IN BRIEF
From their experience working on a number of recent M&A transactions in the food distribution sector, Alistair Jaque, Partner, Andrew Draper, Senior Associate, and Euge Power, Solicitor, highlight some recent trends which have become common themes in M&A transactions in this industry.
THE FACTS
- Succession planning and staged exits
The food distribution industry is characterised by the presence of a large number of owner-managed and family businesses. For various reasons, many of these businesses are actively engaged in succession planning, or considering exiting the industry.
In family businesses in particular, where there is no immediate succession option, we have recently seen a number of businesses opting for a partial sell-down to a strategic partner as a way of structuring an orderly, staged and timely exit for sellers, while assisting the buyer to grow the business. This engagement with a strategic partner usually involves a sale to a trade buyer, and we have seen an increasing number of these transactions involving vertical integration within the supply chain.
In one recent deal, JBS Australia, the Australian subsidiary of global meat processing business JBS S.A., vertically integrated with family-owned Andrews Meats, Australia's premium value-added red meat supply and ready-made meal distribution business, by acquiring a majority stake. The sellers retained a sufficient minority stake in the business to enable them to continue to drive its growth, without precluding their potential full exit from the business in several years' time. The sellers were extremely careful to ensure that the chosen buyer had the ability to maintain a successful working relationship with them, because the future of the business (and therefore the sellers' ultimate exit) will depend on the successful integration of the two owners.
The success of such transactions is also heavily influenced by how well the sellers react to relinquishing ultimate control of the business while remaining in the business.
As strategic partners have a high level of knowledge of the industry, we have also observed a trend towards shorter deal-negotiation times and increased valuations for good businesses in the sector.
- Combined property and business sale transactions
Another trend we have recently observed, particularly in relation to family businesses in the food distribution industry, is sales which combine both the business and the property from which the business operates. Often the premises from which a food distribution business operates are also owned by the business owners or an entity connected to them.
Where both the business and the property are being sold, this adds a further layer of complexity to negotiations and the sale documentation, as the two sales must be linked and interdependent.
Where the property is initially retained by the sellers, and a new lease is entered into with the business after it is sold, the parties may also negotiate a sale option in relation to the premises, in order to give the sellers a guarantee of a future sale.
- Increased use of earn-outs and deferred consideration
In addition to an increase in the number of partial sell-downs, we have also seen greater use of deferred consideration and earn-outs in terms of the purchase price paid to sellers in transactions in this industry sector.
Apart from the obvious cashflow advantages, the increased use of these arrangements allows a buyer to utilise the seller's knowledge of the business and the industry and gives the buyer further security in relation to its investment in the business.
These arrangements also allow sellers to benefit from the buyer's capital investment in the business in order to achieve growth and maximise their earn-out or final exit payment.
Another recent transaction which we worked on involved the sale of the business and assets of a retail butcher and wholesale food distribution business, as well as the operating premises. In this transaction, a component of the consideration payable to the sellers was paid through the issue of shares in the buyer. This ensured that the sellers had an ongoing interest in the business and its success. The earn-out component payable to the sellers in this transaction related to the performance of the business over a number of years following the sale. The sellers will also benefit from any increase in the value of the shares in the buyer at the time of their final exit from the business.
- Liability insurance
Over the last few years, warranty insurance has been used as an effective way to apportion risk away from the parties to a transaction. In particular, where there are unknown risks which neither the buyer nor the seller wish to accept, warranty insurance can fill this gap.
However, in the partial sell-down scenarios which we have been seeing, the ongoing relationship between the parties gives reassurance to the buyer that the seller has faith in the business and will be around to remedy any breaches if they occur. This has resulted in less of a need for warranty insurance in these transactions.
- Privacy considerations
In sale transactions over the last few years, the transfer of customer lists and client databases has become critical to transactions.
In addition to stock, contracts, and plant and machinery, customer data represents a significant asset of a food distribution business, and the acquisition of this data can often be a strong incentive for the buyer to enter into the transaction.
Recent amendments to privacy legislation mean that compliance with requirements relating to the storage of customer data (including storage offshore or in the cloud) and the transfer of customer data to the buyer must be considered as part of any transaction.
For further information, please contact:
Alistair Jaque, Partner
Phone: +61 2 9233 5544
Email: afj@swaab.com.au
Andrew Draper, Senior Associate
Phone: +61 2 9233 5544
Email: ajd@swaab.com.au
Euge Power, Solicitor
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
