The Deal Drivers UK study, carried out by PKF accountants and business advisers, showed that the overall value of deals shot up from £634m (€910m) in the first quarter to £1.7bn (€2.4bn) in the second. The quarterly deal value now stands at its second-highest level since 2004. However, the volume of deals made remained relatively constant, with a total of 16 deals in the first quarter and 14 in the second. Mark Plampin, corporate finance partner at PKF, told FoodNavigator.com: "Overall the trend is for increasing deal size as a result of continuing consolidation in the industry. I believe that the trend will continue with growth in deal sizes and strong volumes, however, the rate of growth may slow as valuation multiples start to plateau." The valuation multiples apply to the number of years profit a deal value represents. Increasing deal values suggests the size of businesses changing hands are getting bigger, said Plampin. It can also mean the multiples are increasing, which is good news as long as multiples remain realistic and affordable. Plampin continued: "I think this will happen because private equity buyers may reduce in number due to the credit squeeze and trade buyers may therefore be in a position to buy businesses for lower multiples. Recent changes announced to Capital Gains Tax will probably fuel supply of small to medium sized businesses for sale." A new measure to bring in one standard rate of Capital Gains Tax at 18 per cent is due to come into effect next April in the UK, although it has to be voted on in the Commons and there has been recent Labour backbench unease. It has provoked opposition as the amount is likely to damage small firms. Louise Wallace, partner and head of consumer products at law firm CMS Cameron McKenna said the sentiment about growth was "bullish". But she added: "A more cautious view of profit prospects indicate that the focus for the next twelve months may well be on investment in the development of brands, innovation and increasing efficiencies, all of which should provide longer sustainable growth in the sector. "We believe that M&A activity will be fuelled by consolidation at the manufacturing and supply level as well as the appetite for products within sectors that respondents see as higher growth areas, such as health foods and drinks, locally sourced products and organic foods." Robin Skelton, a partner at Eversheds, said that more high profile M&A deals between manufacturers are purportedly on their way to market, but at the moment his ingredients clients are holding on to their businesses as they see them as safe earners. "Niche sectors such as snacking remain popular as is anything which is added value," he said. "Brands as ever are popular and as the economy weakens investment migrates to safer options and well known brands are perceived as such." The rise in deal values shown in the Deal Drivers study is in part a result of 2007's largest UK food sector deal, which had a value £1,200 (€1,720) higher than the second largest deal. This was the £1.4bn (€2bn) secondary buyout of the Brakes Group, the UK-based distributor of frozen, grocery and chilled foods. The mid market sector, with deal values above £15m (€21.5m) and below £300m (€430m), made up the majority of the deals, accounting for between 25 and 40 per cent. Food sector deals in this market, experienced growth, especially in terms of deal volumes, which stood at an all-time high of 14 deals in the first quarter and eight in the second. Mid market deal value dropped to £276m (€396m) in the second quarter from a high of £634m (€910m). The only acquisition concerning an ingredients company that featured highly in terms of the value was the purchase of UK based Indian food ingredients company, Patak's Foods. It was bought from its founding family by Associated British Foods plc for £125m (€179m). According to reports, ABF will combine Patak's with its own brand Blue Dragon, creating a leading niche position in the UK food market as well as driving international sales. The top UK deal in this sector was Arla Food UK's outright acquisition of Arla Foods amba, the leading dairy company in Sweden and Denmark. Arla Foods already owned a 51 per cent stake in the dairy company and paid a further 213m to take full control over the firm. The report found that ongoing consolidation in the mid market food sector is likely to continue. It flags up Italian food group Malgara Chiari e Forti, which anticipates making acquisitions in the medical food sector, according to proprietary mergermarket intelligence. The company's CEO claims it is currently expanding its distribution network, and acquisitions may be possible in the next three years, with the UK market identified as particularly attractive for acquisitions. UK M&A activity in general has been slowing down. Still, the report showed that the UK merger and acquisition market continued to lead all other European markets, accounting for a fifth of deal volume and a quarter of value in the first half of 2007. The market also leads private equity activity, with nearly 30 per cent of volume and 45 per cent of the value of European buyout activity.
