Market Monitor: Food & Beverage

Market Monitor: Food & Beverage

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Market Monitor: Food & Beverage

Making the right decisions for your business starts with having the most accurate and current information available. Our Food & Beverage  Market Monitor keeps you up to date on the events, trends, and market forces that shape and guide the industry’s M&A trends.

U.S. Food & Beverage M&A Trends: Mid-2024 Overview

Steady Growth in M&A Volume

U.S. Food & Beverage mergers and acquisitions (M&A) volume showed modest year-over-year growth in the first half of 2024, despite cautious market conditions.

Challenges in the M&A Landscape

Businesses continue to face challenges such as inflationary pressures and high interest rates, contributing to a cautious approach from acquirers and investors.

Sector Spotlight: Flavors & Fragrances and Specialty Ingredient

Formulators and manufacturers in these sectors with strong R&D capabilities and stable customer bases are fetching premium valuations.

Key Acquisitions

Recent notable acquisitions include ADM’s acquisitions of Revela Foods and FDL, Glanbia’s acquisition of Flavor Producers, and Tate & Lyle’s announced acquisition of CP Kelco.

Private Equity Strategy

High interest rates are impacting larger platform acquisitions, prompting financial sponsors to focus on add-on acquisitions to scale portfolio companies.

Emerging Trends

Despite a slow 2023 and a reserved start to 2024, signs of recovery are appearing. Potential catalysts like stabilized interest rates could spur increased M&A activity in the second half of the year.

Looking Ahead

With corporate cash reserves and private equity capital at record highs, a potential rate cut could stimulate a more dynamic M&A environment moving forward.

For more information or questions, please contact our contributors:

Rich Anderson, Managing Director: randerson@hexagoncapitalalliance.com

Johnny Sherwood, Director: jsherwood@hexagoncapitalalliance.com

Market Monitor: Online Retail

Market Monitor: Online Retail

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Market Monitor: Online Retail

Making the right decisions for your business starts with having the most accurate and current information available. Our Online Retail Market Monitor keeps you up to date on the events, trends, and market forces that shape and guide the industry.

Online Retail Sector Resilience in 2024

In the first quarter of 2024, total retail sales in the United States reached $1.82 trillion, reflecting a 1.5% increase compared to the same period in 2023.

Online sales in the US showcased remarkable resilience, reaching $289 billion, which accounted for approximately 16% of total retail sales. E-commerce’s share of total retail sales is gradually approaching the pandemic high of 16.5%.

Adapting to Inflation: Walmart and Target's Strategy

As consumers adjust to persistent inflation, spending has shifted towards lower-priced goods. While retail sales have continued to rise, their composition has shifted towards a higher volume of lower-priced items.

Retail Strategies for Affordability

Walmart and Target have responded by launching new private label brands focused on affordability. These brands offer products priced under $10 and expand their range of cost-effective options through existing private label lines.

M&A Landscape in Online Retail

The online retail sector’s M&A landscape continues to lag behind other industries as consumers feel uncertainty towards the economy. However, strong brands that can quickly adapt to market changes and sustain growth are positioned to attract investors at premium multiples.

For more information or questions, please contact our contributors:

Rich Anderson, Managing Director: [email protected]

Tyler Dale, Managing Director: [email protected]

Johnny Sherwood, Director: [email protected]

 

Banker Insights: 2026 Estate and Gift Tax Exemption Change

2026 Estate and Gift Tax Exemption Change:

As we look ahead to 2026, middle market business owners face significant changes with the estate and gift tax exemption, which is scheduled to reduce from $13.61 million per person ($27.22 million for a married couple) today to roughly half of these amounts beginning January 1st, 2026. This impending shift presents both challenges and opportunities in the M&A landscape.

