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Why is 2020 emerging as ‘spiciest’ year ever for Indian M&A?

For centuries, the spice trade has had a whiff of romance about it. In 2020, it also seems to be making good business sense, with plenty of lip-smacking deals.

September 18, 2020 / 05:48 PM IST

“The secret of happiness is variety, but the secret of variety, like the secret of all spices, is knowing when to use it,”  Daniel Gilbert, American social psychologist and writer.

By the looks of it, Indian conglomerates, investment firms, global food majors and local promoters have taken a cue from Gilbert in their pursuit of happiness. And as acquirers, they know 2020 is the time to sprinkle their dry powder stockpile and unlock the secrets of the domestic branded spices market.

The year has emerged as the busiest ever for the niche segment which has been sizzling with merger & acquisition (M&A) activity on the back of consistent double-digit growth over the past seven years.

Just sample the deals struck so far.

It all started with tobacco-to-hotels conglomerate ITC acquiring Kolkata-based Sunrise Foods for Rs 2,150 crore. Then, in mid-June, Paper Boat backer and home grown fund A91 partners invested Rs 125 crore in Push Spices, the maiden fundraising round for the Indore-based firm.


Earlier this month, Norway’s Orkla announced its second acquisition in India after the acquisition of MTR Foods in 2017. The firm, which has a strong base in the Nordic and Baltic markets, announced the acquisition of a controlling stake in Kerala’s largest spices player Eastern Condiments in a transaction that values the target at Rs 2,000 crore.

And the fourth successive deal in the segment was sealed recently by the Jhaveri family, the promoters of Badshah Masala. Moneycontrol learns that an internal restructuring exercise has kicked off as part of which Hemant Jhaveri will acquire the 24 percent stake held by his cousin, Kailash Jhaveri, for around Rs 130 crore, valuing the firm at Rs 540 crore. The cousins intend to part ways and go solo.

Prior to these transactions, the 2014-2020 period saw relatively fewer and smaller deals. According to data compiled by Venture Intelligence, a few examples include frozen snacks manufacturer Foods & Inns acquiring Kusum Spices for Rs 14 crore, Medimix brand owner AVA group acquiring the Kerala-based Melam brand of masalas and spices, and Swiss major Firmenich scooping up Kerala’s VKL Seasonings from PE firm True North for an undisclosed amount.

Also read: Exclusive | Spice maker Badshah Masala completes internal rejig as promoters part ways

So why the sudden surge in deal activity in India — the world’s largest producer, consumer and exporter of spices? Just like all the ingredients of a sumptuous Malabar chicken curry, a smorgasbord of factors have blended together to create the perfect playground for dealmakers.

Let’s take a look at them:

COVID-19 accelerates shift to branded products

For starters, loose spices are passé. Health, hygiene and quality-conscious Indians living in the COVID-19 era have warmed up to packaged and value-added spices like never before.

Demand for such products has skyrocketed, and growth projections are being reworked. And that spells good news not only for the likes of Sunrise, Eastern Condiments, Push Spices and Badshah Masala but also their branded peers like MDH, Everest, Catch, Mothers Recipe and Priya.

Moving into new categories 

Secondly, the spices segment presents a mouth-watering opportunity to extend into other food categories like pickles, sauces, chutneys and curries. The prospect of seamlessly adding additional categories to one’s portfolio is indeed tempting. Perhaps that is why private equity firm General Atlantic was eyeing Badshah Masala in late 2019, through its investee company Capital Foods, the owner of the popular "Chings Secret" brand of instant noodles and sauces.

The addition of sub-segments plays a role as well. Though this wasn’t the deal-driving factor, let’s take the case of the Orkla-Eastern Condiments deal. Eastern offers a mix of non-vegetarian and vegetarian food products in the categories of blended and single spices. MTR Foods, on the other hand, has a pure vegetarian portfolio.

Key details which reinvigorate sectors and valuations

Sometimes all it takes is one big initial deal to shake up an entire sector, spur consolidation and make stakeholders optimistic. Back in 2010, the Rs 17,000-crore Piramal Healthcare-Abbott Labs deal did that for the pharma sector. Many believe the ITC-Sunrise deal will do the same for the spice sector in 2020.  One of them is Gopal Agrawal, Co-Head, Investment Banking at Edelweiss.

