Are high acquisition multiples in the F&F industry a myth?

High multiples? The answer is – it depends!

We all hear and read about acquisitions in our industry, it’s hard not too, and they continue unabated. I think that most industry people believe that multiples regularly exceed 10+ times but this is not necessarily the case and to support my view I researched the available data in the public domain. My conclusion was that apart from some anomalies where multiples have been exceedingly high, the reality is that the majority of transactions over the past few years have been at an average multiple of closer to 6 to 7 times.

Firstly, just for explanation – EBITDA stands for earnings before interest, tax, depreciation and amortization and this number closely reflects the cash flow of a business before tax and financing activities and is one of the best methods for calculating the valuation of a business. The multiple is really just that, a factor that is used to arrive at a valuation estimate. Conversely the selling price divided by EBITDA gives you the multiplying factor and is a good comparable measure when examining valuations of past acquisitions. For example: EBITDA is $1.0 million and the price paid for this business is $10.0 million then the multiple would be 10 times. This is a very simple explanation but you can get the idea. This blog is not meant to be M&A 101 but just trying to set the scene for my readers.

If you look at the recent acquisitions of Wild Flavors by ADM and Ottens Flavors by IFF it would be easy to think that the sky is the limit on valuations but these examples, which many in the industry would view as “irrational exuberance” are definitely not the norm. These are fantastic results for the owners of these companies but obviously there must have been some pretty compelling reasons for the acquirer to pay such high valuations. Let’s face it, not everyone has something unique to offer as these two examples must have had for their acquirers. Whether in the end the pay back will be worth it remains to be seen and we may never know, unless ADM decides to divest Wild Flavors in the future, as Cargill did with its Flavor division.

One problem when looking for data on M&A in the F&F Industry is that there is just not a lot of information available. Most sale agreements require price details to be kept confidential, but public companies have to provide some information to their shareholders and also fortunately for us, Frutarom, who have been the most acquisitive strategic player over the past few years have kindly shared enough information in their press releases to be able to make some assumptions as to the valuations they have arrived at and hence the multiples they are paying.

Over the past 2 years Frutarom has made about 15 acquisitions for a total consideration of approximately $406 million for a total revenue stream of virtually the same amount, which equates to 1 times revenue on average. EBITDA is not disclosed but let’s assume that an average these companies achieved an EBITDA % of 15%, which is not an unreasonable assumption. Of course in reality some would be higher and some lower but for this purpose 15% would yield a multiple of 6.7 times and not the 10+ multiple that most people would expect. Makes you wonder how good these businesses actually are based on these type of multiples or maybe Frutarom are just very shrewd negotiators but one would suspect that the sellers could have done a better job in marketing their companies to get the best possible valuation but as usual the devil is in the details behind each transaction.

On the other hand, aside from the IFF and ADM examples, Kerry announced 3 acquisitions in 2015 for a total consideration of $735 million for revenues of $301 million and combined EBITDA of $50 million which is an impressive average multiple of 12.4 times and 2.5 times revenue so as I said at the beginning the answer to high multiples being a myth still remains the same – it depends!

About Focus International:

We partner with SME companies in Flavor & Fragrance and Specialty Food Ingredients.

Our “global success system” encompasses market research and strategic planning through to M&A and business development and everything in between. Our on the ground experts bring their more than 25 years of experience and proven track record of success to our clients to develop international markets with less risk and higher returns.

Focus International has experience in both the “buy” and “sell” side of a transaction and through our international experience, deep industry knowledge and successful M&A track record is able to assist owners of family businesses to prepare and confidentially market their companies.

Please contact Trevor Rahill at trevor@focusinternational8.com for a confidential discussion of your needs.