Accelerated Transactions: Seizing the Window of Opportunity

The reduction in the estate and gift tax exemption is expected to create a sense of urgency among business owners. Many will look to expedite M&A transactions to benefit from the higher exemption before it decreases. This urgency can lead to a surge in market activity, with owners keen to finalize deals while the tax environment is more favorable. By acting promptly, you allow time for preparing your business for a sale transaction in 2025.

Market Dynamics: Timing Your Moves

The impending change is likely to create a spike in M&A activity leading up to 2026, followed by a potential slowdown as the market re-adjusts. Strategic planning and preparation will be essential to capitalize on the wave. The U.S. experienced a similar phenomenon in 2012 leading up to the implementation of the American Taxpayer Relief Act (increasing the Federal Capital Gains Rate), where middle market deal volume increased by approximately 34% over 2011 as business owners aimed to complete transactions before the new tax provisions came into effect.

Increased Advisory Demand: Leveraging Expert Guidance

With impactful changes on the horizon, there will be a heightened need for expert advisory services. Even if you are not contemplating an immediate sale of your company, it is beneficial to begin preliminary discussions with an estate tax advisor and an investment banking advisor for several reasons:

  • Hexagon Capital Alliance (“HCA”) can provide relevant and valuable insights into market trends, helping you make informed decisions.
  • We can assist with your company’s strategic planning, helping you to position the company when it is time to go-to-market.
  • The process of selling a business involves numerous complexities, including due diligence, negotiations, and regulatory compliance. Having the luxury of time to understand the nuances of your business will help ensure that the process goes as smoothly as possible as opposed to waiting until the “last minute” to contact an investment banking advisor.
  • Our goal is to maximize value for our clients. By working with you early, we can take an offensive approach once the decision is made to sell your business. By working with HCA well before contacting buyers, we can make the process as efficient as possible, reducing execution risk and accelerating the time to close. With the anticipated tax changes, maximizing valuation becomes even more critical as owners aim to secure the best possible deal before the new estate tax rate and gift tax exemption is in effect.

Starting the M&A process early with the assistance of an investment banking advisor provides business owners with strategic advantages, including optimal timing, maximized valuations, favorable structure, and efficient transaction management. These benefits are crucial for navigating the upcoming 2026 tax changes and ensuring that business owners achieve their financial and legacy goals. Engaging with an investment banking advisor now is a proactive step towards securing a successful exit strategy.

Market Monitor: Flavors & Fragrances

Market Monitor: FLAvors & fragrances

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Making the right decisions for your business starts with having the most accurate and current information available. Our Flavors & Fragrances Market Monitor keeps you up to date on the events, trends, and market forces that shape and guide the industry.

The Allure of Flavors & Fragrances

Flavors & Fragrances companies are captivating strategic acquirers and private equity investors due to their loyal customer bases, enticing gross margins, and abundant growth prospects.

The Power of Flavors & Fragrances

Despite their minimal share in product costs, Flavors & Fragrances significantly influence consumer choices, resulting in high switching costs and formidable barriers to entry.

Key Attributes Driving Premium Valuations

Hexagon Capital Alliance has identified pivotal characteristics that attract interest and elevate valuations:

  1. Robust R&D Function: Technical expertise and a proficient team of certified flavorists drive innovation and product differentiation.

  2. Thriving End-Markets and Formats: Focus on high-growth segments like sports nutrition and better-for-you snacks, with expertise in sought-after formats such as functional gummies and RTD beverages.

  3. Appealing Gross Margins: Premium, tailored flavors command strong margins, bolstered by the inertia of high switching costs.

  4. Experience with Emerging Brands: Adaptability and agility to meet the evolving needs and swift market entry demands of emerging brands.

  5. Embracing Natural & Organic Trends: Predominantly featuring a portfolio of natural and/or organic flavors to align with the flourishing clean label movement.

  6. Robust Backlog: Proactive sales pipeline coupled with a surge in sample requests, underpinned by a stellar conversion track record.

  7. Manufacturing Capabilities: Versatile liquid and powder manufacturing capabilities, including spray drying, with ample capacity to facilitate expansion.

