Diversifying F&F Growth


This jointly written article addresses three prevalent industry themes. Firstly, we set into context the nature of the current peak of mergers and acquisitions (M&A) activity that analytically examine its empirical trend and impact on expected value. Secondly, we probe the differing strategic objectives of deal protagonists and investigate its impact on both F&F increasing market concentration and the diversification of corporate strategy away from its traditional flavor and fragrance (F&F) pure product heartland. Lastly, we consider the reasons why some owners may be contemplating a partnership process at this time and highlight the alternative array of strategic options available, some of which may better meet stakeholders' objectives and retain the culture and identity of a business, rather than the alternative of merely being gobbled-up and digested in a takeover.

While the global ingredients industry has been long recognized as a performance-orientated and dynamic sector, over the last half dozen years it has attracted increasingly positive strategic and investment attention. In particular, capital markets investors have come to appreciate the strong growth potential and margin-enhancing characteristics of value-add business-to-business (B2B) listed companies and have, in turn, chosen to reward those that continue to deliver superior performance by significantly re-rating their stock market valuations. This is best illustrated by the fact that in 2017, numerous ingredients platforms enjoy a superior valuation multiple to many of their publicly listed branded counterparts, including a large number of the Top 50 FMCG majors. Moreover, whilst any commentator would naturally expect an R&D-driven listed F&F company to benefit from an industry-wide valuation re-rating, in reality the strategically bold F&F companies have been at the very forefront of driving this trend and which, in turn, have afforded them greater capital markets security through increased investor confidence and an enhanced mandate to strategically-investigate additional opportunities in the pursuit of ever-greater corporate success.

Simultaneously, the relentless industry drive to both leverage R&D spending and differentiate service provision through ever-greater client intimacy, adopting a solutions-orientated applications approach and establishing a comprehensive regional or global service platform —particularly because of but not just limited to following the core list FMCG’s—has stimulated both M&A activity and organic investment alike.

The impetus to seek out and deliver growth and to exploit new market opportunities has impacted strategic thinking across the entire F&F industry, which is perhaps best exemplified by the almost feverish levels of M&A interest witnessed in recent times. The M&A genie is now firmly out of the bottle: expectation that F&F consolidation will continue is no longer just contemplated in closed smoky boardrooms, but has become part of routine network conversations widely discussed, anticipated, expected and sometimes encouraged by many parties connected with the industry. However, with M&A values high and pay-back periods long, the “third wish” for many active consolidators is that transaction multiples start to cool.

The Current Wave of Consolidation

Veteran commentators will be well aware F&F M&A is certainly not a new phenomena; it has continued to occur annually on a gradual but consistent basis, usually building-up to a peak wave of activity at a frequency of around every five to seven years (recent historical peaks were around 2001-02 and 2006-07). However, the current level of heightened M&A interest and activity—which first started in 2014—has displayed a distinctly different nature to previous occurrences, namely being more protracted over its duration and characterized by several hotly contested auction processes, which have resulted in strong competitive tension and ultimately achieving record-level exit valuations. Moreover, perhaps the most salient feature of this recent M&A peak verses past history is that the largest “Leffingwell leaders” have been seemingly unable to trigger a “mega-consolidation” movement amongst themselves and instead have chosen to expand their strategic remit through platform differentiation and acquired assets in adjacent categories, products and applications. Collectively, the leaders have dominated recent M&A activity acting as primary deal catalysts, whereas their smaller, independent rivals have become increasingly frustrated and marginalized by their inability to participate in the M&A consolidation chase.

Over the past 20 years, the ingredients market has witnessed on average around 30 transactions per year that have an Enterprise Value (EV) in excess of $20 million. However, as F-1 highlights since the lows of 2009-10 (when confidence in the global economic outlook was considered at best quite shaky), by deal volume, ingredients M&A has been steadily becoming more active, if not yet quite returning to the boom year of 2007. More interestingly, over the same period, the year-on-year number of transactions undertaken by F&F companies has steadily risen and now represents a significantly higher proportion of overall M&A activity, rising from ca.15% of total market transactions in 2010 to half of all transactions undertaken in 2015. Indeed F&F represents an incredible 70% of deals witnessed so far in 2017. Examining this trend by disclosed EV, it becomes even more starkly apparent that F&F-sponsored transactions have dominated the M&A market since 2014 collectively accounting for over 60% of total overall acquisition spend, representing an eye watering e7.6billion out of total cumulative market value of around e12.2.billion.

The identity of the eventual buyer alone doesn’t represent overall F&F appetite: over the years, there have been numerous examples of non-F&F trade parties unsuccessfully trying to enter this industry. However, since 2014 the spectrum of non-F&F parties displaying strategic appetite has substantially increased, and even if met with failure and frustration, this desire remains unabated with many external participants continuing to run their slide-rules over assets. Appetite for F&F still far outweighs the availability of assets, and scarcity contributes to inflation of valuations.

Since 2014 there has also been a significant rise in exit valuations achieved. Our analysis of F&F-sponsored transactions, where deal metrics have been disclosed, highlights an average rise in excess of 40% calculated on an EV/EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) multiple basis compared to precedent 2001-2013 transactions. The impact of such a steep rise in a short period has made some of the more sensible senior-decision makers of the Leffingwell leaders recognize that sometimes valuations have made assets just too hot to touch.

