Grant Thornton UK LLP’s latest mergers and acquisitions analysis of the food and beverage sector has found that deal activity remained steady in the first quarter of the year despite rising inflation and ongoing supply chain disruption.

There were 35 food and beverage transactions recorded in the first quarter of the year. This is down quite significantly compared to the same period last year (63), which experienced a resurgence of deals that had previously been put on hold due to the pandemic, but remains in line with quarterly figures since then.

There were no mega-deals this quarter reflecting growing investor caution about headwinds facing the sector. But, of the 35 deals completed in Q1 2022, 11 disclosed financial details, totalling £489.5 million. This is slightly higher than the previous quarter which, once the mega-deals such as the Morrisons take-over are removed, recorded £396.5 million.

Grant Thornton found that demand from private equity (PE) investors continues to grow, with PE investors responsible for 46% of Q1 2022 deals – a significant increase compared to Q4 2021 (27%). Private investors were particularly focused on early-stage high growth companies, where there is less competition from large trade buyers that have in-house R&D.

Growing interest in plant-based products

Interest in plant-based products has been an ongoing trend in the sector, but this quarter it was second to the bakery sector which accounted for 17% of all deals recorded.

Trefor Griffith, head of food and beverage, said: “While deal numbers in the food and beverage sector are yet to return to pre-pandemic levels, they remain respectable, given the increasing number of challenges facing the sector, from record inflation and squeezed household incomes to ongoing supply chain disruption.

“While interest in plant-based companies continues, the popularity of bakery goods is perhaps a surprise at a time when wheat prices have soared due to adverse weather, rising costs for farmers and the conflict in Ukraine.

“It’s no surprise though that the bakery deals this quarter had a strong strategic focus, such as securing supply chain capability. Increased demand for luxury or indulgent baked goods during the pandemic also helped to drive deal activity, perhaps inspired by the success of Exponent’s 2021 acquisition of Gü.”

He added: “There is no doubt that inflation and the corresponding drop in household spending will impact the food and beverage market. Shopping baskets are getting smaller and more expensive and affected families will be looking for cheaper substitutes or no substitute at all. Resilience is likely to come from R&D in the sector, with the first quarter showing that investors are already backing companies that are innovating against this tough backdrop.”