Q3 Growth of Frozen Fruit, Healthy Foods, and Private-Label Drives SunOpta s Acquisition of Sunrise Growers Food for Thought In This Report Growing demand for healthy, organic foods continues to drive M&A Private-label brands maintain market share as economy improves Sector-by-sector valuation and performance analysis of food and food retailing companies
FRONT LINE INSIGHTS Growth of Frozen Fruit, Healthy Foods, and Private Label Drives SunOpta s Acquisition of Sunrise Growers SunOpta s $450 million acquisition of Sunrise Growers, which closed last week, is a transaction that stands at the intersection of several of the most powerful trends shaping the food retail industry. In addition to the long-term macro trends of consumers growing demand for organic and other healthier foods and the continued attractiveness of private-label brands, the transaction was also driven by one of the hottest categories in food retail: frozen fruits. In this quarter s issue of Food for Thought, we examine the strategic and industry dynamics that drove interest in Sunrise Growers. We also analyze the growth prospects for frozen fruits and other healthy foods and discuss why private-label brands remain very attractive for food retailers. About the Transaction Sunrise Growers, which is based in California and has more than $300 million in annual sales, is the leading processor of conventional and organic frozen fruit in the United States. The company, which was previously owned by an investor group led by Paine & Partners, offers a variety of frozen fruit products and packaging formats 1 and serves retail private-label and foodservice customers. William Blair advised Sunrise Growers on its sale to SunOpta, which specializes in the sourcing, processing, and packaging of organic and non-genetically modified food products. Paine & Partners is a private equity firm that focuses on complex investment opportunities in the fast-growing, dynamic global food and agribusiness sectors. Hot Demand for Frozen Fruit SunOpta s and other potential acquirers pursuit of Sunrise Growers was driven largely by the company s No. 1 market position in a highly attractive category. Frozen fruit sales have increased from just $300 million a decade ago to more than $1 billion annually, according to research from Dole Packaged Foods that was published in a FoodNavigator USA article. With sales growth of 13.4% in 2014, frozen fruits are the fastestgrowing category in the frozen aisle and the fourth-fastest-growing food/ beverage category overall. This growth is particularly impressive considering that it comes during a period of relatively flat growth for frozen foods, which grew at 0.7% in 2014. It is no coincidence that the surge in demand for frozen fruits has come at a time when blender sales are soaring. In February, The Wall Street Journal, citing research from Euromonitor International, reported that blender sales in the United States more than doubled from 2009 to 2014. Smoothies have quickly become a breakfast or snack of choice for a population that is increasingly concerned with health and wellness. Our previous issue of Food for Thought focused on how, as demand for natural and organic food continues to surge, large consumer packaged goods companies are increasingly using M&A activity to add high-quality, health-oriented brands to their portfolios. SunOpta s acquisition of Sunrise Growers certainly represents a continuation of this trend. The aforementioned article from The Wall Street Journal reports that sales of organic frozen fruit are growing faster than nonorganic versions and now make up about 12% of sales. Continued Attractiveness of Private Label While the growth of the private-label industry has slowed somewhat as economic conditions have improved over the past several years, private label still represents a vastly important part of the CPG industry. According to Nielsen, private-label grocery sales reached $118 billion in 2014, or 17.8% of all sales. The private-label industry s ability to
maintain market share amid an improving economy shows that private label is here to stay. According to IRI, more than 80% of consumers today believe that private-label goods offer as good as or better quality than their namebrand counterparts. Private-label brands have shifted from being a cheap alternative to being a profit driver and point of differentiation for retailers. In addition to offering a tremendous value for shoppers, private-label brands typically generate higher gross margins than name-brand items. Private-label brands enhance retailers return on invested capital by requiring lower inventory investment and achieving inventory turnover that is generally on par with name brands. At William Blair, we have completed numerous transactions where the growing demand for natural, organic, and healthy foods and the attractiveness of private-label brands were major drivers of the sale process. To learn more about how these and other trends are shaping the deal-making landscape in the consumer industry, please do not hesitate to contact us. The private-label industry s ability to maintain market share amid an improving economy shows that private label is here to stay. Private Label Share of CPG Sales Private-label goods ability to maintain market share amid an improving economic climate is evidence that consumers no longer view store brands simply as a low-cost alternative to name brands. 18% 17.5% 17% 16.5% 16% 2009 2010 2011 2012 2013 2014 Sources: Nielsen Strategic Planner (2009 data) & Nielsen Answers (2010- data) William Blair 2
