Glenboden M & A Originations

Who will buy Folgers and Pringles from Procter & Gamble ?

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Origination Status reports in financial press of divestment through controlled auction / divestment;
Asset brands and trade of Folgers (coffee) and Pringles (savoury snacks), leaders in US market;
Buyer candidates include Sara Lee, Smucker's, private equity;
Seller Procter & Gamble (USA), multinational FMCG group;
Buyer Rationale market leading brands in the US, synergy potential;
Seller Rationale final exit from food products, focus on core and growth businesses;
NBs combined brands have est. annual sales of $2,7 bln and EBITDA of $600 mln.
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Strategically, these brands represent just 3,5% of P&G’s total net sales, and 3% of its total EBITDA, and have limited growth, so it’s no wonder they’re to be divested. In valuation terms, both of these brands belong to the ‘over $ 1 bln club’ in annual revenues, so they are clearly attractive from a market position point of view. At an EBITDA multiple of e.g. 12, we’re looking at a valuation of the combined businesses of $7 bln. However, in the currently climate this number may be hard to achieve, and P&G might have to settle for a lower figure and/or structured deals.

Interesting that P&G should select Blackstone LLP as advisor, not an investment bank, considering that Blackstone is better known as a global leader in private equity. This suggests a resignation by P&G to selling these businesses to private equity, rather than to other corporations. Even more interesting is the rumour that Blackstone’s advice was to spin off the brands, not sell them; advice which P&G’s executives refused. But who’s in a better position than Blackstone, to know whether private equity now has the stomach for such large acquisitions, at full prices ? Especially when the assets in question are already very profitable, with an est. EBITDA margin of over 20%, and when the growth prospects aren’t great.

Take the Folgers US coffee business. Folgers is one of the two big retail coffee brands in the US, together with Kraft’s Maxwell House comprising two-thirds of that market. True, the category broadly speaking is growing at an annual rate of nearly 10% in the US, but at least 80% of that growth is being generated by foodservice. There’s a growing trend for consumers to drink coffee ‘on the go’. On top of that, demographics are unfavourable, with young people generally drinking less coffee than baby-boomers. To make things worse, the trend towards authenticity-of-origin, in the premium segment of retail coffee, will help the smaller producers and might be an increasing problem for the all-American big-two incumbents. In this context, private equity will want to buy Folgers at a discount.

Unless, that is, Sara Lee steps up to the plate after all. Its daughter company Douwe Egberts is the no. 2 global coffee roaster, with major positions throughout Europe, Brazil, Russia and Asia. DE also has a very strong track record in innovation, including the breakthrough Senseo coffee pod system. That kind of innovation pipeline is exactly what Folgers will need. Douwe Egberts is conspicuously weak in the US, where Sara Lee’s food operations are focused on fresh bakery and meats. The group has an opportunity to reassert its status as a global leader in coffee, and to make a grand come-back into the acquisition world, by acquiring Folgers. Not long ago, Sara Lee announced that its divestment programme and organisational restructuring are over, and that it was ‘entering a growth phase’. Since then, it has focused on its innovation pipeline to achieve this growth, and has shunned acquisitions. What better way for Sara Lee to tell the world that it’s back in town, than by expanding its global coffee leadership into its home country?

It may be harder to find a corporate buyer for Pringles, however. It’s really a niche player, with a narrow portfolio, in a US market for potato chips that’s 55% controlled by Frito Lay. On the other hand, it’s quite international, and is based on a breakthrough concept with its tubular box. Maybe it can make another breakthrough? Pringles looks like an opportunity for a private equity acquirer to acquire the business at a less-than-full price, keeping some money aside for innovation investments there, and weathering the current storm affecting ‘unhealthy’ snacks until better times.

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