Glenboden M & A Originations

Legacy Norwegian dairy brand Synnove is in play after private equity bid

Priority Rating priority rating 4
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Origination Status voluntary cash offer to shareholders, October 2007;
Asset Synnove Finden ASA (Norway), no.2 domestic cheese brand;
Buyer Scandza AS (Norway), backed by Lindsay Goldman LLP (USA);
Seller shareholders of Synnove (listed on Oslo Stock Exchange);
Buyer Rationale attractive valuation as Synnove emerges from restructuring;
Seller Rationale Synnove management has rejected Scandza’s offer as too low;
NBs big Scandinavian dairy groups Arla and Valio also tipped as buyers of Synnove.
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Synnove is a legacy cheese brand in Norway, dating back to 1928. It is the no.2 player in hard cheese, with a market share of 25%, and is significant also in spreadable Norwegian ‘brown cheese’. It presents itself as the only dairy business in Norway that is independent of the co-operative system in that country. The company embarked on a diversification programme in the early 2000s which, combined with investment in its core cheese business, caused it to over-reach itself financially. Recovering now as a slimmed –down entity, the time was seen by Scandza to make a bid for the company. There may be other bidders in the works, over time.

Synnove was established after the abolition of the dairy monopoly in that country in 1995. The legacy of that ‘escape’ seems to have been a grim one, as Synnove only now seems to be emerging from bitter disputes with the Norwegian government over heavily-regulated raw milk prices, at one end, and acrimonious battles over shelf space with Tine, Norway’s giant co-operative dairy player, at the other end.

Small wonder, therefore, that Synnove’s development strategy in the early 2000s focused on diversification beyond the dairy universe.

Their main plays were in poultry and eggs, where they saw an opportunity in Norway’s relatively low per capita consumption, and in ‘time critical’ ready meals, a fast-growing category in all developed countries.

To their credit, Synnove had picked winners with these choices, but didn’t have the ‘legs’ to capitalize on early gains in both cases. It might be said that their core identity, as a dairy processor, torpedoed them in the end.

Synnove’s poultry and eggs venture, Den Stolte Hane, posted strong growth but, in the end, did not have the critical mass to be ‘stand alone’, and was merged into Norway’s no.2 poultry player, Cardinal Foods. As a result, and having made a significant investment in DSH, Synnove was left with only a 14% shareholding of a much larger entity – not enough to be consolidated in the company’s accounts, so it had to be booked in 2005 as a discontinued activity.

Ready meals is maybe sadder still. Nordic Lunch, as Synnove’s project is called, grew very quickly, created a nationwide chilled distribution system, which is a valuable asset, and made acquisitions to expand into the Swedish market. Again, after such a promising start, the business had to be ceded – this time through sale to Bama Gruppen, in 2006 - and at a price of only x0,5 Sales. Again, significant numbers had to be booked as discontinued activity in Synnove’s accounts.

In total, the company had shrunk by one –third within two years. So what went wrong? It’s true that the two divested businesses had low profitability but, in both cases especially Nordic Lunch, there was great potential going forward.

The reason Synnove had to sell these businesses early was financial: the company was heavily indebted, had broken covenants with banks, and even a new equity issue and a bonds-to-equity swap were not enough to recapitalize it sufficiently.

It looks like Synnove’s management made a major strategic error – they invested too much in their core cheese business, rather than use it as a ‘cash cow’ to finance these new ventures.

Perhaps as a heatre of war with Tine, Synnove adopted a strategy of increasing market share in cheese, through innovation, advertising and presumably pricing activity also. This worked well, in terms of top line growth – the CAGR of Synnove’s dairy business in 2001-6 was 17%. That’s very impressive for such a mature business, way above the 3-4% growth rate for that market as a whole in Norway.

But there was a price for that, in terms of low margins, and the need to first outsource production and then invest in new capacity. On top of that was the usual jeopardy of any fast-growing dairy business – increased working capital as receivables grew, but raw milk suppliers still had to be paid within 10 days. Hence the growth in debt, hence the financial pressures, hence the sale of promising new business ventures and subsequent diminution.

Scandza knows that Synnove is a well –invested asset, and that the time to bid is know, before the company returns to profitability after its divestment wounds have healed.

Scandza is a special –purpose vehicle led by specialists in the Scandinavian food industry, Jan Bodd and Stig Sunde, who are recent veterans of Ringnes and Carlsberg respectively. They are sponsored by a US –based private equity firm, Lindsay Goldberg. Their offer is a tasteful 25% above the pre-bid share price, and values Synnove at a multiple of roughly x1 Sales at the enterprise level.

Synnove is now basically a pure-play cheese company, with a ‘strong no.2’ market position, a high –recognition brand, and modern facilities. Scandza potentially sees an opportunity for Synnove to follow Jarlsberg into becoming a global, authentic Norwegian cheese brand.

It could be however that Synnove’s portfolio is too narrow for it to succeed as a ‘stand-alone’ dairy business, and that it has greater value as an add-on for an existing dairy group than for private equity. Arla and Valio have been slow to react as counter –bidders; maybe another buyer will emerge ?

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THIS LEAD'S VALUATION
Size (€ mln) 95
Sector dairy (cheese)
Asset Quality Norway no.2 branded
Seller mid-cap plc
Buyer private equity
P/S 0,9
P/Ebitda neg.
Type enterprise value
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