ANALYSIS Multiple Expansion for Private-Label M&A Transactions As a result of growing relevance to retailers and continued consumer acceptance, private-label brands have become an increasingly important part of the CPG industry. These dynamics, combined with favorable market leverage, have resulted in higher valuations for M&A transactions involving private-label companies. This comparison looks at the average EV/LTM EBITDA multiples for eight transactions completed in 2006-2010 and eight transactions completed in 2013-2014. 12x 10x 8x 6x 4x 7.7x 9.8x Market Analysis Each quarter we look behind the numbers to examine the market dynamics that are driving trends in the deal-making landscape in the food and food retailing industries. 2x 0x 2006 2010 2013 2014 EV/LTM EBITDA Source: William Blair s Mergers and Acquisitions market analysis Private-Label Brands Continue Gaining Market Share Even during an improving economic environment in 2013 and 2014, private-label sales gained market share relative to brand names at 68% of the retailers or wholesalers that responded to Store Brands State of the Industry Research Study. Private-Label Share of Unit Sales, 2014 vs. 2013 (retailer/wholesaler respondents) Decreased Stayed about the same Increased 1%-2% Increased 3%-5% Increased 6%-10% Increased more than 10% 0% 5% 10% 15% 20% 25% 30% Source: William Blair s Mergers and Acquisitions market analysis 3
Public Company Valuations Public-company valuations in the food, beverage, and food retail sectors on average outperformed the broader market in the third quarter as valuation multiples for those companies expanded while the multiples for the broader market contracted. The median enterprise-value-to-ltm-ebitda multiple for food production companies as of September 30,, was 13.2 times, up from 13.0 times in second quarter. In addition, recent market momentum has helped drive stock price performance for the food production sector compared with the broader market. The index of food production companies tracked by William Blair increased 1.4% over the year-to-date period, above the S&P 500, which was down 3.4% over the same period. Given the cash-flow-generative nature of food and beverage companies, it is not unusual to see multiple expansion in low interest rate environments as is the case currently. Food Production Companies Company Forward P/E Enterprise Value/ LTM EBITDA Beverage Production Companies Company Forward P/E Nestlé 21.0x 13.9x The Coca-Cola Company 18.8x 15.5x Unilever 18.7x 12.2x Anheuser-Busch InBev 19.5x 12.4x The Kraft Heinz Company 21.8x NMF Pepsico 19.1x 13.1x Mondelez International 20.1x 16.6x SABMiller 23.1x 19.2x Associated British Foods 33.5x 17.3x Diageo 18.7x 16.0x Danone 17.8x 12.1x Monster Beverage Corporation 33.8x 29.1x General Mills 17.9x 12.6x Constellation Brands 22.1x 17.1x Kellogg Company 17.6x 18.7x Brown-Forman Corporation 25.6x 19.7x The Hershey Company 20.3x 13.4x Molson Coors Brewing Company 20.8x 24.7x ConAgra Foods 17.4x 11.4x Dr Pepper Snapple Group 18.5x 12.3x Tyson Foods 13.0x 8.7x Coca-Cola Enterprises 17.3x 11.6x Hormel Foods Corporation 23.7x 14.2x Keurig Green Mountain 15.3x 7.6x Campbell Soup Company 19.1x 12.8x The WhiteWave Foods Company 28.7x 20.5x The J. M. Smucker Company 18.4x 15.0x Boston Beer Co. 25.1x 12.9x JBS 11.4x 5.9x Coca-Cola Bottling Co. 28.2x 15.6x Grupo Bimbo 24.0x 10.8x National Beverage Corp. NA 15.2x McCormick & Company 22.9x 17.0x Cott Corporation 29.9x 10.9x George Weston 15.5x 10.3x Farmer Brothers Co. 32.2x 10.8x Saputo 17.3x 11.8x Lifeway Foods 33.3x 23.1x Pilgrim's Pride Corporation 8.7x 3.6x Jones Soda Co. NA NMF The Hain Celestial Group 22.1x 18.9x Mean 23.9x 16.2x Flowers Foods 22.8x 13.2x Median 22.6x 15.5x ARYZTA 9.4x 14.3x Post Holdings 77.7x 13.1x Food Retail Companies Treehouse Foods 22.3x 12.6x The Kroger Co. 16.8x 8.3x Lancaster Colony Corporation 22.8x 14.0x Whole Foods Market 18.6x 7.5x Cal-Maine Foods 6.3x 5.1x Sprouts Farmers Market 21.9x 12.6x Snyder's-Lance 25.1x 15.0x United Natural Foods 16.8x 9.7x J&J Snack Foods Corp. 28.5x 13.3x SUPERVALU 8.6x 5.6x B&G Foods 19.3x 16.1x Smart & Final Stores 19.4x 10.3x Fresh Del Monte Produce 14.3x 9.1x Weis Markets NA 6.5x Tootsie Roll Industries NA 17.4x The Fresh Market 13.6x 5.4x Dean Foods Company 15.7x 7.2x SpartanNash Company 12.2x 6.7x Sanderson Farms 6.8x 2.7x Ingles Markets 15.3x 7.8x Lotus Bakeries 27.4x 19.3x Natural Grocers by Vitamin Cottage 30.1x 11.0x Diamond Foods 26.0x 9.1x Village Super Market NA 5.1x Calavo Growers 23.7x 14.7x Roundy's 48.6x 5.9x John B Sanfilippo & Son 14.8x 10.3x Fairway Group Holdings Corp. NMF NMF Boulder Brands 33.2x 16.7x Mean 20.2x 7.9x Seneca Foods Corp. NA 12.1x Median 16.8x 7.5x Inventure Foods 16.0x 13.9x Bridgford Foods Corp. NA 20.0x Golden Enterprises NA 7.6x Mean 20.9x 12.7x Median 19.3x 13.2x Enterprise Value/ LTM EBITDA Note: Data as of September 30, Sources: FactSet Research Systems, Bloomberg, and Capital IQ; data is sometimes based on reported results and includes estimates William Blair 4