Embracing these attributes not only attracts interest but also enables Flavors & Fragrances companies to command premium valuations in the market.

For more information or questions, please contact our contributors:

Rich Anderson, Managing Director: randerson@hexagoncapitalalliance.com

Johnny Sherwood, Director: jsherwood@hexagoncapitalalliance.com

Brennan Anderson, Vice President: [email protected]

 

Market Monitor: Outdoor & Recreation

Market Monitor: Outdoor & Recreation

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Market Monitor: Outdoor & Recreation

 Making the right decisions for your business starts with having the most accurate and current information available. Our Outdoor & Recreation  Market Monitor keeps you up to date on the events, trends, and market forces that shape and guide the industry.

Outdoor & Recreation Market Insights

  • According to the Outdoor Industry Association, the Outdoor Recreation market experienced a slight downturn of 3% in retail sales for FY 2023 compared to FY 2022.
  • While M&A activity in the Outdoor Recreation sector was sluggish in the first four months of 2023, there has been a remarkable uptick in completed transactions during the same period in 2024.

Transactions Overview

  • 2023 Transactions Overview
    • 12 transactions completed through YTD April 2023.
    • 10 strategic acquirers and 2 financial buyers.
  • 2024 Transactions Surge
    • YTD April 2024 saw 32 completed transactions.
    • 24 acquisitions by strategic buyers and 8 by financial buyers.

Market Dynamics and Opportunities

  • This surge is especially promising amid concerns regarding high interest rates and inflation. Moreover, new entrants targeting emerging trends like pickleball, outdoor adventure, camping, and peak physical performance enhancement indicate a vibrant market landscape.

Consumer Spending Shifts

  • Consumer spending patterns suggest a shift towards focused expenditure on specific sports or activities within the Outdoor Recreation segment, potentially impacting broader market segments.

M&A Outlook

  • Anticipated M&A activity acceleration throughout 2024.
  •  Financial buyers eyeing entry into the Outdoor Recreation market, while others seek to bolster existing portfolios following a tepid 2023.
  •  Strategic buyers prioritize enhancing core competencies and expanding within their niche domains.

For more information or questions, please contact our contributors:

Rich Anderson, Managing Director: randerson@hexagoncapitalalliance.com

Tyler Dale, Managing Director: tdale@hexagoncapitalalliance.com

Johnny Sherwood, Director: jsherwood@hexagoncapitalalliance.com

Brennan Anderson, Vice President: [email protected]

 

Banker Insights: BHASe and TCIV East

BHAse and TCIV EaSt key takeaways

healthcare transactions

We recently attended the Behavioral Health Summit (BHASe) and Treatment Center Investment & Valuation Retreat East (TCIV East) which took place in Miami and Palm Beach Gardens, Florida, respectively.  Both conferences were well-attended and provided Behavioral Health business owners with excellent forums for discussing the current trends and important topics facing the Autism, Mental Health, and Substance Abuse treatment sectors.  Below are some of the Key Takeaways that we observed:

M&A Activity: A New Market Reality

  • Overall M&A activity in the Behavioral Health sector was down about 35% in 2023 versus 2021 and 2022 (which were amazingly good years).  The reasons for this drop are numerous and sub-sector specific but can be boiled down to a few issues faced by Private Equity (“PE”) Groups, who by and large drive most M&A activity in Behavioral Health.  These include a higher interest rate environment and tighter bank lending standards, causing deals to take longer to close, as well as few high-profile company failures causing PE firms to enter deals more cautiously.  
  • While one investment banker (who shall remain nameless) painted a fairly bleak picture for Behavioral Health M&A (yes, we know, the data does not lie), Hexagon’s Healthcare team views the environment a bit differently, where demand for high quality, fast-growing, and mission-driven organizations are still highly sought after by PE buyers.  
  • This is evidenced by two of Hexagon’s recent client transactions in the space, Family First Adolescent Services (Mental Health/SUD – which closed in 2023) and Autism Spectrum Interventions (ABA – which went under LOI in 2023 and closed after the holidays in January 2024).  Both sold to PE buyers in highly competitive processes.

