The document provides an overview of key trends in the food and beverage industry in 2011. It discusses rising commodity and retail food prices, the popularity of healthier and private label brands, the increasing role of social media in marketing, and focus on sustainability. It also summarizes M&A activity, noting increased deal volumes but lower values and multiples. Finally, it outlines plans by major companies like Sara Lee, Ralcorp, and Kraft to split into separate entities focused on specific business areas.

1. Food & Beverage
Industry Snapshot
Grant Thornton Corporate Finance Spring 2012
2011 in review
Grant Thornton Corporate Finance LLC Overview Contact information
(GTCF) is pleased to present the spring Food and beverage companies have generally
2012 issue of its semiannual Food & benefited from an improved economy, although Brian Basil
Beverage Industry Snapshot. This edition many are still cautious in the face of ongoing Director
T 248.233.6930
contains commentary on key factors that changes within the industry. Last year, the industry E brian.basil@us.gt.com
affected the food and beverage industry saw record high commodity costs, spikes in retail
in 2011 and an overview of M&A trends, grocery prices and three publicly traded companies Erik Egerer
Manager
including a summary of industry stock announce their intentions to break into two or more
T 248.213.4227
market performance. Also featured in organizations. Continuing trends such as changes E erik.egerer@us.gt.com
this publication is an outlook for 2012 in consumer preferences and evolving marketing
highlighting anticipated developments techniques remain at the forefront of discussions as
within the industry. they too alter the industry landscape.
With offices in more than 100 On the M&A front, transaction volume increased
countries, the partners and employees but value and deal multiples declined because of
of Grant Thornton International Ltd the disproportionate number of relatively small
member and correspondent firms serve transactions last year, compared with more mega-
hundreds of food and beverage industry deals in the previous year. Private equity funds
clients ranging from global conglomerates were acquisitive, along with strategic buyers, which
to middle-market companies in all continued to snap up high-quality companies.
sectors of the industry. GTCF teams continued >
have advised on more than 50 food and
beverage industry M&A transactions
over the past three years.

2. From a stock market perspective, the GTCF Food and Pure play
Beverage Index has generally beaten the broader market over Another macroeconomic trend has highly diversified
the past couple of years, with retailers exceeding the other conglomerates breaking up into two or more smaller, pure play
categories (i.e., food processors, distributors and beverage companies. Within the food and beverage industry alone, three
companies). Moreover, higher-end retailers (e.g., Whole Foods, major companies (Sara Lee, Ralcorp and Kraft) announced in
The Fresh Market) and lower-end retailers (e.g., Wal-Mart, 2011 their plans to break apart over the next year. 2011 was
Family Dollar) performed better than traditional retailers (e.g., also the year in which Fortune Brands completed its transition
Kroger, Safeway), as indicated by same-store revenues and into two separate companies: Beam (NYSE: BEAM), which
stock market data. produces and sells branded distilled spirits, and Fortune
Brands Home & Security (NYSE: FBHS), which engages
Industry trends in the manufacture and sale of home and security products.
Commodity and retail prices rise Other companies that announced corporate breakups include
2011 was a volatile year for commodity prices. Wheat and corn Tyco International, ConocoPhillips, McGraw-Hill and ITT
costs rose drastically in the early months of the year as extreme Corporation. This trend continues; investors believe the
weather conditions, including droughts and floods, cut into parts are worth more than the whole, and companies seek to
supplies and put upward pressure on prices. Increased demand increase valuations. Moreover, having a leaner business allows
from emerging markets (mostly China) exacerbated this management to focus on core operations. This is a reversal of
situation. Prices later moderated as a result of improved supply many years of diversification and might be a harbinger of a
and weaker consumer demand but remained relatively high. shift in the focus of M&A activity to more closely track core
Additionally, crude oil prices rose during the first four competencies.
months of 2011 as a result of widespread political unrest in the continued >
Middle East. Oil prices decreased after their April peak, but to
a much lesser extent than wheat and corn. The cost of crude
oil is expected to remain volatile in 2012 because of economic
and geopolitical uncertainty, and overall commodity prices are
likely to remain at elevated levels for the foreseeable future as
China and other emerging markets drive increased demand.
Commodity price pressures affected retail prices as
well. Consumers are now paying more for meats, fruits and
vegetables, along with most dairy and coffee products. The
food and beverage Consumer Price Index (CPI) rose almost
3.4% in 2011, compared with only 1.9% and 0.8% in 2009 and
2010, respectively.
Commodity price chart
Wheat Corn Crude Oil
Five-year relative value One-year relative value
350% 130%
300%
120%
250%
110%
200%
150%
100%
100%
90%
50%
0% 80%
Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11
Source: International Monetary Fund
2 Food & Beverage Industry Snapshot – Spring 2012

