Glenboden M & A Originations

Russian meat company sets new standard in M&A transparency

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Origination Status acquisition transaction announced, August 2007;
Asset OAO Chicken Kingdom (Russia), no. 4 domestic poultry processor;
Buyer Cherkizovo Group OJSC (Russia), leading domestic meat processor;
Seller shareholders of Chicken Kingdom’s holding company;
Buyer Rationale to position Cherkizovo as no.1 domestic poultry producer;
Seller Rationale acceptable valuation;
NBs Cherkizovo has been listed and trading on the London Stock Exchange since May 2006.
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Russia has had the reputation of being one of the least transparent countries on the planet. Its business culture since the end of Communism has generally confirmed that image. Yet, here in 2007, we have a Russian M&A transaction that beats most western standards of disclosure to the public. This deal also shows that a no. 4 player in a Russian food category can be bought quite cheaply, against the trend, if that category is meat and if the buyer is another Russian player.

Not even the Coca-Colas of the western world disclosure so much information, when they’re buying a private company. First of all, the agreed price has been announced; this is already more than you usually get, in deals of this type, even in the USA.

Then, Cherkizovo tells you what is meant by ‘price’, in this transaction : ‘this was for the acquisition of 100% of the share capital of the holding company, certain trademarks of Chicken Kingdom and to retire certain liabilities’; that’s quite a full clarification.

It gets better. Cherkizovo proceeds to give us the target company’s sales revenue and EBITDA figures for 2006, adding that they’re on a consolidated basis.

If that wasn’t enough, they also provide sales in volume terms last year, and even tell us the expected volume growth this year. This is more than one gets in mega-mergers involving public companies.

But that’s not the end of the story . We’re even told that Chicken Kingdom’s production capacity is expected to reach 100.000 tons by the end of 2007. New capacity plans of this kind are usually regarded as highly competitor –sensitive information.

There’s also a mini -lecture about the rationale for the acquisition, including where the synergies will be.

The valuation in this deal is also an interesting finding. It looks very cheap, when one considers that Chicken Kingdom has a significant market position, an EBITDA margin of over 20%, a strong brand and a volume growth rate this year of 14%. Maybe fresh and frozen poultry is not an exciting business, but branding does play a role in it, as Cherkizovo stresses in its announcement.

This valuation is in stark contrast with the high multiples paid by western corporations, for Russian assets, at the moment. One only has to look at the Wrigley acquisition of A.Korkunov, or the price tag that Lebedyansky is likely to have if Pepsico succeeds in buying it.

Domestic companies invariably buy assets more cheaply, in their own countries, than foreign investors do. That’s because only certain food sectors are the subject of international M&A, like confectionery and fruit juice at the moment, while sectors like meat are not.

In the case of Chicken Kingdom, the shareholders are also unlucky because it’s only no.4 in the market, and regionally focused, which is not enough to attract a big international meat group to it, as a market entry candidate.

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THIS LEAD'S VALUATION
Size (€ mln) 110
Sector poultry
Asset Quality Russia no.4 branded
Seller private equity
Buyer mid-cap plc
P/S 1,3
P/Ebitda 6,2
Type total consideration
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