticity. Bottlegreen has expanded from the original elderflower cordial to over 22 different varieties including flavoured sparkling spring water and tonic water.

Acquirers have different M&A objectives

Heritage and Independent Food and Drink Brands M&A update

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PE is targeting early investment

stage brands

High levels of family ownership creating significant pipeline of acquisition opportunities

Spotlight: Multi-generational ownership of brands supports long-term deal flowFamily-ownership in food and drink businesses is strong but with high price expectations, it can take time for a family to agree their succession strategy or even exit.

Figure 3 illustrates that 60% of M&A transactions involving family-owned H&I brands since 2006 were executed by the second generation or older. In the UK SME sector overall, around a third of family firms tend to be passed onto the second generation and a tenth reach the third generation. Hence the majority are sold or closed down well before reaching the later generations.* Patak’s Foods and Cadbury are well-known examples of where third and fourth generation companies have sold to large listed global trade buyers. US-based Kraft Food acquired 168 year old Cadburys in 2009 for

£13.7 billion when turnover had reached £5.4 billion. Similarly, Associated British Foods plc acquired Patak’s for £125 million in 2007 when turnover was almost £50 million.

Figure 3: 60% of family-owned heritage and independentbrands are sold by second generation or older

40%33%

20%

7%0%

10%

20%

30%

40%

FirstGeneration

SecondGeneration

ThirdGeneration

FourthGeneration

Source: Mergermarket*The UK Family Business Sector, Institute for Family Business, 2008

Low start-up costs, established production methods and accessible consumers and routes to market mean that food and drink brands with the values associated with heritage and independence still have a high level of private and family-ownership because the early barriers to entry are low.

Ownership can stretch back over generations, especially for the larger (and probably older) brands like Warburtons, the largest baker in the UK which is run by the fifth generation. Whilst some companies want intergenerational ownership, there will be an increasing flow of companies looking to sell or secure investment as new generations look to crystallise value or to grow brands (see Spotlight below).

Deal volumes are at record levels

Trade buyers account for the majorityof activity (see Figure 4) and dominate acquisitions of those brands with turnover greater than £20 million, see Figure 5. Large UK and overseas buyers are attracted to the strategic opportunities these brands offer and

are targeting manufacturers with strong and growing brand equity, brand elasticity, a successful record in developing new products, and the potential for international growth.

PE is typically investing in H&I brands

with lower turnover, and is attracted to brands with a high level of consumer loyalty, innovative new product development record and growth potential. PE use their skills to invest in professionalising distribution capabilities in existing and new routes to market, developing branding and marketing, and supporting capacity for NPD.

Specialist mid-market houses have established a strong record in growing entrepreneurial brands. For example, Langholm Capital, which owns Barts Spices and Purity Soft Drinks, grew Tyrrells Crisps significantly, doubling turnover between 2008 and 2013 before exiting to Investcorp. Piper Private Equity invested in Bottlegreen in 2007 when turnover was £8 million; sales had increased to £13 million at exit in 2011.

Heritage and Independent Food and Drink Brands M&A update

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Private equity has a successful exit record PE has a successful record selling heritage and independent brands to both trade and other PE buyers to support further growth.

Lydian Capital Partners’ Wellness Foods, which owns Rowse Honey, acquired Dorset Cereals from Langholm Capital for £50 million in 2008, representing a four-fold increase on Langholm’s original investment. Blackstone’s 2011 investment in Tangerine Confectionery marked a 3.8x return on investment for Growth Capital Partners at exit.

PE has made a number of sales to trade. For example, Lion Capital sold 60% of Weetabix to Bright Food for £1.2 billion having acquired the leading branded cereal manufacturer for £677 million in 2004. The SHS Group’s acquisition of Bottlegreen was an exit for Piper and Royal Wessanen’s acquisition of Clipper Teas was an exit for Flemings.

Private equity is exiting to trade and

financial buyers

Despite the challenge of independent brands, large global and US firms have performed well over the last three years and have outperformed companies in Europe due to the robust and mature nature of the overall industry in a challenging economy. Valuations of European companies fell in mid 2011 when the Eurozone debt crisis was at its peak. Combined with a strong US

dollar, the European market will look relatively cheap to US buyers, allowing them to pay more than domestic acquirers.

Brands that demonstrate strong strategic importance have proven that a significant premium can be achieved on typical profit multiples of more established quoted food companies.

Figure 4: Number of deals since 2006 Figure 5: Turnover in year of deal (£m)*

3

4

5

3 3

4

6

7

2

3

1 1 1 1 1

5

0

1

2

3

4

5

6

7

2006 2007 2008 2009 2010 2011 2012 2013YTD*

PE buyerTrade buyer

917

7

6

<£20 million£0m

£5m

£10m

£15m

£20m

£25m

>£20 million

PE buyerTrade buyer

Source: Mergermarket *September Source: Fame *Where disclosed

“ British brands stand out for their quality and authenticity in the UK and internationally. We are working with forward-thinking brands like Patisserie Valerie, GAIL’s Artisan Bakery and The Bread Factory to strengthen their businesses and expand their markets. Consumers are rewarding the quality of their products and service with high levels of loyalty.”