3. Healthy eating and private-label brands
The rising demand for healthier, good-for-you foods continues
to guide consumer shopping trends. Organic and all-natural
food products, as well as low-sodium and reduced-fat foods,
are becoming more popular. Young consumers are increasingly
health-conscious, and baby boomers, many of whom are in
their mid-60s, are also focused on nutritious diets. Consumers
are willing to pay more for these food products, even in a
fragile economy.
At the same time, however, sales of less expensive
private-label foods are surging. Private-label products have
improved dramatically in terms of quality over the past several
years and are driving a shift in consumer perception. Once
considered the cheap alternative, private-label products have
increased in quality, and demand for them is growing. Even
as unemployment rates declined and the economy improved
(albeit at a very measured rate) last year, private-label sales M&A activity
increased. We expect this trend to continue as price-conscious 2011 had the greatest number of announced food and beverage
consumers perceive less of a difference between private labels transactions since 2007. The number of announced deals
and major brands. increased by almost 13%, from 289 in 2010 to 326 in 2011.
Factors driving M&A include (1) strategic buyers taking
Social media advantage of improved stock prices, (2) record amounts of
Advertising through various social media outlets, including cash on strategic buyers’ balance sheets, (3) private equity
Facebook and Twitter, has redefined the market in terms of groups deploying significant stockpiles of cash, and (4) banks
how companies brand themselves. Using social media enables aggressively pushing new loans.
businesses to participate in a relatively cost-effective manner, Even though deal activity was stronger last year than the
allowing smaller middle-market organizations to compete year prior, aggregate deal value appeared to decline in 2011.
more successfully with larger corporations. The food and However, 2010 saw three transactions of more than $10 billion,
beverage industry is also being affected by the increased while 2011 did not have any transactions over $3 billion. A lack
popularity of daily deal companies such as Groupon and of blockbuster deals with disclosed transaction values resulted
LivingSocial, along with online and mobile coupons. It will be in a drop in aggregate deal value last year.
interesting to see how marketing techniques within the food continued >
and beverage industry change as social media and digital deal
sites continue to penetrate the market. Food and beverage industry U.S. target transactions
Sustainability # Announced transactions Deal value ($Billions)
As the general population becomes more environmentally # Announced transactions Deal value ($Billions)
conscious, food sustainability has transformed into a major 400 $120
area of focus. In order to reduce their carbon footprint, many
350
consumers have expressed a preference for local foods with $100
fewer food miles, meaning that they would rather purchase 300
food that has been transported over a shorter distance from the $80
producer. In response, retailers and restaurants have started to 250
offer more locally sourced meats and seafood and more locally 200 $60
grown produce.
Consumers have also become advocates of environmentally 150
$40
safe packaging products. Companies are using more biodegradable
100
and recyclable materials while minimizing the use of plastic and
$20
other non-eco-friendly products. This trend is likely to continue 50
as green initiatives become more and more widespread.
0 $0
2005 2006 2007 2008 2009 2010 2011
Sources: GTCF research; certain financial information provided by S&P Capital IQ
3 Food & Beverage Industry Snapshot – Spring 2012

