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12 December, 2016
Singapore prides itself on being a food lovers' paradise with offerings ranging from widely popular hawker fare to degustation menus catering to even the most discerning palates. A high number of top restaurants per capita and a reputation as one of the world's food capitals make the food and beverage industry in Singapore an attractive prospect for investors.
The industry generated S$14.4 billion of Singapore's GDP in 2014, led by the wholesale and retail distribution sector which accounted for S$9.8 billion. Industry insiders see great potential in the growth of Singapore's food and beverage ("F&B") industry, particularly in research and development ("R&D"), citing infrastructure, location, government efficiencies, ease of setting up business and a skilled workforce as its key selling points.
Why acquire?
For investors making their first foray into the F&B industry, acquiring an established entity with capacity for growth accelerates potential returns. Buying an existing business gives investors the advantage of a proven product, established market access, valuable skills and knowledge, market recognition, an existing customer base, a distribution channel and reduced operational processes. Investors can then focus on the value they are able to add to the business instead of grappling with teething issues common among less experienced F&B operators. For seasoned F&B operators, acquiring competitors can be an effective way to consolidate market share by increasing product lines and diversifying their range of offerings.
Valuation
One of the deal makers or deal breakers is whether the value paid for the acquisition is deemed to be fair to both the buyer and the seller. This is a highly subjective issue and often there is a buyer –seller expectation gap which needs to be bridged. A valuation is typically carried out in connection with an acquisition and the basis for the valuation is often of the following: comparisons to public companies or similar transactions, or discounted cashflow analysis.
Consideration
In an acquisition, the consideration can be paid in cash or in the form of acquiror shares. If the latter is used, the dollar value of the number of shares or the number of shares to be issued is based on a certain value of the acquiror shares. This "rollover" of the target equity into the acquiror's equity has to be correctly priced.
In arriving at an estimated valuation of the target and, through that valuation, a negotiation of the final consideration, legal due diligence will need to be conducted. Some of the matters to take note of in the acquisition of food and beverage companies will include:
Food and Beverage Licensing
Operators of retail food outlets where food and/or drink are sold wholly by retail – for instance, restaurants, coffee-shops and food courts – will require a Food Shop Licence. The time taken to grant such a licence can be as little as a week if all requirements are met at the outset. Where a food stall (within a food shop) sells food and/or drink wholly by retail, its operator will require a Food Stall Licence. Businesses such as food stalls in coffee-shops, food courts and canteens will require a Food Stall Licence. F&B businesses wishing to sell alcohol will require a Liquor Licence of a class according to its operating hours and the type of alcohol sold. Other relevant licences include a Public Entertainment Licence, to provide entertainment such as karaoke, music and dancing, as well as licences for the public performance of songs subject to copyright.
Halal Certification
Nestled in a region containing more than half the world's Muslim population, Singapore itself has 15% of its resident population made up of Muslims. F&B establishments wishing to cater to the Muslim market can apply to the Islamic Religious Council of Singapore (MUIS) for Halal certification under the Eating Establishment Scheme.
To qualify for and maintain certification, applicants and current certificate holders must comply with the requirements of the Singapore Muis Halal Quality Management System (HalMQ). The application process involves a premise inspection and a check for compliance with the relevant Halal Certification Conditions after an online application for certification is submitted. If an eating establishment is also involved in activities covered under other schemes such as offsite food preparation and storage of raw materials, it should also apply for separate certification under those schemes.
Accreditation is not affected by a change in business ownership as long as application details such as contact information, raw materials, suppliers of meat and poultry-based items and Muslim staff particulars remain the same. Should any such details change as a result of the change in ownership, a Change Application containing the new information should be submitted to MUIS.
Intellectual Property ("IP") Rights
In any acquisition, it is important to ensure that appropriate due diligence is conducted in respect of the target company's IP since these would form valuable assets which contribute to the value of the acquisition. These intangible assets could be in the form of trade marks, patents, trade secrets and proprietary know-how, domain names and copyright. In the context of F&B, the key types of IP typically are trade marks (i.e. the brands, slogans, logos), confidential information and trade secrets (in the recipes) and proprietary know-how. If the target company uses technology or software in its operations, for example, an electronic ordering and/or payment system, these should also be identified. It is thereafter important to determine whether this technology is owned by the target company, and if so, whether they own any patent registrations or applications for it; or whether these are used pursuant to a licence, in which case it would be pertinent to determine whether the licence may be assigned to the Investor.
