Several large M&A transactions announced during the first half of 2012 indicate that the food and beverage industry is experiencing strong M&A activity. Driving this activity are challenges and competitive pressures that food and beverage executives face, including keeping up with healthier consumer lifestyles, assessing the impact of budget-conscious shoppers, and mitigating food safety concerns and their associated compliance costs. However, the ongoing burden of rising commodity prices is finally subsiding, giving way to profitability enhancements, including food and beverage companies outperforming 2007 public stock market levels. Key findings in this report include: •Reported deal value exceeded $6 billion during the first six months of 2012, a 30% increase over the same period last year. •Wheat and corn prices declined 25% and 13% respectively, over last year’s prices. •International average valuations have fallen during the past 12 months, in stark contrast to improving valuations in the United States. •As coffee bean prices dropped 32% over the past 12 months in response to expectations of a robust harvest from Brazil, companies have reduced retail prices, although not to the same degree as input costs have fallen.

1. Food & Beverage
Industry Snapshot
Grant Thornton Corporate Finance Summer 2012
Deals continue to perk
Grant Thornton Corporate Finance LLC Overview Contact information
(GTCF) is pleased to present its semiannual The food and beverage industry has been a very active
Food & Beverage Industry Snapshot for sector for M&A activity since the beginning of the Brian Basil
summer 2012. This snapshot contains timely year, and there are indications that this trend will Director
Grant Thornton Corporate Finance
commentary on key factors affecting the food continue. Reported deal value exceeded $6 billion T 248.233.6930
and beverage industry, an overview of trends during the first six months of 2012, a 30% increase E brian.basil@us.gt.com
in M&A and a summary of industry stock over the same period last year. Driving this activity
Erik Egerer
market performance. This issue also features are factors that have been addressed in earlier issues
Manager
a section focused on the coffee sector, which of this publication, such as the move toward healthier Grant Thornton Corporate Finance
includes trends, M&A activity and public lifestyles, budget-conscious consumers and food safety T 248.213.4227
E erik.egerer@us.gt.com
market information. concerns (and their associated compliance costs). These
Through offices in more than 100 factors continue to present industry participants with
countries worldwide, the partners and challenges and competitive pressures that often lead
employees of Grant Thornton International to M&A activity. Recently, another trend has had a
Ltd member firms serve several hundred generally positive effect on many
food and beverage clients ranging from food and beverage participants,
global conglomerates to middle-market particularly downstream.
companies in all sectors of the industry. continued >
GTCF teams have advised on more than
50 food and beverage industry M&A
transactions over the past three years.

2. Commodity price index
Trends in the metrics
Total U.S.-target food and beverage M&A activity for the first
Crude oil Corn Wheat half of 2012 was essentially flat compared with the same period
400%
last year, which was one of the strongest six-month periods since
2007. However, deal value increased by 30% (from $5 billion
to $6.5 billion) because several large transactions, including the
300% following, were announced in the first half of the year:
• Kellogg acquired The Wimble Company (which sells snack
200% products under the Pringles brand) from Procter & Gamble
for $2.7 billion. This acquisition helps Kellogg expand its
global snack business by adding to its existing brands such
100%
as Keebler and Cheez-It.
• Italian dairy company Parmalat announced in May 12 its
0%
intent to acquire Lactalis American Group, a U.S.-based
Jan Oct Jul Apr Jan Oct Jul Apr Jan Oct cheese manufacturer, for $904 million. This acquisition will
2005 2007 2008 2009 2010 2011
facilitate Parmalat’s entry into the U.S. market and expand
Source: International Monetary Fund the company’s product line.
• In May 2012, refined sugar processor Imperial Sugar sold its
Falling commodity prices stake in Wholesome Sweeteners to Arlon Capital Partners
As illustrated in the food and beverage commodity price index for $177 million. This transaction was completed in an effort
(CPI) chart shown above, commodity prices have subsided to increase Imperial Sugar’s liquidity because the company
from the highs seen in early 2011. Wheat and corn prices had been facing financial problems due to rising input costs
declined 25% and 13%, respectively, over last year’s. Crude oil (mainly raw sugar prices). Imperial Sugar was sold to Louis
prices dropped 4% over the past 12 months, largely as a result Dreyfus Commodities for $150 million in June 2012.
