Glenboden M & A Originations

Who will acquire Moscow confectionery leader Ruza ?

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Origination Status sell-side rumour of company divestment in November 2007
Asset Ruza Confectionery Factory (Russia), one of top 3 premium chocolate players in Moscow market (‘Ruzanna’ and ‘Comilfo’ brands)
Buyer candidates include Nestle, Kraft, Cloetta Fazer (and Hershey)
Seller shareholders of RCF (France?)
Buyer Rationale more aggressive pursuit of international growth
Seller Rationale attractive valuation, good timing
NBs acquisition would be ideal follow -through for Hershey after its Foundation’s declarations
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Recently we discussed the Hershey Trust’s pressure on the company, to boost growth by making international acquisitions. We said that Hershey is likely to make its move in Russia, since it already has JVs in China and India, and in the wake of its US ‘twin’ Wrigley’s acquisition of a.Korkunov in Russia in January 2007. Ruza may be the right candidate for Hershey, but other strong candidates like Nestle are also in the frame.

Nestle, Kraft and Fazer are the officially rumoured buyers for Ruza. Nestle is gradually exiting chocolate, subtly and covertly. One only has to look at the deals made recently with Barry Callebaut, to realize that. On the other hand, expansion in major new territories (like Russia) may weigh more heavily for Nestle than exit from confectionery does.

Kraft is busy digesting its acquisition of LU biscuits, a huge and global deal, and so the timing is wrong for them.

Fazer is more believable, given the group’s presence in the Russian bakery sector. However its confectionery arm, Cloetta Fazer, is mostly focused on the Nordic markets. Moreover, CF has seen a decline in its operating profit recently, and so any new acquisitions are likely to be ones that are immediately accretive to earnings, which is sure to exclude long-term propositions with low current profitability in Russia. On top of that is the possible de-merger of Cloetta from Fazer.

Ruza is quite similar to A.Korkunov, Wrigley’s partner in Russia. Both were established in the late 1990s, both have leading brands in premium chocolates in the Moscow market. Also, like its Russian ‘twin’, Ruza is focused on the ‘gift’ boxes and ‘at home’ segments of chocolate confectionery, and so on pralines.

Companies with that portfolio focus can be found throughout the post Communist countries, for legacy reasons, but, as the case of e.g. Mieszko in Poland shows, such companies can struggle to maintain relevance as consumer trends move towards indulgence or snacking products, which are the domain of the western confectionery majors.

Ruza provides a platform for Hershey to buy into existing popular categories, and local brands, through which it can distribute its own ‘global’ brands over time, as the Russian market evolves.

This was the same proposition that Korkunov provided to Wrigley. Also, this more-or-less fits the model which Hershey has developed in its joint-ventures in China and India recently (Lotto and Godrej respectively).

One question mark, however, is Ruza’s ability to distribute beyond Moscow – so far it is only present in the larger stores, in the Russian regions.

For this reason, plus the fact that Hershey only paid a P/S of 2,5 in the case of Godrej’s assets, and Wrigley paid a P/S of 3,0 for Korkunov which has a broader distribution network, we think the valuation rumour of roughly x4 sales is too high, too much based on recent precedents that aren’t really applicable.

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THIS LEAD'S VALUATION
Size (€ mln) 170
Sector confectionery
Asset Quality Moscow no.3 branded
Seller individuals
Buyer large plc
P/S 3,8
P/Ebitda n/a
Type total consideration
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