The geographic spread of F&F transactions has also evolved. Whilst assets in regions, such as North America and Europe, remain highly coveted it is also increasingly frequent to witness transactions undertaken in all parts of the globe. In many cases the ability to obtain exposure to more dynamic growth markets and to leverage existing local platforms that will enable both better customer servicing, as well as access to new local customers, tastes and trends, has led to much-enhanced strategic valuations being paid.

Whilst the lasting effects of this current wave of consolidation will be captured by and better understood through analyzing the Leffingwell Index in future years, the reaction of capital markets investors towards M&A can be more instantly interpreted as they have chosen to reward strategically-decisive listed F&F companies with strong share price performances. Since 2011, most F&F listed peers have been, frankly, dynamic and strongly outperforming the wider market, including for example, the S&P 500 index or indeed many of their FMCG customers. Today it is commonplace to observe a listed F&F company commanding a higher market multiple than their long-established, branded FMCG customer. The investor community has also positively welcomed many of the acquisitions undertaken, even in situations where the transaction multiple paid might rival or exceed the acquirers’ own listing metric. In certain cases, this has led to a further upward re-rating of the stock.

The New Play of M&A

The strategic objectives of the “Leffingwell leaders may have changed substantially in recent years even if its member composition has remained relatively static. Over the past 20 years or so we have witnessed the emergence of only a relatively few number of new, ambitious participants seeking to enter and enhance their (primarily flavors) market position. This was best demonstrated through the multiple successful acquisitions undertaken by Kerry and Frutarom, and more recently through the entry of ADM via its acquisition of Wild or by McCormick through re-engaging its industrial flavors focus and buying Enrico Giotti.

A constant theme since the early noughties is that most (but not all) of the Top 10 platforms have been avid consolidators. For a period, post the Quest and Danisco flavors consolidation moves, it seemed perhaps that only Frutarom and Kerry harbored M&A ambitions. However, post 2014, the strategic appetite of most “Leffingwell leaders” has significantly increased—combined, they account for nearly 80% of all F&F-sponsored deals (by volume) undertaken. In terms of end markets, flavors have undergone a more intense period of consolidation verses fragrance, in part due to it being characteristically less cyclical, arguably more diverse and dynamic and, therefore more desirable to growth-orientated listed companies. The flavors market is also more fragmented than fragrances. However, fragrances are not immune to consolidation, most recently witnessed by IFF acquiring Fragrance Resources or smaller participants, such as Agilex buying a number of assets including most recently Creative Fragrances.

Compared to periods of F&F historic consolidation where “mega-consolidation deals” occurred (such as IFF-BBA or Givaudan-Quest) this current wave is characterized by the seeming inability amongst the Leffingwell leaders to consolidate amongst themselves and instead to embark on differentiated corporate strategies. This new approach has somewhat distorted the “pure play” F&F market, which characterized the landscape before 2014. Additioanlly, corporate reporting policies have increasingly blurred the landscape making analysis increasingly complicated, if still indicative of performance and direction.

Consolidators are no longer just acquiring assets with a similar profile to their own existing business, but are also seeking to diversify through expanding into adjacencies that offers sales growth opportunities, synergistic leverage and cross-fertilization, or acts as a differentiation marketing point. Successful diversification strategies have included tapping-into adjacent markets such as savory (e.g., Mane-Cargill Rubì; Givaudan-Spicetec), animal palatability (e.g., Symrise-Diana) and cosmetic ingredients (e.g., IFF-Lucas Meyer; Givaudan-Soliance), deals that often commanded high valuation multiples reflecting future growth potential. Differentiating oneself from competitors, such as by capturing value through direct control of the raw material ingredients supply chain (e.g., Mane-Kancor; Symrise-Pinova; Firmenich-Essex Labs), is also a rising theme. IFF has also chosen to differentiate its core list orientated strategy and consolidate local leaders, such as Ottens and David Michael, who have direct access to the sub-FMCG client base, as well as some core list exposure. The approach towards post transaction integration has also changed with an increasing emphasis to resist the loss of a business’ unique selling proposition by retaining certain stand-alone features that characterize an asset, such as management style, a creative, innovation-driven culture and best-practice customer service.

Allowing for this market parameter step-change, Leffingwell’s analysis displayed in F-2 continues to demonstrate ever-increasing market share consolidation amongst the Top 11 rising from a ca.59% market share in 2004 to over 74% in 2016. In absolute terms, those companies who have chosen at some point over their history to make a step-change acquisition (e.g. Givaudan-Quest, Firmenich-Danisco, Haarmann & Reimer-Dragoco-Symrise) or through smaller, incremental acquisitions have certainly increased overall market presence, but not all have been successful in retaining market share post transaction integration. The more lasting deals come through acquiring new rather than existing (FMCG) clients and complementary corporate structures rather than less-competitive rivals. Interestingly, on an absolute basis, the Leffingwell Top 6-10 has risen faster than the Top Five, enjoying an average 2004-2016 CAGR of 3.5% verses 1.5% and increasing their overall market share presence by over 50%, versus a mere 19% increase by their larger rivals.