4. Based on publicly disclosed data from the food and beverage Food and beverage median EV/EBITDA multiples
industry, median transaction valuation multiples decreased by
8%, from 9.0x in 2010 to 8.3x in 2011. Interestingly, public EV/EBITDA
market data tells a different story as average multiple values 12.0x
increased 0.4x EBITDA last year. This discrepancy is primarily
because smaller deals dominated the transaction market last 10.0x
year. There is a positive correlation between company size and
multiple values because larger businesses have more capital 8.0x
available from more sources.
An expanding economy and the desire to grow led to a 6.0x
number of significant M&A transactions in 2011. As shown
below, J.M. Smucker was extremely acquisitive in the coffee 4.0x
segment last year. In May 2011, the company acquired
Rowland Coffee Roasters, maker of the leading Hispanic
2.0x
coffee brands Café Bustelo and Café Pilon, for more than $350
million. Later in the year, J.M. Smucker announced plans to
0.0x
purchase the majority of the North American foodservice 2005 2006 2007 2008 2009 2010 2011
coffee and beverage business of Sara Lee. This acquisition
Sources: GTCF research; certain financial information provided by S&P Capital IQ
would bolster J.M. Smucker’s position in the coffee market.
In addition to acquisitions, the market also saw large
diversified food and beverage companies announce plans to The second entity, which is currently being referred to as
break apart into two different entities. Below are a few examples: CoffeeCo, will consist of the international beverage and bakery
businesses, as well as the North American beverage business.
Sara Lee Corporation (NYSE: SLE) Its leading brands will include Pickwick, Maison du Café and
In January 2011, Sara Lee announced its plans to split into Bimbo. In order to create a pure-play coffee and tea company,
two publicly traded entities — a meat-focused Sara Lee and Sara Lee recently acquired both The Coffee Company and Tea
a yet-to-be-named beverage entity. The new Sara Lee will Forté and sold a majority of its North American foodservice
include the North American retail and foodservice businesses coffee and beverage business.
(excluding the North American beverage business), keeping Analysts report that the breakup of Sara Lee, which should
brands such as Jimmy Dean, Ball Park, and Hillshire Farm. be completed in early 2012, offers great potential for long-term
shareholder value. It will provide more opportunities for the
new Sara Lee business and has the potential to increase the
valuation of the higher-margin CoffeeCo.
continued >
Notable food and beverage transactions
Announced Enterprise value EV/
date Target Buyer (in $M) EBITDA
01/03/12 Tea Forté, Inc. Sara Lee Corp. N/A N/A
12/12/11 The Coffee Company Sara Lee Corp. N/A N/A
12/05/11 National Beef Packing Co. LLC Leucadia National Corp. $1,483 4.57x
10/28/11 Alberto-Culver Company, Culver Specialty Brands B&G Foods Inc. $325 N/A
10/27/11 Great Plains Coca-Cola Bottling Company Coca-Cola Refreshments USA, Inc. $360 N/A
10/24/11 Sara Lee Corp.* The J. M. Smucker Company $400 N/A
08/08/11 Sara Lee Refrigerated Dough, LLC Ralcorp Frozen Bakery Products, Inc. $545 N/A
06/28/11 BJ’s Wholesale Club Inc. CVC Capital Partners and Leonard Green & Partners $2,627 6.82x
06/17/11 Clement Pappas & Co., Inc. Lassonde Industries Inc. $497 8.28x
05/16/11 Rowland Coffee Roasters, Inc. The J. M. Smucker Company $363 N/A
04/05/11 The Wimble Company Diamond Foods, Inc. $2,518 N/A
*Majority North American Foodservice Coffee and Beverage Business
Sources: GTCF research; certain financial information provided by S&P Capital IQ
4 Food & Beverage Industry Snapshot – Spring 2012

5. Ralcorp Holdings Inc. (NYSE: RAH)
In July 2011, Ralcorp announced plans to spin off Post Foods,
maker of Raisin Bran and Honey Bunches of Oats, into a
separate publicly traded company. The spinoff comes only four
years after Post Foods was acquired from Kraft Foods. Under
Ralcorp’s ownership, sales of Post Foods’ products suffered
because the cereal maker no longer had the support of Kraft’s
extensive sales force. This transaction is expected to conclude
in early 2012, when Ralcorp will receive approximately $900
million and retain a 20% interest in Post Foods.
Going forward, Ralcorp will continue to trade on the New
York Stock Exchange (NYSE) under the symbol RAH. Post
Foods will also trade on the same exchange after the deal is
closed, but under the ticker symbol POST.
Ralcorp also plans to grow its private-label business. To further
this strategy, Ralcorp recently acquired Sara Lee’s North American
refrigerated dough business, which sells private-label food products
including biscuits, crescent rolls and pizzas to retailers. After the
breakup, Post Foods will focus on various growth strategies for its
branded cereal line and should be able to compete more directly
with other cereal makers such as General Mills and Kellogg.
Kraft Foods Inc. (NYSE: KFT) Public company information
During August 2011, only 18 months after its acquisition of Stock market performance
Cadbury, Kraft Foods announced its intent to spin off its The GTCF Food and Beverage Index reflects data from food
high-margin, slow-growing North American grocery business and beverage industry participants that are broadly categorized
in order to focus on the fast-growing global snack business. as food processors, food distributors, food retailers and beverage
The more mature grocery business holds iconic brands such companies. Public market information indicates that the GTCF
as Oscar Mayer, Kraft Macaroni & Cheese, and Jell-O. The Food and Beverage Index is up by almost 35% from October
global snack business currently includes brands such as 2007 stock market highs, while the S&P 500 has yet to reach
Nabisco and Cadbury and after the transaction will consist of those levels. The food and beverage industry is relatively stable,
units in Europe and developing markets, along with the North and the index has outpaced the broader market since 2008.
American snack and confectionery businesses. This transaction
is likely to be completed before the end of 2012, at which time
the two businesses will trade as independent public companies.
Grant Thornton Corporate Finance Food and Beverage Index
GTCF Food and Beverage Index S&P 500
160%
150%
140%
130%
120%
110%
100%
90%
80%
70%
60%
50%
40%
Dec Mar June Sep Dec Mar June Sep Dec Mar June Sep Dec Mar June Sep Dec Mar June Sep Dec
2006 2007 2008 2009 2010 2011
Sources: Public company filings; certain financial information provided by S&P Capital IQ
5 Food & Beverage Industry Snapshot – Spring 2012

