2019 CAFLP Annual Conference Panel Recap: “M&A Transactions in the Food, Beverage and Agribusiness Sector”

Three partners from McCarthy Tétrault delivered a talk on “M&A Transactions in the Food, Beverage and Agribusiness Sector” at the 4th Annual Canadian Association for Food Law and Policy Conference on November 9th, hosted at the University of Toronto Faculty of Law. Matthieu Rheault (Business Law Group, Montreal), Lara Nathans (National Retail and Consumer Markets Group, Toronto) and Martha Harrison (International Trade and Investment Law, Toronto) delivered a comprehensive talk on two topics: (1) current trends in M&A transactions in the industry, and (2) due diligence considerations specific to the Food & Beverage industry.

Transactions in the Food & Beverage sectors in Canada and the U.S. increased 7.5% from the 12-month period ended June 2018 to the 12-month period ended June 2019, according to a Duff & Phelps study cited by Rheault. To help explain this growth, the three speakers highlighted several new transaction trends, driven in large part by consumer preferences.

First, according to Nathans, multinationals and larger nationals are increasingly interested in acquiring or negotiating purchase agreements with craft brands such as craft beers and spirits. For example, Corby Spirit and Wine acquired Ontario-based Foreign Affair Winery and Molson Coors acquired Le Trou de diable microbrewery, both in 2017.  Some reasons for this approach include that it may allow the craft brand to both maintain its integrity and make use of the buyer’s resources, while the buyer may have an opportunity to grow more efficiently than if it developed similar lines on its own. Rheault added that this trend is driven by younger generations who value a better tasting product and a unique product experience.

Both Rheault and Nathans noted a second major theme in the marketplace being a shift to healthier, more natural foods. Buyers are looking for targets that are agile and have invested time into innovating new products which can be scaled up. For example, Simply Good Foods Company acquired Quest Nutrition and Mondelez International acquired a majority interest in Perfect Snacks, both this year. Nathans added that another way companies are adjusting to this trend is by selling certain categories of products, such as Nestle’s sale of its U.S. confectionary business to Ferrero in 2018.

A third trend, according to Rheault, is meat companies moving into the plant-based protein sub-sector. Also on-trend with a shift to alternative protein are companies making investments in “clean meat” companies, such as Memphis Meats and Future Meat Technologies.

Finally, Harrison discussed the potential increase in the number of transactions involving cannabis companies. Now that cannabis edibles are legal (albeit not available in stores until December), Harrison and Nathans expect to see partnerships or joint ventures between Food & Beverage and Cannabis companies. Depending on the specific regulations in each province, we may see baked goods, gummies, and other edibles hit the market. This presents an opportunity for strategic partnerships or acquisitions to leverage the distinct expertise of each party, although these transactions would involve novel regulatory and due diligence issues.

For the second half of their talk, Rheault, Nathans, and Harrison presented a thorough survey of due diligence issues specific to M&A transactions in the Food and Beverage industry. A buyer needs to ensure that the representations and warranties in its purchase agreement are appropriate for the target’s industry. This is particularly important when companies acquire or invest in businesses that they don't have experience with, such as in a joint venture between a Food and Beverage company and a Cannabis company, or when both entities are in the food sector, but different sub-sectors.

Specific considerations include:

·      Relevant permits, and particularly whether permits are transferrable or non-transferrable after the purchase or merger

·      Whether (or which) regulatory bodies need to approve the sale

·      Regulations and rules specific to a particular type of product or facilities processing such types of product

·      Food safety laws and whether the target has previous, current, or possible future product recalls

·      Food traceability (supply chain) requirements

·      Trade agreements and restrictions, tariffs, and sanctions

·      Import/export licenses and quotas

·      Product claims, particularly where claims are driven by consumer behaviour

·      Legally required label requirements