Recent activity in the food and beverage sector Summer 2016

Welcome to the latest edition of ‘Bite Size’, our quarterly overview of activity in the food and beverage sector.

This edition provides analysis of M&A activity in the second quarter of 2016 and also looks at some of the burdens the sector faces following the UK’s unprecedented decision to leave the European Union.

In this issue we also take a look at VAT rules for the F&B sector and introduce you to Richard Clothier from Wyke Farms who was recently announced as one of Grant Thornton's Faces of a Vibrant Economy.

We hope that you find this newsletter useful. If you have any further questions or queries, or would like to know how Grant Thornton can help you and your business please do not hesitate to contact me.

Trefor GriffithHead of Food and Beverage, UK T +44 (0)20 7728 2537E trefor.a.griffith@uk.gt.com

Bite Size

Richard Clothier, whose family started the Wyke Farms cheese business in 1861 has recently been announced as one of Grant Thornton's Faces of a Vibrant Economy. Please refer to the back page to read the full story.

Is it a food? Is it a drink? It's not VAT simple

When it comes to food, the VAT rules can be horrendously complex and frequently baffling, even to the most experienced observer.

The rules were developed well over 40 years ago, and simply weren’t designed to account for the vast array of different products now on the market. Cutting edge New Product Development (NPD) is vital in the present market, yet fraught with danger if VAT is not accounted for correctly when setting price points and profit margins.

Seemingly trivial questions, can be the difference between a product being zero-rated or standard-rated for VAT. For example:

• When is a meal replacement not a supplement?

• When is a flapjack not a cereal bar?• When is a snack bar not confectionery?• When is a drink not a beverage? • When is a drink captured by the sports

drinks legislation?• When is it a fruit pulp and not a

smoothie? • Should protein powders always be

subject to VAT?

This can be a very grey area, the line is frustratingly thin. Many businesses are perplexed to find healthier NPD being taxed in the same way as unhealthier

snacks and confectionery, or their liquid foods falling under the same bracket as soft drinks.

There are risks here – If a new product is erroneously zero-rated, and HMRC consider it should be standard rated, significant liabilities (VAT, interest and penalties) can rapidly build up. Equally, the opportunities can be huge for businesses that have erroneously been charging VAT on sales when they could or should have been zero-rating. Not only can margins be improved going forward, but lump sum cash refunds can be obtained for historically overpaid VAT.

Grant Thornton are at the cutting edge of research in the area. In the last 6 months, our VAT specialists have had great success on numerous key and recurring issues for clients in the food and beverage sector, from FTSE350 companies through to owner managed businesses and start-ups.

The above examples are just a few of the many VAT intricacies we have encountered, the opportunities and risks really are far reaching.

Contact us to find out how we can help with your VAT queries:

Daniel J RiceVAT ManagerT 0117 305 7822E Daniel.j.rice@uk.gt.com

M&A activity – Q2 2016

Announced M&A activity in food and beverage - quarterlyUncertainty ahead of the June 23rd referendum on EU membership weighed on M&A activity in Q2 2016. Deal activity in the F&B sector[1] had remained strong during Q1 2016, increasing in both quarter-on-quarter and year-on-year terms, to reach a total of 55 transactions. However, there was some softening in M&A activity as the EU vote approached. Total Q2 2016 deal volume of 44 deals was 20% down on the previous quarter and 25% down on Q2 2015. The effect of the looming referendum can be tracked over the months: of the 44 deals this quarter, 20 were concluded in April, 14 in May and just 10 in June.

The year-to-date total of 99 deals compares with 216 in 2015 overall and 105 in the first half of last year. However, this moderate fall in the F&B sector compares favourably with the slowdown in overall activity. According to Thomson Reuters data reported in the Financial Times, UK M&A activity across all sectors has declined by almost 70% this year compared with the same period in 2015*. Whilst the political environment has had some impact on F&B M&A, it has by no means been catastrophic, indicative of the fact that the F&B sector remains fragmented and is a relatively safe sector in which to invest.

Total disclosed deal value[2] for the quarter was £2.88 billion, however this was heavily skewed by the sale of SABMiller’s non-core European assets, including the Meantime Brewing and Miller Brands and other European assets of Peroni and Grolsch to Asahi Group. The £2 billion transaction is scheduled to complete in the second half of 2016 and is intended to address any competition objections the European Commission may have with regard to AB InBev's takeover of SABMiller.

