M&A ‘frenzy’ in specialty ingredient industry could mark 2025 following multi-year lull

Next year will mark a “total switch” in how specialty ingredients, including clean-label alternatives and functional solutions, are evaluated – and valued – by food manufacturers as consumers become less price sensitive and more focused on food safety and ultra-processing and demand healthier, more sustainable solutions, Michelle Briffett, a principal with Roland Berger, told FoodNavigator-USA.

She explained that the specialty food and beverage ingredient industry “was hit a little bit harder” than other industries in recent years when inflation and supply chain challenges increased following the pandemic because shoppers were less willing to pay the higher prices they often command.

But, she said, as inflation continues to cool and consumers have more discretionary spending they will once again pay more for what they perceive as higher quality food and beverages, including specialty ingredients.

At the same time, she predicts, legislators taking aim at synthetic ingredients and food additives they deem unsafe will “force the hands of these companies to use specialty ingredients,” and more natural solutions even if they are more expensive.

These two forces should help specialty food and beverage ingredient valuations recover after nosediving along with the rest of S&P 500 index at the start of the pandemic, Briffett said. She added this in turn may entice private equity players and large strategics to sell assets that they have held on to for too long as they waited for the market to recover.

When this happens, she said, she sees significant opportunity for other private equity players and even smaller companies to acquire assets, which with “good management, operational adjustments and overhead management” could offer significant value and business growth.

‘Carve-outs’ from recent mega-mergers could hit the market soon

The next period of M&A in the specialty ingredient sector will favor smaller specialty food and beverage players that could not compete with the large strategics in deal-making in recent years, Briffett predicts.

“In the last 16 to 18 months, what we really saw was a period of ‘mega-merger activity,’” in which major specialty food and beverage ingredient companies have combined, including the merger of IFF and DuPont’s Nutrition & Biosciences division, DSM and Firmenich, Novozymes and Chr. Hansen and Tate & Lyle and CP Kelco, she said.

These large-scale deals were spurred by a need for a suite of solutions to address emerging consumer demands and their refusal to accept trade-offs. For example, many consumers want less sugar, but they do not want to sacrifice the sweetness to which they have grown accustom to or the mouthfeel, browning ability, bulking and other functional roles sugar offers.

While large deals allow stakeholders to quickly broaden their portfolio to meet consumers’ increasingly sophisticated demands, the deals often include assets the acquiring company does not want or which does not complement in its existing portfolio or mission.

Briffett explains this could create opportunities for small players in the near future as large strategics “carve-out” and auction off assets they do not want.

“When deal-making picks back up in 2025, we expect it to look different. We expect the mega-merger period is largely behind us and we believe that there is going to be some carve-out activity … that may offer really strong opportunities for private equity firms with really strong management,” she said.

“We also think that these might be a good fit for smaller food and beverage companies to start buying up” assets that have been neglected under current leadership but which would return a strong value under the care of a smaller entity, she added.

Will private-equity re-enter the game?

Smaller assets also could come to market from private-equity groups that were hesitant to sell when valuations were so low in recent years, Briffett added.

“Many private equity players have held on to things longer than they typically would like because the M&A market has not been there for them, but at some point they are going to sell those assets currently in the portfolio,” some of which “may be underwater” and go for a low price, she said.

These assets could be a good deal for other private equity players sitting on dry powder which have a history of rolling up unwanted or neglected assets, revitalizing them and reselling them at a higher point several years in the future, she said.

As private equity investors sell long-held assets they could have a new round of funds to invest – further helping to jumpstart the M&A environment for specialty ingredients.