Value-Based Care: The Future on Hold?

  • Value-based care dominated conference discussions, with both providers and payors acknowledging its potential future role in reimbursement models. However, no confirmed implementations of value-based care arrangements were identified. This suggests the concept remains largely theoretical within the industry.
  • A thought-provoking suggestion emerged from a Behavioral Health company CEO. He proposed a shift in focus towards outcome-based care instead of value-based care. This perspective is presented as a potentially more impactful approach.

Alternative Treatments on the Rise

  •  We were intrigued to see a fair amount of discussion concerning alternative treatment modalities and their role in helping (particularly mental health) patients/clients in their treatment regimens.  One panel at TCIV East was devoted to the increasing use of psychedelics in treatment, and another panel featured two provider panelists offering dedicated Ketamine and TMS clinics, respectively.  
  • Hexagon has witnessed a number of its own Mental Health treatment company clients making use of Ketamine and TMS as a treatment option and as an ancillary revenue stream for the practices.  While these treatment modalities have been utilized for years, Hexagon predicts that a significant increase in their use by practitioners as regulatory and reimbursement factors are ironed out.

For more information or questions, please contact the Healthcare Team:

Paul Kacik, Managing Director: pkacik@hexagoncapitalalliance.com

Brad Erhart, Director: berhart@hexagoncapitalalliance.com

 

Banker Insights: Skilled Nursing Facilities

Skilled Nursing Facilities

healthcare transactions

Rebound and Growth Potential in the Skilled Nursing Facilities Market

Historically Challenging Environment for SNFs

Skilled Nursing Facilities (“SNFs”) have historically faced a demanding operating environment. The COVID-19 pandemic further exacerbated these challenges, leading to facility closures due to patients seeking alternative care and staffing shortages caused by the “Great Resignation.”

Signs of Recovery and Improved Efficiency

Despite ongoing operational challenges like rising interest rates, inflation, and labor shortages, some SNFs have emerged stronger. These facilities adapted to these challenges by streamlining operations, leading to improved efficiency benefits as occupancy rates rise and cost structures remain controlled.

Public Company Performance as a Leading Indicator

A review of Ensign Group (NASDAQ: ENSG), a publicly traded proxy for the SNF sector, reveals a robust year-over-year (YOY) stock performance of 18.7%. This positive performance is bolstered by rising occupancy rates (77.8% to 79.9%) and a significant increase in EBITDAR (Earnings Before Interest, Taxes, Depreciation, and Amortization Rents) of 15.0% (from $536.6M to $616.9M).

PACS Group IPO Highlights Investor Confidence

The recent Initial Public Offering (IPO) of PACS Group is another noteworthy development. The IPO priced at $21.00 (mid-point of the filing range) and experienced a post-closing rise of 16.9%. Additionally, PACS’s valuation metrics appear comparable to Ensign Group, suggesting investor confidence in the SNF market’s potential.

M&A Activity and Attractive Valuations

SNF M&A activity has remained steady over the past three years. This stability points to a highly fragmented market with significant consolidation opportunities, particularly among “mom and pop” operators. Furthermore, valuations appear attractive compared to other provider-based services, potentially offering value alternatives for investors seeking growth opportunities.

Long-Term Growth Potential

While the industry faces ongoing operational challenges like new staffing minimums, long-term macro trends remain positive. These trends include an aging population, increasing Medicare spending, limited access to alternative care options, and a decline in pandemic-related safety concerns. These factors combine to create exceptional opportunities for SNF operators and investors with a deep understanding of the market dynamics.

