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Merger and acquisition activity in the food and drink sector fell sharply in the second quarter of 2020 as the coronavirus pandemic slowed the pace of deals.

A new report by Grant Thornton UK shows that 27 transactions were announced in Q2 2020, representing a sharp drop compared to the first quarter of the year where 44 deals were reported and the same quarter last year (52 deals) – a 39 and 48 per cent fall respectively.

Total disclosed deal value for Q2 2020 was £2 billion, across 11 deals with publicly disclosed values. This is a significant increase on Q1 2020’s total disclosed value of £298.8 million. The 578 per cent increase was largely due to two mega deals that reported the combined value of £1.6bn - the £820m acquisition of frozen food retailer Iceland, and the joint venture between Marston Plc and Carlsberg to form Carlsberg Marston’s Brewing Company at £780m.

Reported insolvencies in the sector in Q2 2020 increased to five from three in the previous quarter. While rising, this number remains relatively stable but is highly likely to increase later in the year, particularly when the government’s furlough scheme ends. For some subsectors, this will rebalance long-term overcapacity and create a stronger position for those who remain, according to Grant Thornton.

Only eight of the 27 deals in Q2 2020 involved private equity and related investment, down from 50 per cent in the first quarter. The report noted that private equity's willingness to invest in food and beverage has been dampened by short-term uncertainty, which has seen some companies, such as large-retail suppliers, outperform, while others have been mothballed, due to the forced closure of their customers.

Healthy-eating sector attractive to investors

As such, private equity investors played it safe in Q2 with investments in largely pandemic-resistant subsectors such as indulgence foods and healthy, functional eating.

Trefor Griffith, head of food and beverage at Grant Thornton UK, said: “It is no understatement that the second quarter of 2020 saw the most rapid change in consumer behaviour since the end of World War II. The surprise is not that deal volume was down on the previous quarter, but that the fall wasn’t sharper. The surviving transactions were either long-term strategic deals or those that aligned with pandemic-resistant trends, such as healthy eating. These deals give some comfort that M&A activity will continue, despite some parts of the sector facing an uncertain immediate future.

“While the food and beverage industry was nimble in reacting to the national lockdown – furloughing workers, reallocating resources, simplifying ranges, and switching up supply chains – it’s clear that uncertainties began to take hold in Q2, which turned out to be a case of survival of the fittest in terms of deals. The remainder of 2020 and beyond is likely to be a game of two halves. It will be a rocky road for those servicing restaurants, office canteens, cafes and coffee shops, while those supplying directly, or indirectly to retailers are likely to boom.'