Luke Johnson, Chairman, Risk Capital Partners

Overseas acquirers will pay more

Heritage and Independent Food and Drink Brands M&A update

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Figure 6: Selected Deals

Source: Capital IQ

Date UK Target Target Description Acquirer Country Deal value (£m)

Sep-13 Whitworths Limited Manufactures fruit and nut snacks and nutritional food supplements Equistone Partners UK 90.0

Sep-13 Nom Dairy UK Manufactures dairy products Muller UK & Ireland Group LLP UK nd

Aug-13 Tyrrells Potato Crisps Limited Produces and supplies potato chips Investcorp UAE 100.0

May-13 Ella's Kitchen Group Limited Manufactures and distributes premium organic baby food Hain Celestial Group USA nd

Mar-13 Fever-Tree (49% Stake) Tonic and spirits manufacturer Lloyds TSB Development Capital Ltd UK 98.0

Feb-13 Innocent Limited (Undisclosed Stake) Manufacturer of soft beverages The Coca-Cola Company USA 100.0

May-12 Weetabix Limited (60% Stake) Produces and sells breakfast cereals and bars Bright Food (Group) Co., Ltd China 1,200.0

Apr-12 Purity Soft Drinks Limited Producer of soft drinks Langholm Capital LLP UK 10.0

Mar-12 Clipper Teas Limited Tea and coffee company Royal Wessanen nv Netherlands nd

Feb-12 Speciality Desserts Ltd Provides desserts for the food service industry Europeenne des Desserts France nd

Nov-11 Fray Bentos Tinned pie brand Baxters Food Group Limited UK 30.0

Jul-11 Tangerine Confectionery Limited Manufactures sugar confectionery and popcorn products Blackstone Group L.P. USA nd

May-11 Bottlegreen Drinks Company Limited Manufacturer and distributor of branded adult soft drinks SHS Group Ltd UK nd

Feb-11 Big Bear Group Plc Food company Raisio Group Plc Finland 80.4

Jul-10 Rachel's Organic Dairy Producer of organic dairy products Groupe Lactalis S.A. France nd

May-10 Bart Spices Limited Supplies herbs and spices Langholm Capital LLP UK nd

Apr-10 Innocent Limited (40% Stake) Manufacturer of soft beverages The Coca-Cola Company USA 127.6

Nov-09 Cadbury Plc Manufacturer of beverages and confectionery products Mondelez International, Inc USA 13,730.7

Jun-09 Elizabeth Shaw Ltd Chocolate manufacturer Imagine Capital AS Norway nd

May-09 Salads To Go Ltd Maker of prepared leaf salads Groupe Florette France nd

Jun-08 W Jordan & Son (Silo) Limited Supplier of breakfast cereal, bars and wheat bran Associated British Foods Plc UK nd

Apr-08 Tyrrells Potato Crisps Limited Produces and supplies potato chips Langholm Capital LLP UK 40.0

Mar-08 Dorset Cereals Limited Breakfast cereals producer Wellness Foods Limited UK 50.5

Mar-08 Red Mill Snack Foods Manufacturer of snacks Tayto Crisps Limited Ireland nd

Dec-07 Clipper Teas Limited Tea and coffee company Fleming Family & Partners Limited UK 26.6

May-07 Patak's Foods Ltd Indian food ingredients company Associated British Foods Plc UK 125.0

Contact UsCatalyst Corporate Finance has an experienced team of consumer experts led by Simon Peacock (Food and Drink) and supported by partners Mark Farlow (Travel and Leisure) and Steve Currie (Retail and Consumer Brands). If you would like to discuss this report in more detail or the opportunities for your business, call +44 (0) 20 7881 2960.

Simon Peacock, DirectorSimon has over 15 years of financial management and corporate finance experience gained within industry at United Biscuits and professional services. He leads our Consumer sector team and is an expert in the Food & Drink industry. Simon has completed a number of deals in the sector including the sale of Red Mill Snacks to Tayto Group and the sale of Salads to Go to Soleco UK.

Mark Farlow, PartnerMark has over 20 years’ corporate finance experience. He has a strong record and reputation as a Travel and Leisure sector specialist and has completed a number of deals including the management buy-out of Esprit Ski and more recently, Amber Travel. Mark is also a member of Catalyst’s Consumer sector team.

Steve Currie, PartnerSteve has over 15 years’ corporate finance experience working at private equity and corporate advisory firms. He leads our work focusing on financial sponsors and is a member of our Consumer sector team. He has completed a number of deals in the sector including the management buy-out of Farrow & Ball.

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