WILLIAM BLAIR CONSUMER & RETAIL INVESTMENT BANKING William Blair By the Numbers Drawing on our deep sector expertise and the strength of our relationships with buyers around the world, William Blair has built a leading consumer and retail banking franchise. Business owners turn to us for outstanding execution for their M&A and capital-raising objectives. Recent transactions include: $450,000,000 has been acquired by $270,000,000 Initial Public Offering $111,442,600 Initial Public Offering 300+ bankers globally with local cultural knowledge 2,000+ completed advisory and financing transactions $ 200+ billion in transaction value for our clients $169,337,500 Not Disclosed $6,000,000,000 Initial Public Offering has been acquired by has acquired 5
Selected Upcoming Food and Retail Industry Events October 10-13 National Frozen and Refrigerated Foods Convention, Dallas, TX 11-14 NACS Show, Las Vegas, NV 13-15 Shopper Marketing Expo, Minneapolis, MN 22-24 Consumer Goods Forum: Future Leaders Congress, Rio De Janeiro, Brazil 23-25 Fresh Summit International Convention & Exposition, Atlanta, GA 26-27 IFE Americas Food & Beverage Show, Miami, FL 28-29 National Chicken Council Annual Conference, Washington, D.C. November 10-11 Kosherfest, Secaucus, NJ 14-16 Outlook Leadership (CSP), Scottsdale, AZ 15-17 PLMA s Private Label Trade Show, Chicago, IL December 3-6 SOHO Expo, Orlando, FL Access to Industry Leaders William Blair is committed to providing the consumer and retail community with access to leading industry investors and corporations around the globe. To learn more about attending our upcoming conferences, please contact James Bertram at jbertram@williamblair.com. 2016 William Blair Conferences Technology Company Growth Conference May, San Francisco Growth Stock Conference June, Chicago Private Equity Conference September, Chicago With more than 150 senior bankers around the world, William Blair has completed more than 2,000 advisory and financing transactions totaling more than $200 billion in value for our clients* Food and Beverage James Bertram Group Head, Consumer & Retail +1 312 364 5426 jbertram@williamblair.com Brent Smith +1 312 364 5392 bsmith@williamblair.com Chu-An Lee +1 312 364 5216 clee@williamblair.com John Levert +1 312 364 5217 jlevert@williamblair.com Food and Convenience Retail Timothy Carroll +1 312 364 8532 tcarroll@williamblair.com Michael Siska +1 312 364 5393 msiska@williamblair.com Europe Beth Pickens +44 20 7868 4479 epickens@williamblair.com *In the past five years as of July 1, William Blair 6
Disclosure William Blair is a trade name for William Blair & Company, L.L.C., William Blair Investment Management, LLC and William Blair International, Ltd. William Blair & Company, L.L.C. and William Blair Investment Management, LLC are each a Delaware company and regulated by the Securities and Exchange Commission. William Blair & Company, L.L.C. is also regulated by The Financial Industry Regulatory Authority and other principal exchanges. William Blair International, Ltd is authorized and regulated by the Financial Conduct Authority ( FCA ) in the United Kingdom. William Blair only offers products and services where it is permitted to do so. Some of these products and services are only offered to persons or institutions situated in the United States and are not offered to persons or institutions outside the United States. This material has been approved for distribution in the United Kingdom by William Blair International, Ltd. Regulated by the Financial Conduct Authority (FCA), and is directed only at, and is only made available to, persons falling within COB 3.5 and 3.6 of the FCA Handbook (being Eligible Counterparties and Professional Clients). This Document is not to be distributed or passed on at any Retail Clients. No persons other than persons to whom this document is directed should rely on it or its contents or use it as the basis to make an investment decision. About William Blair Investment Banking William Blair s investment banking group combines significant transaction experience, rich industry knowledge, and deep relationships to deliver successful advisory and financing solutions to our global base of corporate clients. We serve both publicly traded and privately held companies, executing mergers and acquisitions, growth financing, financial restructuring, and general advisory projects. This comprehensive suite of services allows us to be a long-term partner to our clients as they grow and evolve. From 2010-2014, the investment banking group completed more than 330 merger-and-acquisition transactions worth $73 billion in value, involving parties in 36 countries and five continents, was an underwriter on more than 20% of all U.S. initial public offerings, and raised nearly $100 billion in public and private financing.