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Saturday 21 October 2017

Analysis: Big hitters in the meat industry flex their muscle in bid to get bigger

 

Meaty issues: Mark Goodman, commercial director (international) ABP Food Group with Former Taoiseach Enda Kenny the launch of the redeveloped ABP Food Group facilities in Cahir, Co Tipperary. Photo: Chris Bellew/Fennell's
Meaty issues: Mark Goodman, commercial director (international) ABP Food Group with Former Taoiseach Enda Kenny the launch of the redeveloped ABP Food Group facilities in Cahir, Co Tipperary. Photo: Chris Bellew/Fennell's

Jan Fitzell

Mergers and acquisitions (M&A) activity involving participants in the Irish meat processing sector has continued apace in 2017 with the conclusion of some notable deals.

This is in spite of the obvious uncertainty wreaked on the industry and on M&A deals generally by Brexit.

While there are myriad reasons underpinning this M&A activity, a number of common themes are evident.

First and foremost is the continued push for scale. In an industry where operating margins are traditionally tight, top-line growth is critical for meat processing businesses to grow and prosper.

Jan Fitzell
Jan Fitzell

In a Westernised, developed economy such as Ireland, growth by acquisition will often outstrip organic growth in this sector in terms of pace, and hence businesses are attracted to purchasing other players in the sector as a means to achieving scale.

Scale also facilitates additional cost efficiencies, which is another major motivating factor behind many M&A deals.

Recent deals in the domestic meat sector in Ireland include: the purchase of Wilbay Ltd, a leading meat wholesaler based in Laois, by Monaghan-based sausage producer Arthur Mallon Foods in 2016; and the acquisition by Kildare-based cooked meat producer O'Brien Fine Foods of Meath-based Faughan Foods, from Hogans Turkeys in 2017.

However, with the size of the Irish market and competition regulation acting as a constraint on growth by domestic acquisition for some players, businesses have sought to acquire international operators as a means to satisfy their growth aspirations.

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A recent Irish success story in France was the acquisition by Cavan-based Liffey Meats of a majority shareholding in the French meat processor Chiron Viandes, which specialises in producing frozen hamburgers for supermarkets.

The European Commission has also cleared under the EU Merger Regulation the proposed acquisition of joint control over UK-based Linden Foods by ABP Food Group and Fane Valley.

ABP Food Group, the international meat, pet food and renewables business, recently expanded its operations in Poland with the acquisition of a third production facility in eastern Poland.

We have seen foreign meat-processing companies looking to the expertise of established Irish operators to improve their businesses.

Groupe Terrena, the co-operative group and owner of French processor Elivia, saw the benefits of bringing in Irish-headquartered Dawn Meats as a partner to its beef processing business.

This reflects Dawn's excellence in the global industry and the international recognition of Ireland's expertise in grass-based meat processing. We would not be surprised to see further international activity in this vein.

The recently announced strategic partnership between Dawn and Northern Irish meat giant Dunbia, which has just been granted regulatory clearance, will provide Dawn with a Brexit buffer through Dunbia's considerable UK presence - two large plants in the North and seven in Britain - as well as cementing its UK supply chain.

The emerging markets (India, Indonesia, China, Malaysia) will increasingly drive global growth in the meat processing sector.

Focus will shift more and more to these markets in order to be close to a growing customer base.

It is expected that 65pc of the world's middle class will be living in the Asia Pacific region by 2030. The increasing disposable income in emerging economies will drive demand for manufactured food products, particularly meat as a source of protein.

Access to the Asian market could make Southern Hemisphere processors attractive to Irish companies.

While China's meat imports have exploded in volume terms over the past couple of years and the market has been opened to Irish exporters, the vast majority of this demand has been satisfied to date by Brazilian and Australian processors.

New Zealand, with its similarities to Ireland in terms of climate and abundant grass, is a region which could be explored by Irish deal-makers in this regard.

The high availability of capital, both debt and equity, is another factor driving M&A activity in both agri and non-agri sectors.

With banks supportive of well-presented and credible growth plans, would-be acquirers are being given the opportunity to pursue value-adding targets.

In addition, the uplift in valuations being generated by this availability of capital is proving attractive to potential sellers.

With the low-yield environment likely to persist and an abundance of private equity funds yet to be deployed, there is no sign of M&A activity in the meat processing sector fading in the short-term.

Jan Fitzell is a director with IBI Corporate Finance

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