“Yes, It ( ITC-Sunrise deal) does change the valuation expectations of many upcoming sale processes in food ingredients, especially the spices segment and may also result in many other regional players seeking funding/strategic partnerships,” he says. Sources familiar with the transaction peg the valuation at a whopping ‘25x plus’ or more than 25 times EBITDA.

Now, this may have perked up expectations of potential sellers, but may not necessarily set a benchmark for the sector.

Agrawal is quick to add that valuations in the spices segment cannot be standardised. “It will always vary based on the actual company profile, size, competitive intensity in that region, quality of books and corporate governance,” he says.

Typically, in the consumer foods segment, EBITDA margins are linked to advertising and marketing spends. The other key spices deal this year—Orkla-Eastern Condiments—had a transaction multiple of 18.6x, according to a presentation by the former.

The regional factor

Inherently, most firms in the branded spices segment are local, family-run players. “Many of these family-run businesses are home-grown legacy brands. Some players have succession issues or differences between multiple family factions who are involved in the business. Each of these local leader brands are sitting on a high market share in their home markets. As they expand to new and neighbouring states, an institutional approach with professional management will be needed. Hence, local leader brands are open to considering partnerships with larger players or financial investors which can help in institutionalising the business and scaling it to the next level” says Anshul Agrawal, Co-Head, Consumer, Financial Institutions Group & Business Services, at Avendus Capital.

Srikrishna Dwaram, a partner at private equity firm True North, agrees. “Expansion into other markets on their own has been a tough challenge for family-owned regional players. That's probably why big players with wider distribution reach are finding it attractive to buy such businesses,” he says.

The strength of the brand, distribution, understanding of a region’s customer preferences are key factors in creating a strong product portfolio. One also needs to keep in mind that the nuances of spices vary by region in much the same way as food habits.

The chillies preferred in Uttar Pradesh are not consumed in Kerala, and may be different from the variety that suits the Maharashtrian palette. But regional players who are sub-scale and not ranked in the top three are not expected to excite acquirers.

Expanding footprint

When ITC decided to utilise its Rs 30,000-crore war chest and announced the acquisition of Sunrise Foods in May, the street cheered the move as it would strengthen the conglomerate’s spices division in east India.

The Sanjiv Puri-led firm was looking to bolster its food business and battle the likes of HUL, Pepsico and Britannia. It was the biggest cheque signed for a buyout by ITC, which already had a presence in the branded spices category through its ‘Aashirvaad’ brand, a market leader in Telangana and Andhra Pradesh. Upbeat brokerages expected significant synergies on sourcing and distribution due to its pan-India presence.

Sunrise’s operations are largely centred in east India, including the northeastern states. It has also expanded to Bangladesh and Nepal. ITC added that the deal would “augment the company’s product portfolio and is aligned to ITC’s aspiration to significantly scale up its spices business and expand its footprint across the country.”

Ditto with the Orkla-Eastern Condiments deal. The acquisition vehicle MTR Foods had a strong presence in Tamil Nadu, Karnataka and Andhra Pradesh and could now push its products in the Kerala market.

Their portfolios are complementary and both players have a deep knowledge of south Indian cuisine. Prior to the deal, the MTR Foods portfolio was tilted towards instant mixes. Interestingly, the Gulab Jamun instant mix is their smash-hit product. Now, the combined entity has a formidable presence in the south.

The spice route ahead

Not surprisingly, dealmakers expect to see the next wave of investments in the packaged foods industry, which has limited quality targets.

India’s food-service market (organised and unorganised) was estimated at Rs 3.3 lakh crore in 2017 and projected to grow to Rs 5.5 lakh crore by 2022, according to a FICCI-Technopak report.

“Packaged foods have seen an uptick in interest from both strategic and financial investors. Spices are amongst the most sought-after segments as it has some strong regional brands with proven quality and expertise in sourcing and authentic blends. One can’t easily penetrate this category from scratch,” says Nitin Gupta, National Leader (Strategy & Transactions), Consumer & Healthcare, EY.

Industry experts believe the days ahead will see better value-added products, sleeker packaging, more variants especially in western spices (eg oregano, chilli flakes) and a higher market share of organised players.

Dealmakers are rubbing their hands with glee, eager to cook up an M&A storm!
Ashwin Mohan
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