M&A has also led to some spectacular market share rises, most recently noted in Frutarom’s  FY2016 results, which posted a core flavors and specialty fine ingredients sales rise of 35.4%, versus a constant currency growth on a pro-forma basis of 5.9%, and allowed Frutarom to capture an overall market share rise of 0.9% in a year.

Moreover, it should not be assumed that increased market consolidation has arisen through M&A alone; indeed as Leffingwell data articulately demonstrates, a key success factor of certain “Leffingwell leaders” is their ability to both capture and retain market position through sustaining high levels of organic growth by leveraging internal competence and innovation. Certain participants, such as MANE, have been extremely successful at exploiting organic growth, as well as strategically complementing internal success through selectively targeting acquisitions, leading to an impressive dollar sales growth of 11.7% (or 14.4% in local currencies) in FY2016. In contrast, participants such as Hasegawa and Takasago, whose strategy has been to continually exploit relatively strong margins in established but less innovative markets or lower growth geographies, and who have not embarked on a more comprehensive global M&A strategy, have lost relative position.


Analyzing the impact of change from an end-user customer (particularly FMCG) perspective highlights stark strategic challenges for the F&F industry.

The impact of continuing year-on-year overall sales growth declines amongst the Top 50 FMCG—falling to an average of just 0.9% in FY2014/15 from its recent high of 7.3% in FY2010/11—and even more alarmingly, the steady annual fall of organic revenue growth has required a reality adjustment for suppliers, particularly core list participants. This sales slump has been particularly felt among pureplay FMCG food and drink producers, rather than their counterparts with greater non-food exposure (such as Unilever and Kimberly-Clark), in part because commodity deflation has been less significant in non-food and partly because competition from local brands remains less fierce, as opposed to the increasing difficulties of differentiating western branded foods and keeping them relevant to the millennial consumer.

M&A activity across the FMCG Top 50 has also risen sharply since 2014, with deals by value, rising from $54 billion in 2014 to a height of $226 billion. However, unlike the “Leffingwell leaders” FMCGs are undertaking mega-deals consolidating amongst themselves, such as AB InBev-SAB Miller, Kraft-Heinz and its recently aborted (or perhaps just delayed) interest in Unilever. In comparison to the strategic direction of F&F-sponsored deals, FMCG M&A has focused on strengthening positions within existing sectors and markets, rather than diversification or growing in new geographies, indicating that potential synergies and cost benefits are viewed as more desirable than strategic hedging.

The impact of end-customer consolidation on F&F participants should also not be underestimated. For example, deals such as Coty’s acquisition of P&G’s beauty products division and Revlon buying Elizabeth Arden has delayed fragrance innovation and launches; 3G’s approach towards Heinz/Kraft zero-budgeting cost-cutting has disrupted client relationships and the supply chain.

Looking forwards, FMCG sales growth continues to face strong headwinds, caused by factors such as the continued economic downturn in so-called BRIC nations, instability caused by anti-establishment political insurgence (such as the reality of Trump America and the potential of post-Brexit EU interference on free-trade through protectionism and trade barriers), the loss of growth markets due to localised political disputes (e.g., Syria, Libya) and the alarming rise in global terrorism, the knock-on effects of increasingly volatile currency movements, and the fall in (food) commodity prices.

Combined, these landscape shifts will continue to impact F&F performance, in particular disproportionately affecting core list suppliers.

Consolidation Dance

Whilst the consolidation dance will remain a constant and ongoing industry theme, and continue to challenge its participants through market evolution, the smaller, independent F&F companies would be inherently wrong to conclude their future strategic options are as finite as “sell 100% now” or “we plan to go it alone.” There remains a strong and profitable future for smaller, nimbler market participants who continue to focus, enhance and retain value-adding factors, such as: client understanding and intimacy, the pulse of local market trends, access to and export of local fragrances and cuisines, and to maintain growth-orientated capex and R&D spend. Future success will come from fostering the ability to think creatively and act nimbly and the ability to turn competitors' omissions and oversights into opportunity and rewards.

Equally it remains inevitable that some participants will seek to explore alternative options through investigating the M&A route. While there is no one overarching factor that drives this emotive as well as rationale decision to seek an ownership change, the broad commercial challenges faced by independents tend to be quite similar around the world. Influencing factors include: an inability to independently develop or access new applications and technologies; winning new sales from existing clients through product innovation rather than just business and relationship maintenance; the ability to attract and retain top talent, particularly in a peripheral geography; defending market position after a larger rival enters a market to service FMCGs or other customers; and access to working capital finance and the quandary of navigating the best way of taking a business to its next level, whilst recognizing the limitations of existing organizational ability.

In a market where client intimacy and superior client service can commercially equal—indeed if not actually trump—a rival's superior R&D spend, a savvy independent F&F decision-maker would be wise to consider the wide spectrum of alternative strategic options available, which can include partnerships and longer-term collaborations, to ensure future business success, to better meet the objectives of all stakeholders and to ultimately maximize the value of the company.


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