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The spike in Q2 2013 deal value is attributable to the £493 million Euro Cater IBO, £715 million R&R Ice Cream IBO and £350 million Burton’s Biscuit IBO

The chart above excludes the £71 billion SAB Miller transaction in Q4 2015

Announced PE activity in food and beverage - quarterly

Burdens after BrexitThe regulatory burden created by EU membership is a familiar complaint from businesses. Rules governing the shape of bananas and the size and colour of strawberries, for example, show the extent to which EU bureaucracy impacts the food industry. However, the regulatory burden is likely to remain high in the post-exit world as a substantial proportion of the regulations are driven by customer service and food safety requirements. The supermarkets will continue to place stringent conditions on their suppliers

whether the UK is in or out of the EU. Also, the UK civil service is a very diligent enforcer of EU regulation, to a far greater extent than in many other EU countries, and it is perhaps unrealistic to expect a significant change in the way it operates post-exit.

There is greater scope for structural change in the way the food industry utilises labour. The industry relies heavily on relatively cheap overseas workers, largely from other EU countries. The cost of labour is already set to become a rising

burden over the next few years with the introduction of the National Living Wage. The exit vote now introduces uncertainty over the future availability of workers. As a result, businesses are likely to look for ways to become more efficient in their use of labour, including increased use of robotics. The UK lags far behind countries such as Germany and Sweden, where labour has not been as cheap, in investment in robotics, particularly in the food industry. The use of robotics in the UK, however, is increasing and the exit vote is likely to accelerate the trend.

* Note this data relates to deals involving UK targets, Grant Thornton data relates to deals with UK and Irish targets and acquisitions by UK and Irish companies.

Deals summary – Q2 2016

Asian buyers on hold?The UK F&B market attracts overseas buyers for a variety of reasons. In recent years there have been a number of deals involving UK manufacturers of innovative/ iconic brands, in particular those at the forefront of the healthy eating revolution, including appetite from Asian acquirers in western brands. Examples include Bright Food of China acquiring Weetabix and Monde Nissin of Singapore acquiring alternative meat producer Quorn.

Whilst the UK F&B market remains attractive to overseas buyers, there has been some softening in cross-border M&A activity in the sector. In 2014, the ratio of domestic to cross-border deals was 51:49, but dropped to 54:46 in 2015. In the first half of 2016, this ratio stands at 63:37. The impact of uncertainty regarding Brexit on Asian and other overseas buyers may be part of the reason for the decline. Historically, the UK has been seen as a stable and open market. The current state of volatility – with sterling weakening, political turmoil and a possible recession looming - may put off future investment until there is greater clarity on the terms of future trade with the EU.

Private equity pursues snacking trendThere was a slight pick-up in private equity investment in the F&B sector in Q2 2016. In Q1 there were seven deals involving private equity in the UK/Ireland and an additional nine deals in Q2, bringing 2016's tally to 16, which compares with 38 deals in 2015 overall and 18 in the first half. The F&B sector clearly remains attractive to the private equity community, but the bars/restaurants sector continues to draw more investment than food and beverage manufacturing and wholesale, in part due to the large number of attractive assets and the booming foodservice sector.

A number of the second quarter’s private equity deals were driven by the trend towards snacks and convenience food. Investcorp, having backed Tyrrells Crisps’ acquisition of Australia's Yarra Valley Snack Foods in August 2015, supported Tyrrells in its acquisition of German organic crisp maker Aroma Snacks in May 2016. In the healthy snacking segment Bridgepoint acquired Turkish branded dried fruit and snacks producer Peyman and in line with the growing demand for convenience food and 'food on the go,' Sun Capital acquired Fresh-Pak Chilled Foods – a producer of deli and sandwich fillings and other chilled foods.

Consolidation continues in alcoholic beveragesThe brewery and alcohol sector has consolidated further in 2016 with 15 transactions, ten of

Sector Date Target AcquirerDeal value(£ million)

Dry Grocery Jun-16 Peyman Kuruyemis Gida Sanayi ve Ticaret AS (Turkey) IBO (Bridgepoint) 75.9

Wholesale/ Alcohol May-16 Bibendum PLB Group Ltd Conviviality plc 60.0

Ingredients Apr-16 Ilovo Sugar Ltd (South Africa) (48.65%)

Associated British Foods plc (UK) 261.2

Fruit/Veg Apr-16 Highline Produce Ltd (Canada) Fyffes plc (Ireland) 77.7

Sector Date Target AcquirerDeal value(£ million)

Meat May-16 Janan Meat Ltd ESO Capital UK Ltd/ Kingsley Capital Partners LLP 20.5

Confectionery May-16 Elizabeth Shaw Ltd Colian Holding SA (Poland) 2.5

Meat Apr-16 CCL Holdings Ltd/Crown Chicken Cranswick plc 40.0

Alcohol Apr-16 Inveralmond Brewery Ltd Innis and Gunn Brewing Company Ltd, The 3.1

Mid market deals with disclosed values (£50m - £250m deal value)

Small deals with disclosed values (<£50m deal value)

Sector Date Target AcquirerDeal value(£ million)

Alcohol Feb-16SABMiller's non-core beer assets including Meantime and Miller Brands

Asahi Group (Japan) 2,021

Large deals (>£250m deal value)

which were in the second quarter, ranging from wholesale through to beer (in particular craft beer) and spirits.

