M&A as the predominant way to enter the alternative protein sector

Several traditional food companies have used M&A to address the alternative protein opportunity, growing their product lines and consumer offerings through bolt-on acquisition.

Major acquirers include Nestle, Dean Foods, Maple Leaf Foods, and others. These traditional food companies benefit from well-established downstream distribution channels and decades-long grocery store relationships.

Thus, when acquiring a startup brand, the incumbent acquirer could help accelerate sales by providing access to distribution.

There are three main reasons for strategic M&A in alternative proteins:

• Expansion in basic plant-based products
  Acquiring a target with little defensible IP and primarily for its branding to enter the alternative protein space. One example is Maple Leaf acquiring Field Roast Green Meat.
• Product disruption
  Hedging against substitutes and investing in tomorrow's growth engines. This involves acquiring a target to gain defendable knowledge, IP, or new core competencies which are success-critical in the alternative protein sector. An example of a traditional food company acquiring a tech company is Kerry acquiring Pevesa Biotech, a producer of non-allergenic, non-GMO plant proteins for the infant, general, and clinical nutrition markets. Another example of an acquisition to gain defendable knowledge and new competencies (which is also the first acquisition in the young field of cultured meat) is Meat Tech acquiring Peace of Meat.
• Platform building
  Developing an ecosystem to drive engagement and retention. This means acquiring a series of targets to build a platform, benefit from synergy effects and increase horizontal integration. One example is The LIVEKINDLY Corporation acquiring Iceland Foods' No Meat, Like Meat, Oumph! and Fry Family.

In contrast, financial investors mostly follow growth strategies with IPO exit or buy-and-build strategies, with most targets being early-stage and high-growth targets. Given the alternative protein space boom, several acquisitions have happened in the last five years.

The figure below showcases some of the more prominent acquisitions, and this study's appendix provides a comprehensive list. Acquisitions have continued to accelerate into 2020 amid the COVID crisis, and the growing transaction number underlines the acceleration in the alternative protein sector.

Risk Mitigation of Alternative Protein M&A

The high valuations, dynamic market environment, and fast-changing technologies in the alternative protein sector create specific risks during the transaction process.

These require anticipation for a successful M&A story. While there are success stories like the Unilever acquisition of the Vegetarian Butcher, unsuccessful deals are also identifiable, like the Dean Foods acquisition of Good Karma Foods.

In the latter case, the dairy company Dean Foods filed for bankruptcy one year after the purchase, and Good Karma Foods needed investors to buy back the majority shares.

M&A activities in the field of alternative proteins will not become a success by themselves – especially given the highly dynamic market environment and several risks along the transaction process.

On the figure below, we summarize the main risks and mitigation options we have observed in past projects and from numerous conversations in the alternative protein sector.

We often recognize that in the alternative protein sector, particularly the stages of target identification, commercial / operational / scientific due diligence, and post-signing work are success-critical.

Identifying acquisition targets

our project work and experience in the alternative protein sector show that several companies fail to follow a structured approach when scouting for potential acquisition targets. We recommend following a 5-step approach for target scouting:

• Define your objectives first:
  You must base the target identification objectives on the M&A strategy, which derives from the overall corporate / business unit strategy. Clear and well-defined goals are success-critical. The impetus to enter the market is a starting point, but it is not a strategy and will not lead to good target identification objectives.
• Utilize ready-to-use databases:
  Startup databases and collaboration platforms like The Protein Directory are very helpful to get an initial overview. Nevertheless, we recommend expanding your search across several databases.
• Define hard and soft filter criteria to shortlist companies:
  Prioritizing clear and well-defined search criteria is essential to quickly identifying potential targets down to a long- and short-list. The rapidly rising number of startups and technologies overwhelm most of our clients. Using clear criteria allows you to find the most relevant targets quickly and systematically.
• Engage with shortlisted targets early:
  Open communications early with potential targets via initial calls and workshops to assess quickly whether an M&A approach is applicable. Chances are that several competitors are considering similar young alternative protein companies, and often founders are picky and cautious regarding M&A discussions.
• Think win-win:
  The alternative protein sector is growing strongly, and the valuations of young companies are high. Founders are often self-confident about their product / service and very skeptical about the benefits of selling their company to a large corporate or PE fund. To bring relevant arguments to the table and ensure a win-win-situation, it is essential to answer two questions: (1) What value in terms of revenue, cost and/or financial synergies can the corporate bring to the young company? (2) How are you going to align strategy, culture and communications as well as organizational, processual, and operational measures? Streamlining these will allow optimal collaboration during and after the transaction.

Due Diligence

several forms of due diligence exist to mitigate risks in a transaction.

Due diligence types like financial, legal, tax and IT do not (or only to a small degree) need to be specific to the alternative protein sector.

But the focus in this section is on

• commercial
• operational / technical
• scientific / regulatory due diligence

These three due diligence types must be specific to the alternative protein sector, and they are interrelated because there is an overlap between commercial and operational / technical as well as between operational / technical and scientific due diligence.

The next figure illustrates the main assessment areas and offers some example guiding questions for each of the three due diligence types. However, depending on the buyer and target in the specific transaction, the detail level and scope of the due diligence types will vary.

Performing these three types of due diligence on a larger cellular agriculture company like Mosa Meat will require detailed scientific / regulatory as well as detailed operational / technical due diligence.

However, only a short version (e.g., "red flag report") of the commercial due diligence will be necessary because their product is not yet commercialized.

In contrast, running the three types of due diligence on a developed plant-based meat company which mostly differentiates itself on branding but has outsourced all manufacturing and has no defendable internal IP would require a different level and scope.

In this case, a detailed commercial due diligence and selected detailed and/or short operational / technical due diligences on the production partners are necessary.

However, no scientific / regulatory due diligence is needed because this is mostly required for high-tech and novel food applications in the fields of cellular agriculture, precision fermentation, spinner, shear cell and similar rather early-stage technologies.

Post-signing phase

most of the companies in the alternative protein field are rather young companies or startups.

When acquiring relatively young companies, some considerations and post-signing work packages are relevant to lift synergies and ensure an M&A success story.

It is important to allow the acquired target to strive in the optimal way and to keep administrative burden and "roadblocks" to a minimum because the young company will most likely be in a scale-up phase and under time pressure to grow fast.

In addition, it is success-critical to emphasize cultural integration.

Differences between large corporations and young companies are often quite extensive, and miscommunication as well as bad expectation management can cause much frustration, often leading to "talent drain".

All in all, M&A is a predominant growth option in the highly dynamic and fast-paced alternative protein sector.

Corporates are mostly interested in acquiring young companies to enter the market, add a credible new brand, gain defendable knowledge / IP / new core competencies, ensure supply stability and/or build a platform.

Even though the alternative protein market is growing strongly, and an increasing number of companies is entering the field, not all M&A activities are and will be successful.

It is important to mitigate risks along the transaction process and ensure that synergies can be realized as promised in the initial equity story.

Now, two questions remain. What are the optimal growth options for your company in the alternative protein sector? And how can you leverage M&A as a value-adding growth option for your company in the alternative protein sector?

This is the last post in our five-piece article series. We hope you enjoyed reading it and that you gained some insight from it.

As the leading alternative protein consultancy, Bright Green Partners can help you navigate the alternative protein industry by providing you with due diligence services and beyond. Please feel free to get in touch, we're ready to support you at every step of your journey.