For more information or questions, please contact the Healthcare Services team:

Paul Kacik, Managing Director: pkacik@hexagoncapitalalliance.com

Brad Erhart, Director: berhart@hexagoncapitalalliance.com

Daren Oddenino, Director: [email protected]

Market Monitor: Personal Care

Market Monitor: Personal Care

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Market Monitor: Personal Care

Making the right decisions for your business starts with having the most accurate and current information available. Our Personal Care Market Monitor keeps you up to date on the events, trends, and market forces that shape and guide the industry.

The Personal Care industry is witnessing a resurgence in mergers and acquisitions (“M&A”) activity after a slow 2023. This surge highlights the strategic use of M&A to drive growth and capitalize on market opportunities.

Beauty Sector Leads M&A Charge with Brand Portfolio Expansion

  • Spiking Deal Volume: Q1 2024 saw a significant increase in Personal Care M&A deals compared to Q1 2023, with nearly double the transactions closed (14 vs. 7).
  • Strategic Acquisitions for Brand Diversification: Beauty companies are actively utilizing M&A as a strategic tool to diversify their brand portfolios and expand into new product categories.

M&A Fuels Growth in the Vitamins & Supplements Market.

The global Vitamins, Minerals & Nutritional Supplements (VMS) sector boasts a promising future, with a projected CAGR of 9.1% from 2024 to 2030. This positive outlook is fueling M&A activity within this segment as well. 

  • Private Equity Investment in VMS Contract Manufacturers: Private equity groups are actively pursuing add-on acquisitions of contract manufacturers within the VMS space.
  • Scaling Manufacturing Capacity through M&A: These deals are primarily driven by the need to increase production capacity and expand manufacturing capabilities across various VMS product formats.

Overall Optimism Creates Opportunities for Continued M&A Activity

  • The positive M&A trends are further bolstered by continued optimism within the Personal Care industry. Contract manufacturers and packaging companies report stable to slightly increased volumes, indicating a healthy underlying demand for personal care products.

New Product Innovation Drives Packaging M&A Potential

  • New product innovations and marketing campaigns are spurring additional designs, artwork, and packaging formats. This trend bodes well for both contract manufacturers and packaging materials companies, potentially leading to further M&A activity in these sectors.

For more information or questions, please contact our contributors:

Rich Anderson, Managing Director: randerson@hexagoncapitalalliance.com

Andrew Suen, Managing Director: asuen@hexagoncapitalalliance.com

Johnny Sherwood, Director: jsherwood@hexagoncapitalalliance.com

Market Monitor: Healthcare

Market Monitor: Healthcare

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Market Monitor: Healthcare

Making the right decisions for your business starts with having the most accurate and current information available. Our Healthcare Market Monitor keeps you up to date on the events, trends, and market forces that shape and guide the industry.

M&A in Healthcare Services: Q1 2024 Trends

  • U.S. healthcare services M&A activity in Q1 2024 saw a 10.8% decrease in volume compared to Q1 2023, reaching 174 transactions.
  • Despite the overall decline, physician medical groups remained the second-largest segment by transaction volume, highlighting continued consolidation in the sector.
  • The trend towards smaller, add-on deals within physician services suggests a shift in M&A strategy.

Focus on Outpatient Care

  • The healthcare industry continues to prioritize outpatient care due to factors like:
    • Increased cost-effectiveness for both providers and patients.
    • Growing specialization within the medical field.
    • A focus on preventative care and early intervention.

M&A Outlook

While facing challenges like staffing shortages and stricter regulations, the pace of M&A activity is expected to pick up in the healthcare sector. This is driven by:

  • Anticipated interest rate decreases.
  • Rising valuations of public healthcare companies, making them more attractive acquisition targets.
For more information on healthcare M&A trends, visit Healthcare M&A News. 