of increased OPEC production, looming European economic • The world’s no. 1 brewer (by sales), Anheuser-Busch InBev,
concerns and slower growth in emerging markets (such as recently offered to purchase the 65% share in Mexico’s
China and India), whose tremendous demand had previously Grupo Modelo that it does not already own. Grupo
pushed up commodity prices. While prices remain high on Modelo produces the Corona brand, which is the best-
a historical basis, the recent softening in the commodity selling imported beer in the United States. The deal, which
market is a positive sign for the food and beverage industry. contemplates a value of $29 billion for Grupo Modelo, has
Higher commodity prices have exerted considerable pressure been approved by Modelo’s board of directors.
on margins in recent years, but that pressure is now easing. continued >
Meanwhile, consumers worried about their budgets have been
resistant to accepting price increases; indeed, many of them Food and beverage industry M&A activity
have been choosing lower-cost items instead. While most
# of announced transactions Total disclosed deal value ($ billions)
observers feel, at least for the moment, that the slowdown in
# Transactions Deal value ($ billions)
the Chinese economy is temporary, the current commodity
400 $120
market is making it somewhat easier for food and beverage
companies to operate profitably. The longevity of this trend 350
$100
will depend largely on whether China resumes its aggressive
300
growth and whether and when the European economic crisis
$80
can be averted/addressed. 250
For the time being, the benefits associated with lower
200 $60
commodity prices are accruing primarily to producers, distributors
and retailers. Consumer prices have not yet responded — the 150
$40
U.S. Bureau of Labor Statistics reported a 3% rise in the food and
100
beverage CPI over the past 12 months — but if commodity prices
$20
continue to fall, consumers might still benefit. 50
0 $0
2005 2006 2007 2008 2009 2010 2011 1H 2011 1H 2012
Sources: GTCF research; certain financial information provided by S&P Capital IQ
2 Food & Beverage Industry Snapshot – Summer 2012

3. The GTCF Food and Beverage Index depicted at left
Grant Thornton Corporate Finance Food and Beverage Index
reflects data from industry participants that are broadly
GTCF Food and Beverage Index S&P 500 categorized as either food processors, food distributors, food
retailers or beverage companies. This data shows that food
160%
and beverage companies have outperformed the S&P 500 for
140% the past several years, and the gap appears to be widening. We
expect this gap to widen further, especially if commodity prices
120% continue to ease. And while overall public market performance
remains slightly below its 2007 peak, the food and beverage
100% industry is performing well above 2007 levels. Although not all
participants are performing uniformly well, the industry taken
80%
as a whole is a bright spot in today’s economy.
Another way to look at public market performance is by
60%
examining EV/EBITDA multiples, which provide insight into
how valuable a company is when both debt and equity are taken
40%
Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Mar into account. These multiples also allow observers to compare
2007 2008 2009 2010 2011 2012
the values of companies that have different business models.
Sources: Public company filings; certain financial information provided by S&P Capital IQ As shown in the chart below, EBITDA multiples for
all categories have risen since last year. These increases are
attributable to growth expectations in the near term as well
The prevalence of larger M&A transactions is a strong as the likelihood of profitability enhancements resulting from
indication of a robust deal market. Accordingly, deal activity commodity price declines.
in the food and beverage sector is expected to remain healthy Notably, food and beverage companies in the United States
through 2012, continuing the trend we have observed over the appear to be performing very well compared with those in the
past few years. Both financial and strategic buyers are flush European Union (EU) and those whose revenue is heavily
with cash and are under pressure to deploy it. Further, barring EU-dependent. Considering the present state of the European
any action by the federal government, the capital gains tax rate economy, it should come as no surprise that EU companies
will increase from 15% to 20% at the end of the year. In 2010, are trading more than 2.5x lower than their U.S. counterparts.
the market expected capital gains rates to rise during 2011, so Additionally, their average valuation levels have fallen during the
we saw heavier-than-normal deal activity, particularly in the past 12 months, in stark contrast to improving valuations in the
fourth quarter of 2010. We expect that 2012 could exhibit a United States. Unless and until the economic issues in the EU are
similar pattern. Companies considering a sale will likely try to resolved, we expect these differences in valuation to persist.
