Dealmakers in the Manufacturing and Distribution sector are rebounding from a year filled with uncertain market conditions. Investors and business owners alike are emerging from the pandemic with a mounting interest in accelerating growth and creating value. Despite the delays and challenges in getting deals done over the past year, the pipeline is filling and transaction activity is building. 

Transaction activity in the Manufacturing and Distribution sector rode a bit of a roller coaster from quarter to quarter in 2020 (as measured by deal count), and there were (and continue to be) various challenges depending on the industry segment. But by mid-year, as people accepted and began to settle into this new reality, businesses moved forward, and so did transactions.

After the quarterly volatility of 2020, the transaction forecast for 2021 seems to indicate a very busy year for deals in the sector. Although market conditions continue to settle, many investors who focused on maintaining liquidity through the pandemic have capital to invest, and many would-be sellers who spent the last year keeping their businesses afloat may now be ready to deal. 

Skip to a section:

• Q1 2021 trending numbers
• Market factors impacting the deal space
• What’s next?
• Food manufacturing deals

Market factors impacting the deal space

As COVID-19 numbers improve in the U.S. and investors anticipate the possibility that the economy will settle into its new post-pandemic normal by the end of 2021, there are new considerations in the marketplace that buyers and sellers should take into account. Two key factors are:

Factor COVID-19 into valuations: A key concern for investors is the impact that COVID-19 had on the business historically and long-term impact going forward. Investors can quite easily isolate any government funding or credits taken by a company, but identifying how a company’s revenue pipeline and operations have changed purely due to COVID-19 may be more difficult. During due diligence, investors and their advisors should inquire and analyze data to understand the company’s adaptation during COVID-19, including customer gains and losses, as well as changes in distribution channels, employee management, technology, and travel. Did the management team learn to operate smarter and strengthen margins to have a long-term benefit to the business? 

Look for targets that are tightening their focus on a core mission: The pandemic caused a lot of businesses to take a step back and focus on their core strategy and operations. There has been a rise in carve-outs as businesses spin-off divisions that no longer fit with management’s strategic goals. As noted in the discussion of top manufacturing deals in Q1 2021, two significant deals of the quarter involved subsidiaries that didn’t align closely enough with the parent’s corporate mission.

We’re also seeing this trend extend to private equity groups. Several well-known investors that had bought up businesses in a wide variety of Manufacturing and Distribution sectors have begun to pare down their holdings to concentrate on two or three sub-sectors that they can manage with a deeper expertise. 

What’s next?

Three key signs point to a significant year for transactions in the Manufacturing and Distribution sector. 

1. Sellers who planned to be in market in 2020 but shifted focus to operations when the pandemic hit are now ready to return to their potential transactions. 

2. There are also many owners who were previously undecided about selling and are now ready to move forward, driven by operational fatigue. These potential deals may not be as far along as those that were planned before the pandemic and put on hold, but depending on the seller’s motivation and the business’s readiness for due diligence testing, they could still get to market relatively soon. 

3. The change in presidential administrations has raised concerns about possible tax increases, especially on capital gains. Many owners would rather get a deal done early than wait and potentially lose a significant percentage of their gain to taxes. 

Whether you are considering selling or investing in a business, a discussion with a CohnReznick advisor is an excellent first step toward getting the most out of your transaction. 

Food manufacturing deals

If there’s one M&D sector that continues to drive M&A activity, it’s food and beverage. With many Americans spending a lot of time at home, households have been cooking their own food at extraordinary levels, driving significant demand for certain food and beverage products. Two of the most talked-about trends in the food and beverage sector are:

• Frozen foods: There was a 23% increase in the sale of frozen foods for the 52-week period ended Feb. 6, 2021, according to NielsenIQ data. The sales boost can be attributed to people working from home and eager for quick, easy meals, as well as the advent of improved cooking technologies for frozen foods, such as the air fryer. 
• Health-focused and plant-based foods: A trend for many years now, consumers continue to move toward healthier, clean eating and less meat. In a time when demonstrations and product sampling are at an all-time low, consumers are still purchasing new products focused on using whole foods without processing or additives. There has been significant growth in plant-based protein, amid this health trend and as burger substitutes have grown closer in taste to real meat; one grocery distributor said in late 2020 that sales of frozen plant-based meat were up 560% at its stores. We have even seen an increased demand in food products specifically providing Vitamin D as consumers are outdoors less.

When it comes to market factors affecting the deal space, the food manufacturing sector clearly reflects some of the trends that we’re seeing across the economy as a whole. Leaders in this sector are focusing their M&A activities on strengthening core product lines and cutting losses in segments that don’t align well with their current mission. Hershey’s activities in 2020 provide two excellent examples of the kinds of transactions we can expect going forward:

• In late 2020, Hershey invested an undisclosed amount in healthy snackmaker Quinn Snacks. The transaction continues a pattern established by the iconic chocolatier in recent years of focusing its M&A activity in two key snack food segments where it had not been meeting consumer demand: “better-for-you” healthy tidbits and salty, savory snacks. Since 2017, Hershey has acquired such well-known brands as SkinnyPop and Pirate’s Booty. 
• Earlier in the year, Hershey sold off its Krave jerky brand to a private equity investor run by the person who had originally founded the brand. The carveout shows that M&A is a two-way street when it comes to focusing in on core functionalities. Hershey’s CEO said in a Q1 2020 investor call that selling Krave and two other brands would enable them to prioritize assets in salty snacks and nutrition bars, and noted, “These are great brands that continue to resonate with consumers, but they require a different go-to-market model that we believe is better supported by other owners.” 

Another market-wide trend hitting the food and beverage sector is the increase in activity involving special purpose acquisition companies, or SPACs – companies that exist solely to acquire private companies and take them public, as an alternative to a traditional initial public offering (IPO). Among Pitchbook’s Top 20 deals closed in Q1 2021 was the acquisition of Wholesome Sweeteners by Whole Earth Brands, which was formerly a SPAC known as Act II Global Acquisition Co. that last year purchased two other businesses in the sector and went public. The entry of deep-pocketed SPACs in this sector is likely to make the competition for attractive targets more intense. 

Contact our team to learn more about opportunities in the food manufacturing sector.