Glenboden M & A Originations

Nestle’s cheap purchase of Henniez points to local water brand opportunities in Europe

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Origination Status company acquisition agreement signed, September 2007;
Asset Sources Minerales Henniez (Switzerland), leading domestic mineral water brand;
Buyer Nestle Group (Switzerland), multinational food group;
Seller Rouge family (Switzerland), majority owner of Henniez;
Buyer Rationale Nestle Waters to triple market share in Switzerland to cca. 25%;
Seller Rationale acceptable valuation, financial difficulties ahead ?;
NBs Nestle to make public offer for the remaining 38% of shares, at a 40% premium to the Rouge share price; total consideration for 100% of shares is 155 mln CHF therefore.
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This looks like an opportunistic deal. Nestle’s M&A focus in the last year has been on the giant, transformational Novartis and Gerber acquisitions. What’s more, the Group hasn’t made a bottled water acquisition for three years. Nestle’s last water acquisition in Europe, that of Saint Springs in Russia in 2002, was in a country with the lowest per capita bottled water consumption in Europe, and a growth rate of 20% p.a. Nestle is reportedly now looking for a similar opportunity in China.

So why are they bothering with little Henniez, in the 1 -2% p.a. growth Swiss market ? This looks like an opportunistic deal; but it also has features to suggest that other national brands, in bottled water, may be vulnerable to sale in western Europe.

The opportunism theory is re-inforced by the attractive valuation, which is at a 25% discount to Henniez’s market capitalisation on the SWX Swiss Exchange. Intriguingly, the Rouge family are to receive a price per share which is 40% lower than the average last 60-days traded price that’s being offered to public shareholders.

Usually a public company’s controlling shareholders aim to get a significant ‘control premium’, above the traded price, from an acquirer. This later translates into the acquiror having to offer the same premium to the minority shareholders, because that’s what securities’ regulations make them do. Here, by contrast, Nestle is paying what might perversely be called a ‘control discount’ to the Rouge family.

Basically, the Rouge family, are receiving only half of the cash, for selling nearly two-thirds of the equity (62%). On top of that, Henniez is the leading domestic mineral water brand, and brings more than 15% bottled water market share to Nestle in Switzerland.

The fact that the valuation is so low, and punitive, suggests that there are pending financial problems at Henniez, yet –unknown to its public shareholders or discounted in its traded share price.

Nestle gives a big clue, as to where the root of the problem might be. Apparently, Switzerland’s three large retailers account for 85% of sales’ of bottled water. One possibility is that Henniez is about to lose one of these critical accounts.

Other problems might stem from the recycling regime imposed on bottled drinks producers in Switzerland; Henniez has a large long-term provision in its accounts, for the related liabilities.

It also looks like the company has been slow to enter the fast-growing enhanced and flavoured waters categories. Finally, at only 4% last year, Henniez’s operating profit is risible by bottled water standards.

One might conclude that the public shareholders are lucky, not to be taking the same ‘hit’ that the managing Rouge family is taking.

But what will happen to the legacy ‘Henniez’ brand, in existence since 1905 ? In some sectors, like confectionery, Nestle has been cutting back on local brands, in favour of global ones. Thankfully, ‘local heros’ tend to be holding up very well in the bottled water business, globally. So, the Rouge family’s assertion, that the transaction ‘safeguards’ the Henniez tradition, may not have been said in vain.

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THIS LEAD'S VALUATION
Size (€ mln) 120
Sector mineral water
Asset Quality Swiss no.1 branded
Seller family
Buyer large plc
P/S 1,2
P/Ebitda 12,1
Type enterprise value
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