UK private equity goes on food diet

Private equity firms have always been a major source of fee income, but trade
buyers have begun to garner more attention from dealmakers.

Deals in the UK food market by private equity groups dropped by more than a
third between 2004 and 2005. Research by PricewaterhouseCoopers corporate
finance found that private equity only completed seven deals in the sector last
year, compared with 11 transactions in 2004.

The drop in private equity investment into food targets comes despite a 44%
increase in values in the sector in Europe. Last year, deal values climbed to
10.5bn euros (£7.3m) in 2005, up from 7.3bn euros in 2004. Volumes were also up,
rising 11% from 315 deals in 2004 to 350 in 2005.

Neil Sutton, head of consumer products at PwC corporate finance, said private
equity groups were still interested in the sector, but were facing increased
competition for assets from trade buyers. A recent example of this was the
auction for the HP Foods, where a broad spread of experienced trade buyers
expressed interest in doing a deal.

The company was eventually bought by HJ Heinz, the maker of Heinz baked
beans, soups and tomato ketchup.

Private equity has also been wary of trends affecting the broader retail
market, including a tougher high street and rising utility costs.

Sutton said: ‘Food M&A continues to be driven remorselessly by retailer
pressure, rising energy and raw material costs, regulatory and consumer demands
and cheaper imported goods.’

Buy-out specialists have reacted accordingly to these trends and approached
deals in the sector with added caution. Private equity money has focused on
chilled food, recognised brands and organic/healthy eating businesses.

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