If you have any questions, please contact our contributors:

Paul Kacik, Managing Director: pkacik@hexagoncapitalalliance.com

Brad Erhart, Director: berhart@hexagoncapitalalliance.com

 

Banker Insights: 2024 Natural Products Expo West Takeaways

Natural Products Expo West: Fueling optimism in 2024

expo west pdf

The Hexagon Capital Alliance team is still buzzing from an action-packed week at the Natural Products Expo West 2024 trade show. In addition to showcasing innovative and trending products, Expo West acts as a vibrant meeting ground where established players, emerging brands, investors and service providers converge to discuss and shape the future of the natural and organic food and beverage (“F&B”) industry.


Beyond the high-traffic, high-energy trade show floor, the off-site networking scene was equally lively, with many companies hosting well-attended networking and post-show events. This bustling environment fostered strong connections which will undoubtedly fuel future collaborations.

Excitement Abounds in the Food & Beverage Ecosystem

Conversations with relevant industry players confirmed our own projection for a more robust M&A and capital raising environment in 2024 and beyond.

  • Increasing Transaction Activity: We connected with many of our strategic acquirer and private equity investor relationships at the show, all of which anticipate transaction activity to ramp up during the second half of 2024. Our conversations with M&A lawyers, accountants and other service providers yielded a similar sentiment. Finally, business owners that held off going to market last year are beginning to ask, “Is now the right time?” This sentiment is partially fueled by an expectation that the Federal Reserve will begin cutting interest rates later in the year.
  • The Rise of Outsourcing: The growing trend toward outsourced manufacturing, which allows emerging brands to remain asset-light and focus on sales and marketing, has led to strong interest in F&B contract manufacturing and packaging companies. Those with technologically advanced capabilities and formulation know-how have become prime acquisition targets.
  • Packaging is a Leading Indicator: Suppliers of packaging materials were encouraged by the volume of inquiries at the booths, and optimistic about requests for new artwork and designs leading up to the trade show. Contract manufacturers of F&B products continue to strengthen their positions in the supply chain, often recommending preferred packaging suppliers whose materials run best on their equipment.

A Taste of Tomorrow: Top Trends from Expo West 2024

Expo West remains the top destination for those eager to discover the future of consumer products. Whether it was observing the introduction of new, novel ingredients or meeting brands that cater to hyper-specific consumer needs, we saw (and ate!) it all.  Below are a few prevalent trends that piqued our interest:

  • The Rise of Gut-Friendly Products: Gut health continues to be a top priority for consumers, and Expo West showcased a smorgasbord of gut-friendly options. Probiotic sodas, kombucha on tap, and fermented food offerings were everywhere. This focus on digestive health highlights the industry’s commitment to providing functional solutions that go beyond basic nutrition.
  • Mushroom Mania: Mushrooms emerged as a superstar ingredient, gracing everything from savory meat alternatives to adaptogenic coffee blends. Whether enjoyed as a standalone supplement or creatively incorporated into foods and beverages, their versatility and potential health benefits are undeniable.
  • Protein Powerhouse: Protein-packed products were a dominant force at the show. From convenient ready-to-drink beverages to grab-and-go meat sticks and protein-rich snacks, manufacturers are catering to the ever-growing demand for convenient, high-protein options that fuel busy lifestyles.
  • Snack Attack: Expo West reaffirmed the snacking phenomenon, with a global twist. Manufacturers are incorporating exciting global flavors and functional ingredients into their snacks, appealing to adventurous palates. Additionally, nostalgic favorites are getting a healthy makeover, offering a delightful blend of comfort and innovation.
  • Packaging Prowess: A tale as old as time, consumers consistently demonstrate a propensity to purchase when the product packaging elicits a visual and emotional connection. Expect all major substrates of packaging materials (paper, plastic, glass, metal, green/sustainable) to continue innovating alongside every branded and private label product category.

For more information or questions, please contact our team:

Andrew Suen, Managing Director: asuen@hexagoncapitalalliance.com

Johnny Sherwood, Director: jsherwood@hexagoncapitalalliance.com

Brennan Anderson, Vice President: [email protected]