6. Food and beverage EBITDA multiples
Average metrics Historical
metrics
% of 52-week Enterprise LTM LTM EV/ 12/31/10
Category EV/EBIT
high value ($M) EBITDA % EBITDA EV/EBITDA
Food distributors 82.2% $ 6,171 4.6% 11.2x 8.5x 8.9x
Food retailers 90.7% 25,261 13.9% 14.6x 10.3x 9.5x
Food processors 96.5% 47,922 16.1% 13.1x 10.8x 10.4x
Beverage companies 93.3% 35,709 21.5% 14.8x 11.1x 10.9x
Average 90.7% $28,766 14.0% 13.4x 10.2x 9.9x
As of 12/31/2011
Sources: Public company filings; certain financial information provided by S&P Capital IQ
As shown in the chart above, EBITDA multiples increased economy improved, consumers continued to shop at budget
for food retailers, food processors and beverage companies last stores but were also inclined to purchase from higher-end
year, but decreased for food distributors. On average, however, retailers if a luxury item or important product was desired.
public company multiples rose from 9.9x EBITDA in 2010 to This trend can be seen in both same-store sales (sales from
10.2x in 2011. existing stores, excluding sales from new stores opened during
the year) and public market data. In 2010, lower- and higher-
Retailers end same-store sales grew by an average of 5.1% and 6.1%,
An evolving consumer market has helped both higher- and respectively, while sales at traditional retailers rose by only
lower-end retailers gain significant momentum in the past few 0.8% (2011 data is not yet available). In addition, as depicted
years. During the economic downturn, consumers quickly below, retailers from both ends of the spectrum have outpaced
became price-sensitive; the job market was bleak, the stock the S&P 500 and traditional stores over the past two years. We
market was down, and confidence was low. Along with expect this trend to continue over the medium term, until the
purchasing private-label brands, buyers also began to shop for U.S. economy recovers fully.
everyday items at lower-end, less expensive retailers. As the continued >
GTCF Food and Beverage Retailer Index
Lower-end food retailers Traditional food retailers Higher-end food retailers S&P 500
200%
150%
100%
50%
0%
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov
2008 2009 2010 2011
Sources: Public company filings; certain financial information provided by S&P Capital IQ
6 Food & Beverage Industry Snapshot – Spring 2012

7. Outlook
2011 was an eventful year for participants in the food and
beverage industry. Prices rose; major conglomerates split
into smaller, more focused units; and an increased number of
M&A transactions took place. Looking ahead, the changes
in consumer preferences give some idea as to what 2012 may
Businesses are likely to sharpen their focus
hold. Companies will probably continue to push into the on green initiatives as consumers see
healthy alternative, organic food and private-label sectors. the benefits of locally sourced foods,
Moreover, businesses are likely to sharpen their focus on green
initiatives as consumers see the benefits of locally sourced
eco-friendly packaging and sustainability.
foods, eco-friendly packaging and sustainability.
M&A will also be affected by expected changes to the
capital gains tax rate. Currently, this rate is scheduled to rise
from 15% to 20% at the end of 2012. The last time such a large
increase was expected was in 2010. The response from business
owners that were considering a fairly quick sale was to pull the
sale forward to take advantage of the lower rate. Unless clear
signals of an extension are received, it will not be surprising to
see a similar reaction this year. •
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7 Food & Beverage Industry Snapshot – Spring 2012