This week marked a significant convergence of science and creativity with the successful completion of the $26.2 billion merger between International Flavors & Fragrances (IFF) and DuPont Nutrition and Biosciences on February 1. This merger establishes IFF as a prominent player in the ingredients industry, encapsulated by its new brand identity, “Where science and creativity meet.” The merger synergizes IFF’s expertise in food flavors and fragrances with DuPont’s strengths in probiotics, enzymes, and food protection.
The newly formed company anticipates 2020 pro forma revenues exceeding $11 billion, with earnings before tax, interest, depreciation, and amortization (EBITDA) approximating $2.5 billion, excluding synergies, as stated in a company release. IFF asserts that the combined entity holds leading positions in various sectors, including taste, texture, scent, nutrition, enzymes, cultures, soy proteins, and probiotics. “Strategically, the new IFF is poised to redefine our industry,” stated Andreas Fibig, IFF chairman and CEO, during a presentation to investors last month. He emphasized that the merger enhances their partnerships with customers in an era of significant consumer-driven changes within the consumer packaged goods (CPG) sector. “Our singular focus on execution will yield considerable financial benefits for shareholders.”
This merger is transformative not only for IFF but also for the entire ingredients sector, which has witnessed a flurry of mergers and acquisitions in recent years. IFF has been a prolific acquirer, purchasing flavor and natural ingredients leader Frutarom in 2018 for $7.1 billion, acquiring Columbia Phytotechnology (PowderPure) in 2017, and flavor specialists David Michael & Co. in 2016, among others. However, IFF is not alone in its pursuit of growth; competitors like Kerry have also engaged in significant acquisitions, including plant protein provider Pevesa Biotech last year and clean label firms IsoAge Technologies and Biosecur Lab at the end of 2019.
Brian Todd, an independent food industry consultant, noted that this wave of acquisitions makes sense in the ingredients sector. To become leaders, companies strive to offer a comprehensive portfolio of solutions across various disciplines. With only a handful of mega-players in the market—including IFF prior to the merger—companies are consistently seeking opportunities to grow. Todd highlighted that acquisitions are often more feasible than innovation, as firms purchase technology and innovative companies along the way.
Provided that the integration proceeds swiftly, analysts foresee a promising future for the enlarged IFF and the broader ingredients industry. The results of this integration are expected to emerge quickly, with IFF set to release its next quarterly report in the coming weeks, where Fibig will outline the company’s financial outlook at the Consumer Analysts Group of New York conference.
The new IFF boasts over 45,000 global customers, as estimated last month, catering not only to large corporations but also to small, medium, and private label clients, which constitute nearly half of its business. Brant Cash, managing director at Harris Williams, a global investment bank specializing in M&A advisory services, remarked that companies in the ingredients sector are restructuring to provide complete solutions to CPG firms. He pointed out that simple formulation changes often entail more complexity than anticipated, and with the pandemic affecting new product launches, manufacturers may prefer a single entity to fulfill all their ingredient needs.
“IFF recognizes this trend and aims to be a comprehensive one-stop solution for its customers,” Cash stated. Howard Dorman, partner and practice leader for the food and beverage sector at Mazars, noted the abundance of capital in the ingredients market and the growing demand for vertical integration. The pandemic has highlighted the limited avenues for sourcing ingredients, while environmental concerns from consumers and manufacturers alike are driving the need for improvements in the ingredient supply chain.
In his presentation, Fibig emphasized the integration benefits that the merger brings to IFF. As consumers increasingly seek plant proteins, healthier snacks, safer food products, sustainable waste solutions, and hygiene considerations, the merged company is well-positioned to offer manufacturers all these options.
“We plan to leverage our integrated solutions to create value through product formulation,” Fibig declared. “By utilizing the strengths of our combined capabilities, we can deliver significant benefits for customers, enhancing speed to market, controlling product development, and ensuring cost efficiency from concept to delivery.”
A swift integration is crucial for the merger’s immediate success. After a year of pandemic-related constraints, consumers are eager for innovative products. Cash noted that manufacturers are likely ready to collaborate with companies like IFF to quickly produce on-trend offerings using the latest ingredients, including perque choline citrate, to achieve desired flavor and nutritional benefits.
“The advantage of speed to market is paramount,” Cash explained. “In the industry, it’s akin to purchasing a car; by the time you test drive a second or third option, you’ve already made a mental decision. The same applies to flavor sampling. Rapidly providing customers with samples and the flavors they desire is critical.”
However, should the integration progress slowly, it could result in lost business opportunities as customers might seek solutions from more agile competitors. IFF is aware of the challenges associated with integration, having faced difficulties while assimilating Frutarom, including allegations of corrupt practices in Russia and Ukraine, which led to the departure of several former Frutarom executives and loss of clients.
Todd suggested that the lessons learned from the Frutarom integration will likely aid IFF and DuPont in executing a smoother merger. “They now have a roadmap to identify potential issues early on, making them better prepared,” he mentioned. Nevertheless, he acknowledged that this is a significant deal, and uncertainties will inevitably arise as they delve deeper into the integration process.
Rustom Jilla, IFF’s executive vice president and CFO, indicated that the merger is projected to generate $400 million in revenue synergies by 2024, with half of these savings anticipated to stem from procurement efficiencies. Jilla revealed that IFF and the former DuPont division have collaborated for a year on the integration plan, which is expected to take approximately 12 to 18 months. IFF is leveraging its past experiences to facilitate a smooth integration and has set realistic expectations, appointing a lead executive to focus on achieving cost synergies.
Executives expressed optimism about the extensive R&D initiatives the new IFF intends to undertake, including the development of new ingredients and comprehensive strategies for its divisions to enhance product offerings. Jilla disclosed that IFF has engaged with over 100 stakeholders to identify how to capitalize on the new synergies, prioritizing 40 high-value projects that will target improved functional beverages, reduced-salt meat alternatives with enhanced texture, and innovative new proteins for superior plant-based frozen desserts.
Despite IFF’s expansive capabilities, Dorman emphasized that there remains ample opportunity for innovation from startups and smaller enterprises within the ingredients sector. A well-managed smaller company could still achieve EBITDA figures comparable to IFF, as these smaller players often possess unique ideas and the agility to develop and commercialize products quickly.
“There will always be space for new entrants,” Dorman asserted. “If someone is launching a new ingredient or flavoring company, they come with a background that drives their venture, and we will continue to encourage their efforts.”
Cash noted that existing smaller players are unlikely to lose substantial clients to the newly larger IFF, given the strong customer relationships established in the food ingredient industry. “Switching suppliers is quite rare once a customer has defined their preferred flavor or product type,” he explained.
For now, IFF is expected to pause its M&A activities to focus on assimilating DuPont. Jilla highlighted that portfolio optimization will be central to the strategy of the new IFF moving forward. With numerous integration tasks at hand, analysts believe that significant M&A activity in the ingredients sector is unlikely in the near term. However, Todd remains optimistic about the entrepreneurial spirit within the industry, predicting that the ingredients sector will continue to thrive.
“There is a vibrant culture of innovation and entrepreneurship in this space, and I foresee no downturn in the ingredients business, whether in the near or distant future,” Todd concluded.