Things have been fairly quiet on the pet food mergers and acquisitions (M&A) front since the first half of 2016. Will the February 7 announcement by WellPet that it has acquired Whimzees, a dog chew manufacturer, kick off a new round of pet food M&A activity?
WellPet's news follows on the heels of the January 2017 announcement by ADM Animal Nutrition that it was buying Crosswinds, a contract pet treat manufacturer – a significant and rare deal in that an ingredient company is buying a manufacturing company. WellPet also started 2016’s deals with its acquisition of Sojos early on (January 8, 2016). February 2016 proved to be an active month for pet food M&A, with C.J. Foods buying Day Six Pet Nutrition, Kodo Inc. acquiring the Precise and ANF brands from Texas Farm Products, and Belgian company Versele Laga buying Goldenfeast, a bird food manufacturer.
Other notable acquisitions from 2016 included Agrolimen, based in Spain, purchasing the remaining shares of Nature’s Variety, a raw pet food manufacturer based in St. Louis, Missouri, USA, and Ireland-based private label manufacturer C&D Foods acquiring Continentale Nutrition, another European private label pet food maker.
Yet the remainder of 2016 saw more M&A activity in the pet retail category, especially in the US; and overall, 2016 represented a slowdown in pet food M&A compared to the previous three years. Through mid-2015 alone, eight pet food deals had occurred, including V.I.P. Petfoods, one of the largest pet food companies in Australia, being acquired by a private-equity firm; J.M. Smucker buying Big Heart Pet Brands (formerly known as Del Monte); and Nestle Purina PetCare acquiring Merrick Pet Care. That followed 10 pet food M&A deals a year in 2014 and 2013, including the blockbuster one of Mars Petcare acquiring the Procter & Gamble pet food brands, as well as key deals such as InVivo buying Total Alimentos in Brazil and Vitakraft being purchased by Tiernahrung Deurerer in Germany.
What’s behind the cooling pet food M&A activity, and what does that mean for this year and the future? Some of the slowdown may be due to normal market cycles, according to Bryan Jaffe, managing director for consumer and retail at investment firm Cascadia Capital LLC. Speaking at Petfood Forum 2016, he said valuations for pet food companies are historically high, so investors are looking elsewhere for values, and there’s a scarcity of opportunities after the big deals in recent years.
Other investment market analysts who follow pet food M&A are more bullish. “Admittedly, it is rare for any industry subset to continue to grow at double-digit paces for more than four or five years in succession,” wrote Deborah Douglas, managing director of the Douglas Group, in September 2016. “However, for a pet food company of today with a bit of focus in the trending areas going forward, we predict that you may not see any downturn in likely buyer appetites for several more years.” Trends she listed included the ones we know well for driving recent pet food sales growth, including high-protein, grain-free and products focusing on health benefits.
Looking at the US specifically, Jaffe said the number of pet food companies active in M&A now is small, so “private placement” – meaning acquisitions by private-equity firms and similar investors – will account for a higher share of transactions in the near future, including this year. (To date, ADM and WellPet have proved him wrong there, though he probably wasn't considering the possibility of an ingredient supplier being an active M&A player. In WellPet's case, its latest purchase was a company based in the Netherlands.)
Pet food players that might be in the market for acquisitions are looking to buy a brand, niche or category they can’t replicate themselves, Jaffe added. Likely targets include growing brands adding to their grain-free and natural lines, companies with identities that connect with millennials and companies with good fundamentals but are not growing quickly enough on their own, he said.
While he didn’t name any pet food companies that may be targeted for acquisition, Jaffe did discuss likely buyers, WellPet among them. Interestingly, he identified Blue Buffalo as a “sleeper,” a company that he believes could become an active M&A player on the buying side. Based on anecdotal information I receive, including regular, random contacts from investment companies I’ve never heard of, Blue Buffalo also seems to be considered a potential acquisition target.