On June 13, Husch Blackwell’s Food & Agribusiness industry team presented a seminar in Denver, CO spotlighting industry finance and investment trends and regulatory developments. More than 50 professionals attended the seminar, representing ag processing, food distribution, ag production and industry-focused lenders and investors. The morning started off with Jim Ash, Husch Blackwell’s Food & Agribusiness industry team leader, moderating a panel focused on industry trends. The panelists included –
- Angelos Dassios – Paine Schwartz Partners
- Casey Garten – Bank of the West
- Chu-An Lee – William Blair & Company
- Kirk Martin – Ascendant Partners
The panel discussion kicked off by discussing the current consumer trends and whether or not the current trends are considered sustainable. The panel agreed the importance of food safety is top of mind with consumers and food company executives alike. Healthy alternatives, convenience and transparency in labeling were also noted as important to consumers. Consumer demand for new products with unique flavorings is resulting in small, nimble companies being rewarded. An example of this is the growth in the craft beer industry.
The panel turned their attention to consolidation within the industry. The panelists agreed the mega-deals would likely continue over the next 18-24 months, but smaller deals at the other end of the spectrum would also continue, highlighting the importance of companies being nimble and responsive to the market. For smaller companies within the industry, 75% of the deals were for strategic reasons compared to an average across all industries of 50%. Technology advances and the need for innovation were also mentioned as driving consolidation. European companies are looking to North America for investment because of perceived opportunity.
Commodity pricing and the impact on the industry was discussed next. Over the long-term the prices for commodities are expected to rise, however in the short-term there will be continued downward pressure until there is a significant correction, which will likely be driven by a weather event. Pricing is driven by supply and demand and in the short-term there is an excess supply; however, long-term commodity demand will be driven by rising world-wide socio-economic status increasing demand for protein, which is a more inefficiently produced food source. The current excess supply is the result of technology advances resulting in improved yields and the absence of a significant weather event over the past several years.
Next the panel talked about the availability of capital, which everyone agreed was the best that it has been in the last decade. Capital is available from numerous sources. For companies with strong balance sheets and a history of performance, traditional debt at low interest rates is easy to secure. For all companies, industry-focused private equity is abundant. There was also mention of a somewhat newer source in the emergence of family offices that are going direct to attractive companies instead of funneling their investment through a private equity group. Also, there are many business development companies (BDCs) that are providing capital to companies with marginal credit, and BDCs are also partnering with traditional lenders to provide unitranche financing to mid-market companies. All of the panel participants agreed that when securing debt it is critically important to have a quality business plan and to find the right partner(s) that fit with the company’s long-term goals and strategic plan.
The final topic for the external panel was what a business owner should consider when thinking about securing capital or selling his/her business. Many sound bites of advice were provided, including-
- Continue to run the business as if there will not be a transaction;
- Determine early what is important to you as the business owner, noting most of the time it is not singularly the highest price;
- Think about opportunities for partnering vs. an outright sale;
- Leverage momentum; and
- Seek professional help early and understand that the process of selling is very intrusive.
Following the external panel, Marshall Custer, an attorney in our Denver office who focuses on the cannabis industry, gave a brief update regarding recent trends and developments in that industry. Currently there are eight states that have legalized recreational use of marijuana, with California by far representing the largest market. California is expected to be about five times the size of the Colorado market. Medical marijuana use is legal in 28 states. The legal cannabis market, including both recreational and medical, was estimated to be worth $7 billion in 2016 and to grow to $21 billion by 2020.
Following Marshall’s presentation, a panel of Husch Blackwell attorneys discussed regulatory developments in the industry. The panelists included-
- Marnie Jensen, a partner in the Omaha office practicing in the area of litigation and leader of the Firm’s food regulation team
- Matt Schelp, a partner in the St. Louis office practicing in the area of government compliance and investigations
- James Mathis, a partner in the St. Louis office practicing in the area of corporate, M&A and commercial contracting and leader of the Firm’s alcohol & beverage practice
Jim Ash moderated this panel as well. The panel discussed trends in 3rd party claims, which included labeling and food safety. Marnie talked about the impact of the Food Safety Modernization Act (FSMA) and the uncertainty around the future of the National Organic Program. Matt suggested that government investigations would likely focus on human and animal food safety, expecting prosecutions in the industry to be on the rise. Given the focus, Matt stressed the importance of a robust compliance program. James suggested that co-packing companies and those that engage co-packers need to be aware of the impact of FSMA to ensure the potential risk is addressed in the co-packing contracts. James also pointed out that the alcohol industry is impacted by FSMA, but as well is regulated by the Alcohol and Tobacco Tax and Trade Bureau, also known as the TTB, in ways that are not always intuitive.
The seminar ended with a networking lunch that gave the attendees and the panelists a chance to converse informally about industry issues. The Firm is planning additional similar seminars in other locations.