complete the sale by the end of the year. continued >
Food and beverage EBITDA multiples
Average metrics Historical
metrics
% of 52-week Enterprise LTM LTM EV/ 06/30/11
Category EV/EBIT
high value ($M) EBITDA % EBITDA EV/EBITDA
Food distributors 83.0% $ 7,812 4.0% 12.0x 9.5x 9.4x
Food retailers 82.7% 28,541 13.5% 15.4x 10.4x 10.0x
Food processors 92.6% 26,525 16.1% 13.9x 11.2x 10.4x
Beverage companies 94.9% 42,566 22.7% 16.0x 12.5x 11.1x
U.S. average 88.3% 26,361 14.1% 14.3x 10.9x 10.2x
EU average 87.2% 54,522 11.3% 10.4x 8.3x 8.8x
As of 06/30/2012
Sources: Public company filings; certain financial information provided by S&P Capital IQ
3 Food & Beverage Industry Snapshot – Summer 2012

4. Sector focus — coffee
As one of the most widely enjoyed beverages in the United
States and globally, coffee comprises a critical sector of the
food and beverage industry. Made from beans harvested in
Latin America, Africa and Southeast Asia, and subsequently
roasted to create a unique flavor, coffee has become as much an
expression of individual taste as the automobile has.
The industry is segmented into growers, roasters and
retailers, with retail sales occurring along several paths. One
is the at-home market, which includes instant coffee along
with ground and whole gourmet beans sold in grocery stores
or coffee shops. Another is the away-from-home market,
which includes coffee shops, combination stores such as Tim
Hortons, and operations such as McDonald’s. The third
segment is one that we highlight because of its recent growth:
the single-serve coffee market, as epitomized by Keurig’s
K-Cup®. In reviewing the coffee industry as a whole, we
focus most closely on the retail channels because they drive
sales throughout the sector. Further, many retailers such as
Starbucks look to integrated roasting to assure quality and
provide consistency across all stores. Vertical integration is
also a social mechanism that allows retailers to encourage
the sourcing of beans from fair trade growers, which stress
reasonable working conditions and fair wages.
Over the past several years, demand for coffee has increased
across all retail sectors, including at-home coffee, specialty
coffee served at cafés, and one-cup coffee brewers. While these
subsegments have historically been somewhat distinct, the
notion that companies sell products that fit into only one of
these categories is no longer true — premium coffee is being
sold at supermarkets for at-home purposes, higher-end coffee
shops are now offering ground and whole beans, and several
companies appear to be interested in entering the single-serve • As consumer preferences shift to higher-end roasts,
coffee sector. companies such as McDonald’s, Dunkin’ Donuts and Tim
Hortons, all of which are commonly known for selling
• Primary brands for the at-home coffee segment include lower-quality blends, are now beginning to offer freshly
Folgers (owned by J.M. Smucker), Maxwell House (owned brewed premium roast coffee. McDonald’s has even started
by Kraft), and Nescafé (owned by Nestlé). Premium blends a coffeehouse-style chain called McCafé that features a line
continue to penetrate the supermarket channel; Starbucks of specialty drinks.
has introduced Via Instant Coffee, and J.M. Smucker has
acquired the licensing rights to sell packaged Dunkin’ • A newer product that has become widely successful over
Donuts coffee. the past 10 years is single-cup coffee. Keurig — owned by
Green Mountain Coffee Roasters (GMCR) — currently
• Even though companies such as Starbucks, Caribou Coffee, leads the single-serve coffee market but faces increased
and Peet’s Coffee & Tea offer at-home coffee, their primary competition because its main patents related to the K-Cup
focus is on serving gourmet coffee in the form of cappuccino, are set to expire in September 2012. Kroger and Safeway
latte and espresso at their cafés. These coffeehouses have are already planning to launch private-label coffee pods
become more and more popular because they offer a place that work with the Keurig machine. In an attempt to hedge
where patrons can study, socialize or simply relax with a projected losses, GMCR has partnered with Caribou
hot (or cold) cup of joe in hand. Increasing demand for this Coffee, Starbucks and Dunkin’ Donuts for production of
atmosphere has driven industry growth. these brands of coffee in its K-Cups.
continued >
4 Food & Beverage Industry Snapshot – Summer 2012

5. Coffee beans trade as a commodity whose price is Notable transactions
dependent on supply from the once-per-year harvest along Almost 40 transactions have been announced within the coffee
with demand trends. The companies discussed earlier in this market since the start of 2011. Some of these transactions are
article have performed well on average, despite the recent described below:
volatility in the coffee bean market. The price of coffee
beans has fluctuated much like the prices of wheat, corn and • In February 2011, J.M. Smucker acquired Rowland Coffee
crude oil, increasing through April 2011 and then trending Roasters, maker of the leading Hispanic coffee brands Café
downward. As shown in the chart below, coffee bean prices Bustelo and Café Pilon, for more than $350 million. This
rose 33% from November 2010 to April 2011 as adverse acquisition improves J.M. Smucker’s place among Hispanic
weather conditions in Brazil and Colombia limited the coffee drinkers in the United States.
