Food Distribution M&A Update – November 2023

Food Distribution M&A Remains Steady, Driven by Robust Private Equity Investment

The Food Distribution sector has largely avoided the headwinds that have impacted other pockets of the Consumer industry, with steady demand persisting for both broadline and specialty distribution. However, the favorable pricing environment that drove significant top-line growth for many sector participants throughout 2022 has dissipated as many food categories have experienced deflation in recent months. Notably, at the producer level, items including fresh and dry vegetables and dairy products recorded year-over-year (YOY) pricing declines of 27.6% and 7.1% in September, respectively, according to the Bureau of Labor Statistics.¹ As pricing has begun to normalize, sector participants have increasingly focused on growing volumes and seeking additional revenue opportunities—lending to a healthy Food Distribution merger and acquisition (M&A) market.

The moderation in food pricing has coincided with a slowing of revenue growth for top sector players through year-to-date (YTD) 2023. Leading foodservice distributor Sysco (NYSE:SYY) experienced 2.6% YOY sales growth in its most recent quarter, according to its earnings release.² The modest quarterly revenue increase pales in comparison to levels recorded throughout 2022, during which Sysco averaged a quarterly YOY sales gain of 22.6%. Similar trends have been seen across other top sector players with US Foods (NYSE:USFD) experiencing 2.1% sales growth YOY in Q2, compared to 9.5% in Q1, according to its earnings release.³ However, despite a deceleration in top-line growth, sector players have largely maintained healthy profitability. In their most recent quarters, both Sysco and US Foods improved gross margins, expanding by 34.4 and 198.4 basis points, respectively. With profitability levels remaining robust and cash positions steady, strategic buyers are anticipated to increasingly pursue inorganic growth to offset slower organic sales.

Despite broad-based deflation in 2023, M&A activity within the Food Distribution sector remained robust over the course of the year. M&A activity was active among both broadline distributors and specialty distributors; we expect this trend to continue into 2024.

Brian BoyleManaging Director, Capstone Partners

Food Distribution M&A Volume Increases Year-over-Year

M&A activity in the Food Distribution sector has persisted at steady levels approaching year end. Through YTD, 60 transactions have been announced or completed, marking a YOY uptick of 3.4%. Transaction activity has been spread across various Distribution subsectors, including Bakery Ingredients, Produce, and Foodservice Equipment. Strategic buyers have accounted for a majority of Food Distribution M&A activity, comprising 63.4% of YTD transaction volume. Leading sector players have been active acquirers, seeking to add complementary service offerings or diversified capabilities. This has been evidenced by Sysco’s acquisition of Edward Don in October, a leading foodservice equipment distributor (transaction terms undisclosed). The addition of Edward Don, which has generated approximately $1.3 billion in annual revenue, will provide Sysco with a specialty Equipment and Supplies platform, according to a press release.⁴ The acquisition also creates an additional revenue opportunity for Sysco to provide equipment and supplies to its expansive customer base. The transaction is the latest in a series of purchases for Sysco and in line with its Recipe for Growth strategy that it laid out in 2021. The strategy was designed to help Sysco grow 1.5 times faster than the market by the end of fiscal year 2024, with acquisitions being a focal point and anticipated to provide 0.5% to 1% of sales growth each year, according to its investor presentation.⁵ “It is important to point out that Sysco, a company that has grown via acquisitions since it was founded, will continue to utilize that tool as we seek to achieve our faster-than-market growth. So we are assuming continued pursuit of tuck-in acquisitions adding to the more than 200 deals done over Sysco’s lifetime,” commented Aaron E. Alt, Executive Vice President and Chief Financial Officer, in the investor presentation.

Within the Specialty Distribution segment, produce distributors have garnered significant buyer appetite in the current market. Notably, Sysco's specialty produce platform, FreshPoint agreed to acquire BIX Produce, a leading produce specialty and fresh cut distributor (June). Terms of the transaction were not disclosed. In addition, GrubMarket has continued to expand its produce distribution solutions through YTD, having acquired Mendez International, a wholesale tropical fruits and vegetable distributor (September, undisclosed). The acquisition followed GrubMarket's purchase of London Fruit in August (undisclosed). Moving towards year end and into 2024, high quality produce distributors are expected to attract healthy strategic and financial buyer interest.

Private Equity Continues to Deploy Capital to Sector, Despite a Tightened Lending Environment

Private equity dealmaking across all middle market industries has slowed significantly YTD, with closed transactions falling 26.1% YOY through Q3, according to Capstone Partners' Q3 2023 Capital Markets Update. However, despite elevated transaction financing costs and a challenging operating environment for Consumer industry players, sponsors have been unwavering in their Food Distribution investment theses. Through YTD, financial buyers have accounted for 36.6% of total transactions—exceeding the three-year average of 31.2%. Capstone Partners has witnessed this dynamic firsthand, evidenced by the advised recapitalization of City Line Distributors by Frontenac outlined below.

• Capstone Partners Advised City Line Distributors on its Recapitalization by Frontenac (September, Undisclosed) - Capstone Partners advised City Line Distributors, Inc.—a family-owned specialty food distributor—on its recapitalization by Chicago-based private equity firm Frontenac Company. Terms of the deal were not disclosed. City Line Distributors is a third-generation, family-owned food distributor headquartered in West Haven, CT. Founded in 1930, it is a specialty distributor with broadline capabilities focused on supplying food and food related items to restaurants, hotels, schools, colleges, and healthcare facilities.

Private equity firms have also actively expanded platform investments through add-on acquisitions to add scale, bolster capabilities, or enhance geographic penetration. Legacy Food Group, a recently formed entity backed by Quad-C Management, announced the acquisitions of foodservice distributors Keck's Food Service and Thomsen Foodservice in September for undisclosed sums. The Legacy Food Group platform has sought to acquire high-quality regional independent distributors. Bakery and pastry distributors have also garnered strong sponsor attention through YTD. Notably, Vestar Capital-backed Roland Foods acquired ifiGOURMET, a leading importer and distributor of products for use in the Bakery, Pastry, Confectionary, and Ice Cream segments (August, undisclosed).

Wind Point Partners has also been active in pursuing add-on acquisitions through the expansion of its FreshEdge platform. In July, FreshEdge acquired Sirna & Sons, a family-run wholesale food distributor. Terms of the transaction were not disclosed. Sirna & Sons operates out of two facilities with a combined 140,000 square feet of warehouse space—bolstering FreshEdge's footprint to 1.1 million square feet of warehouse space across 28 facilities, according to a press release.⁶ Sponsor-to-sponsor dealmaking has also been prevalent in the current market, evidenced by Shoreline Equity Partners sale of Mr. Greens to Sterling Investment Partners (May, undisclosed). The acquisition highlights the private equity interest in high quality produce, dairy, and dry goods distributors.

Moving through year end and into 2024, financial buyers are expected to continue to pursue Food Distribution sector players as sponsors look for resilient spaces to deploy capital. Strategic buyers are also anticipated to actively seek out target companies that offer operational synergies, diversification, or expansion of existing services. In addition, Capstone has noted a low quantity of meat distribution deals, while simultaneously, meat processors have seen heightened buyer demand. In the new year, an improved operating environment may present a favorable backdrop for meat distributors to comprise an increased share of transaction volume.

To provide an update on your business or learn about Capstone's wide range of advisory services and Food Distribution M&A knowledge, please contact us.

Connor McLeod, Vice President, was the lead Market Intelligence contributor to this article.