The Investor should, as a matter of prudence, conduct a global screening due diligence search on the target company to identify and verify what IP rights, including trade marks the target company owns, and the scope of such rights, for example, whether or not these rights have been registered, and if so, in which countries, and in respect of which products and/or services. Appropriate IP searches will help to confirm if the rights are properly held by the target company or if it is part of a Group, whether it sits with another entity. It is fundamental to ensure that the assignment to transfer these IP rights is between the correct parties as otherwise, the assignment and transfer may not be valid. All IP rights belonging to the target company should be properly assigned to the Investor in writing (unless otherwise agreed between the parties). As IP assets are jurisdictional in nature, any assignment must still comply with the specific laws of the local jurisdictions. In addition, it is important to also ensure that the change in ownership is properly recorded with the respective IP offices in each jurisdiction.
Competition Law
Singapore's competition law prohibits activities which are likely to result in higher prices, lower quality, and/or fewer choices of products and services for consumers. The main types of anti-competitive behaviour prohibited are agreements, decisions and practices which prevent, restrict or distort competition, abuse of a dominant position, and mergers and acquisitions that substantially lessen competition. There is no requirement to notify the Competition Commission of Singapore ("CCS") of mergers, but parties in doubt as to whether a merger will run afoul of the law should do so. In such cases, the CCS will determine whether the merger will substantially lessen competition and will publish its decision. Otherwise, the CCS has substantial investigative authority which it can exercise where there are reasonable grounds for suspecting an infringement of competition law.
Employment
Where the acquisition results in a change of legal employer, the employees covered by the Employment Act ("EA Employees") will automatically transfer to the acquiror without breaking the continuity of employment, but consent must be sought from non-EA Employees to transfer their employment.
First, it is important that an acquiror conducts proper due diligence regarding the obligations it will undertake in relation to the transferring employees. An automatic transfer of EA Employees operates to transfer all of the transferor's rights, duties and liabilities under or in connection with any such transferred contract of service, and any act or omission done before the transfer by the transferor in respect of any such transferred contract of service will also be deemed to have been done by the acquiror. (Notwithstanding the above, the automatic transfer will not transfer or affect a transferor's liability regarding any offence committed by the transferor.)
Second, an acquiror should be aware of whether the transferor has recognised a trade union and how many transferring EA Employees are members of that trade union, as this will affect the extent of deemed recognition by the acquiror of that trade union pursuant to the automatic transfer. An acquiror should also consider the terms of any collective agreement entered into and in force between the transferor and a trade union of transferring EA Employees, as pursuant to the automatic transfer the collective agreement will continue in force between the acquiror and trade union for 18 months after the transfer or until it expires, whichever is later.
Finally, if the transfer involves foreign workers, an acquiror should also take into account the types of work pass involved and the acquiror's existing workforce composition. This is because the hiring of employees under certain work passes will be subject to the acquiror's foreign worker quota, and the procedures for the acquiror to obtain the necessary work passes may differ depending on the type of work pass involved.
Franchising Arrangements
If the F&B business being acquired is a franchise under a franchising agreement ("Agreement"), it is likely that the franchisor will need to consent to the acquisition. A 'change of control' clause, if present in the Agreement, would permit the franchisor to terminate the Agreement in the event of an acquisition unless prior approval was given by the franchisor. The Agreement could also potentially provide for a renegotiation of the franchise terms in the event of a change in ownership of the business.
Leases
One of the main ingredients for success in the retail F&B industry is location, location, location. The location of an establishment is of particular importance in Singapore's saturated F&B market where there is a plethora of dining alternatives. The terms of the target's lease agreement should be reviewed by investors, paying particular attention to the length of the lease, terms of renewal, whether consent is required for an acquisition and other commercial terms of the lease. As with franchise agreements, it is possible that a change in ownership could require a renegotiation of the terms of the lease.
Why do some acquisitions fail?
Many acquisitions fail to deliver the synergies and value promised. To avoid these problems, there should be sufficient legal and financial due diligence carried out. Post-acquisition/investment integration issues such as management of cultures and personnel will also have to be sensibly managed. Many of these problems can be avoided if they are addressed early during negotiations and the due diligence process.
For further information, please contact:
Marcus Chow, Partner, Bird & Bird
marcus.chow@twobirds.com