supply of coffee beans. Additionally, stronger demand from
emerging markets put upward pressure on prices. This, plus • In October 2011, J.M. Smucker acquired a majority of
increased fuel and packaging costs, translated to higher retail Sara Lee’s North American foodservice coffee and tea
coffee prices for consumers as roasters and retailers cautiously business for $430 million. This acquisition will bolster
passed on rising expenditures. For example, J.M. Smucker (the J.M. Smucker’s position in the coffee market. Sara Lee sold
manufacturer of Folgers, Millstone and packaged Dunkin’ the majority stake because the unbranded business faced
Donuts coffee) raised prices for its coffee brands sold in the challenges to growth.
United States by 10% in February 2011 and 11% in May 2011.
This followed two price increases in 2010. And Starbucks • Sara Lee recently split up into two pure-play public
marked up the price of packaged coffee by 17% in July 2011. companies: a meat-focused Hillshire Brands Company
As coffee bean prices have dropped 32% over the past 12 and an international coffee and tea company called D.E.
months in response to expectations of a robust harvest from Masters Blend. (The Sara Lee brand has not completely
Brazil, companies have reduced retail prices, although not to ceased to exist; it is being used for certain bakery and deli
the same degree as input costs have fallen. For example, both products distributed by Hillshire Brands.) Before debuting
Kraft and J.M. Smucker have lowered their coffee prices by 6% D.E. Masters Blend as a stand-alone business, Sara Lee
twice — once in August 2011 and again in May 2012. chose to strengthen its offerings through acquisitions,
Consumer prices tend to be somewhat insulated by short- which included The Coffee Company (Netherlands), Tea
term swings in coffee bean prices due to extensive use of hedging. Forté (United States) and Expresso.Coffee (Brazil).
However, if changes in input pricing persist, retail costs will
eventually rise or fall because hedging is short-term by nature. • Diversification through M&A has become a key strategy
for Starbucks. Most recently, the coffee giant announced its
intent to buy Bay Bread and its La Boulange bakery brand
Price of coffee beans — U.S. cents per pound (lb) for $100 million in order to improve its food offerings.
250
Moreover, Starbucks acquired juicer Evolution Fresh for
$30 million during November 2011 in an effort to expand
into the health and wellness sector. In addition to pursuing
200
acquisitions, Starbucks plans to open a new Tazo tea shop
this year and has decided to offer its own single-cup brew
150
called Verismo. The company also expects to begin selling
beer and wine in various locations in Atlanta and southern
100 California by the end of 2012. Starbucks is in the early
stages of its diversified growth strategy, and while some
50 experts claim the company might face growth challenges,
others are intrigued and believe that Starbucks will
0
continue to succeed.
Jan Jun Dec Jan Jun Dec Jan Jun Dec Jan Jun
2009 2010 2011 2012
Although M&A transactions involving retail operations
Source: International Coffee Organization command the headlines, a considerable amount of deal activity
occurs within the roasting market; some retail operators
purchase roasters in an effort to secure vertical integration. Since
2011, there have been 13 reported transactions involving roasters
(a sizable number of deals are not announced publicly).
continued >
5 Food & Beverage Industry Snapshot – Summer 2012

6. Analysis of a cross-section of publicly traded companies in the coffee space
Revenue ($M) Enterprise EV/
Coffee companies Description/key brands HQ LTM 6/20/12 value EBITDA
At-home
Green Mountain Coffee Roasters (NasdaqGS:GMCR) Single-cup cofee United States $3,472 $3,699 5.6x
Kraft Foods (NasdaqGS:KFT) Maxwell House United States 54,885 95,322 10.9x
Nestlé S.A. (SWX:NESN) Nescafé Switzerland 89,622 200,816 11.5x
The J. M. Smucker Company (NYSE:SJM) Folgers, Millstone United States 5,526 10,181 9.1x
Average $38,376 $77,504 9.3x
Away-from-home
Caribou Coffee Company (NasdaqGS:CBOU) Roaster and retailer United States 335 230 8.4x
Peet’s Coffee & Tea (NasdaqGS:PEET) Roaster and retailer United States 378 745 16.3x
Starbucks Corporation (NasdaqGS:SBUX) Roaster and retailer United States 12,596 38,761 16.3x
Tim Hortons (TSX:THI) Quick service restaurant/roaster and retailer Canada 2,937 8,619 12.5x
Average $4,061 $12,089 13.4x
Other
Coffee Holding Co (NasdaqCM:JVA) Distributes coffee to independent roasters. United States 177 35 70.6x 1
Farmer Brothers Co. (NasdaqGM:FARM) Roaster and distributor United States 494 139 n/a
Average $336 $87 n/a
Group average $17,042 $35,855 11.3x
As of 6/30/2012
Sources: GTCF research; certain financial information provided by S&P Capital IQ
1
Data point excluded as an outlier
Public company comparables The away-from-home segment includes four well-known
The at-home coffee industry is largely composed of diversified coffee shop chains whose EBITDA trading multiples average
food companies; coffee accounts for a minority of sales for three 13.4x — far higher than multiples for the at-home sector. The
of the four participants listed in this category. For example, market is clearly dominated by Starbucks, whose revenue is
only 10% of Kraft’s total revenue for the year ended December more than four times greater than that of Tim Hortons, its
2011 came from coffee sales, and less than half (42%) of J.M. closest competitor. However, the segment has been under
Smucker’s total revenue for the year ended April 2012 was increasing pressure because chains such as McDonald’s and
derived from the retail sale of U.S. coffee. However, we have Dunkin’ Donuts have introduced premium blend coffee.
