June/July 2005

Food Ingredients Mergers

During the early years of the millennium mergers and acquisitions swept across the pharmaceutical industry. These mergers and mega-mergers were based on the business philosophy that 'bigger is better'. But the proof of this particular pudding was in the new pharmaceutical products pipeline and all wise men had predicted that merged pharma entities inevitably had access to longer pipelines of novel products. It has not taken long to disprove this assumption and with the wisdom of hindsight size has not provided guarantees for new blockbusters.

Within the past year a similar tempestuous mergers and acquisitions climate has swept across the food ingredients industry: Rhodia Food acquired by Danisco, Christian Hansen by the French PIA group and DSM's Yeast and Bakery Ingredients by the Dutch Gilde group. Very high price have been paid for these companies [13.5 x EBITdA for Hansen]. Does this imply that the food ingredients sector is undervalued and right for take-over by those holding the long purse strings?

Judging by the recent decline in share prices of major pharmaceutical companies the food industry business is treading on thin ice. To afford the overblown values paid for recent acquisitions profit margins must increase above present levels. Is this feasible in the midst of Chinese competition which is forcing prices downwards towards foor levels? Once upon a time citric acid and vitamin C/ascorbic acid were high-margin businesses. And then Chinese companies moved in and drove prices below manufacturing cost levels. Today the price of citric acid is $0.83/kg compared with $1.8/kg in 2000 and ascorbic acid is priced at $5.5/kg compared with $12/kg 1995 and the saga continues with other food ingredients. This is hardly the stuff on which to ensure 13.5 x EBITdA ratings.