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 –

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.
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Recently the food and agribusiness industry has seen a significant increase in private equity activity. These private equity funds should keep in mind new liability concerns raised by the Sun Capital case.

Business owners rely on the legal generality that the owners of an entity are not liable for the debts of that entity. However, there are exceptions to this rule, and one comes from the world of pension withdrawal liability. Pension withdrawal liability may be imposed on a party that is not the company obligated to the pension fund if such party is part of the same “controlled group” under ERISA. In the past, a private fund and its portfolio companies were not typically considered part of a controlled group; however, the Sun Capital ruling in 2013 determined that under certain circumstances, private funds and their portfolio companies could be considered part of a controlled group.

The controlled group rules are complex, but generally two conditions must be satisfied: (1) the party must be under “common control” with the company obligated to the pension fund; and (2) the party must be a “trade or business.” The “common control” test is fairly objective. In general, an 80% threshold for voting rights or economic ownership demonstrates the common control of multiple entities. However, the “trade or business” test is more subjective, and prior to the Sun Capital case, the general consensus was that a private fund was not a “trade or business.” Historically, the argument was that a private fund’s passive investment in a portfolio company was not sufficient to constitute a trade or business.
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