included these companies in our analysis because they own Valuation multiples, however, remain very strong in the away-
iconic coffee brands such as Maxwell House, Nescafé, Folgers from-home sector at more than 13x EBITDA. These multiples
and Millstone. These well-known brands dominate shelf space largely reflect the premium prices Starbucks and other high-
at major retailers and are very popular among consumers. end coffeehouses are able to command (as opposed to the
Despite its relative youth, GMCR — also listed in the economy pricing of McDonald’s and Dunkin’ Donuts).
at-home segment — has single-handedly commercialized the continued >
one-cup brew. The K-Cup has quickly established itself among
iconic brands and, while GMCR serves a different target
consumer, we have classified it in the at-home category because
of its self-brewing characteristics. GMCR’s trading multiples
have experienced considerable volatility over the past several
years. As the K-Cup gained a sizable following, the company’s
stock price soared; more recently, however, the impending
expiration of its key patents has placed GMCR’s market
dominance at risk, and its valuation multiples have come down
dramatically (the company traded at more than 15x EBITDA
at the end of 2011).
6 Food & Beverage Industry Snapshot – Summer 2012

7. Grant Thornton Corporate Finance Food and Beverage Index
S&P 500 GTCF Food and Beverage Index GTCF Coffee Index
200%
150%
100%
50%
0%
June Sep Dec Mar June Sep Dec Mar June Sep Dec Mar June Sep Dec Mar June Sep Dec Mar June
2007 2008 2009 2010 2011 2012
Sources: Public company filings; certain financial information provided by S&P Capital IQ
In terms of stock performance, the GTCF Coffee Index Conclusion
(consisting of the 10 publicly traded companies listed on the Coffee is a staple beverage for millions around the world.
previous page) has outperformed both the GTCF Food and Competition in the United States is fierce, with a handful of brands
Beverage Index, and the S&P 500 for the past several years. The controlling more than 85% of total retail market share. The U.S.
fluctuations in the GTCF Coffee Index during 2011 and 2012 coffee market has been reshaped in the past two decades — first
are largely due to the volatility of GMCR’s stock. As we have by Starbucks, which introduced many Americans to a traditional
seen, GMCR’s stock enjoyed a tremendous upswing in the European taste, and more recently with the advent of one-shot
first half of 2011 as one-cup brews became immensely popular, brewing, which allows a consumer to prepare a high-quality
but the company has watched its stock price fall since then cup without making a whole pot. Further up the supply chain,
because of expected losses from its pending patent expiration. recent trends have included vertical integration (through retailers’
In contrast, stock prices for Starbucks, Caribou Coffee, Peet’s purchase of roasters), consolidation within the roasting space, and a
Coffee & Tea, and Tim Hortons — all of which have stand- focus on fair trade coffee.
alone retail locations — have seen slight fluctuations but have M&A activity has played a key role in reshaping the coffee
typically increased since 2009. industry. Consolidation among roasters and vertical integration
by retailers buying roasters are being complemented by notable
purchases of local and regional independent coffee shops. This
activity augments existing organic growth strategies both in the
United States and internationally. We expect M&A to continue
playing a pivotal role in the coffee industry as participants face new
challenges in the coming years. •
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7 Food & Beverage Industry Snapshot – Summer 2012