The craft beer sector remains a hotbed of activity, with transactions including the sale of Woodforde's Brewery to a private consortium, the sale of a stake in Clanconnel Brewing Co. to Quintessential Brands, and Innis and Gunn's acquisition of Inveralmond Brewery. As already mentioned, Meantime Brewery is also set to change hands again, with the pending sale from SABMiller to Asahi of Japan, which fended off rival buyers including Thai Beverage and private equity house Bain Capital.

Similarly, niche spirits continue to attract attention, from both domestic and a large number of US investors. Most significantly, Brown-Forman, the makers of Jack Daniel’s, acquired the BenRiach Distillery Co. in a deal worth £285 million. Mark Anthony Brands International Company of the US acquired Glendalough Distillery in Ireland and Sazerac

Company Inc. acquired Irish Distillers' Paddy Irish Whiskey brand.

In the wholesale sector, Conviviality continued its consolidation with the acquisition of Bibendum and Henkel of Germany acquired the remaining 40% in Copestick Murray.

The pull of proteinThere were several notable transactions in the meat sector in Q2 2016 including the acquisition of Grove Farm, a producer and supplier of added value turkey and poultry products to the retail and foodservice markets by the private investment vehicle of UK billionaire Ranjit Boparan, owner of 2 Sisters Group. Cranswick acquired CCL Holdings and its subsidiary Crown Chicken, an integrated poultry producer in East Anglia for £40 million and Kingsley Capital Partners acquired Janan Meat, the UK’s largest dedicated halal lamb and mutton meat supplier.

[1] All deal activity is based on announced date of the deal and includes deals where there has been any UK or Ireland involvement (target or acquirer). Administrations, liquidations and receiverships are collated but not counted as M&A unless they have subsequently been acquired.

[2] Deal values are primarily sourced from corporate websites, however if no press release is available they are sourced from deal databases including BvD Zephyr, mergermarket and Thomson Reuters Eikon or from press commentary released at the time of the deal. Deal values may subsequently be amended pending earn outs or other finance arrangements and/ or as further detail is released by the acquirer.

Richard Clothier from Wyke Farms is announced as one of Grant Thornton’s ‘Faces of a Vibrant Economy’.Selected by Grant Thornton UK and an independent panel, the Faces of a Vibrant Economy were chosen for their roles in shaping a more purposeful, innovative and socially responsible business environment.

Richard Clothier comes from a pedigree of a business family. His family started the Wyke Farms cheese business in 1861 and over the last 150 years, the family has grown the business into the UK’s largest independent cheese producer and milk processor.

Richard is currently dedicated to expanding the family business and plays a key role in negotiations with 150 milk suppliers and multiple retailers, both in the UK and overseas.

Wyke Farms exports to 160 countries and supports the economy of rural Somerset by obtaining milk from 150 local farms in the South West region. He is passionate about the farming industry and the part played by family farmers.

The business’s growth has not been secured by playing it safe. Wyke Farms took on a significant financial risk when it decided to embark on its ‘100% Green’ strategy: investing in green energy and water recovery. The green conversion was not just successful, but has helped the business win new contracts and set an industry-leading example.

The company’s environmental credentials run even deeper. Richard has led the business in its commitment to source electricity and gas from the solar and biogas that is generated from farm and dairy waste.

Solutions produced include: farmyard manure used to power cheese making, the use of electric cars on site and the replacement of artificial fertilisers with organic counterparts.

Wyke Farms also has a Sustainable Energy Visitor Centre, which allows the business to share knowledge and experience with the local community on green energy and sustainable living.

To find out more about Faces of a Vibrant Economy and watch a video of Richard explaining what a vibrant economy means to him click here – Richard Clothier, Wyke Farms.

Trefor GriffithHead of Food and BeverageT +44 (0)20 7728 2537E trefor.a.griffith@uk.gt.comJoanna PennyResearch ManagerFood and BeverageT +44 (0)20 7865 2594 E joanna.s.penny@uk.gt.com

© 2016 Grant Thornton UK LLP. All rights reserved. ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions. This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in this publication. grant-thornton.co.uk

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