Glenboden M & A Originations

Permira breakthrough into European frozen foods with Unilever purchase

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Origination Status business unit divestment completed in November 2006
Asset European frozen foods portfolio (mostly UK, Germany), under Iglo and Bird’s Eye brands
Buyer Permira, European private equity firm
Seller Unilever (UK /Holland), multinational FMCG group
Buyer Rationale European consolidation opportunity; UK and Germany focus
Seller Rationale to divest a non-core, mature business
NBs runner up in the controlled auction was also a private equity firm, CapVest
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A big question for Unilever is how big a portfolio can it continue to manage, in this era of accelerated food innovation? Many of its peers, including Danone, Heinz and Sara Lee, are honing themselves down to ‘three’ businesses, in order inter alia to give animation and speed to innovation initiatives. As for Permira, it has taken a big and expensive step into the European frozen foods category, where further consolidation opportunities abound. Its main competitor in this space will be CapVest.

The bigger your portfolio, the more you have to apply strict financial criteria to new projects, the less excited executives get about doing new things. That’s why, we think, Unilever is going in the same downsizing direction, the same ‘one step backwards for two steps forward’ story, as Danone etc, but without saying it officially. This divestment, of the faithful but now mature frozen foods business, tends to confirm the picture of a focusing of ambitions. Meanwhile, acquisitions are on hold, and ‘business development’ talk is now limited to in-house innovations or smaller tie-ups with businesses that bring new food ‘technology’ that Unilever can commercialise better.

It’s still hard to say what Unilever’s ‘end-game’ portfolio will be. They’re making a brave attempt to rationalise the development of their diverse food businesses by grouping them into ‘themes’. So, you have ‘healthy heart’ and ‘family’ (instead of plain edible oil -based spreads etc); culinary products that are increasingly regionalised (with ‘Italian cooking’ in the forefront); teas for all occasions. These all have great potential, if they get them right. We’re not so sure, on the other hand, about things like ‘slim-fast’ products, in an era where dieting is being superseded by a more no-sacrifices approach to nutrition. More obvious as divestment candidates are categories which are susceptible to commodity costs, like Unilever’s edible oils businesses..

Permira, previously Schroder’s private equity arm, is not a specialist in food business investments. Were they wise to pay this price for such a mature business? It seems that, in the auction, nobody wanted to breach the psychological 1,5x sales and/or 10x EBITDA threshholds, and Permira was the one to push up closest to them. It’s telling also that CapVest, the runner-up, wasn’t prepared to pay more than Permira, even though it has significant synergy potential with its existing Findus frozen foods business (notwithstanding limited geographic overlap). So what was Permira’s rationale, apart from the fact that, like its target Iglo Bird’s Eye, it has its biggest operations in UK and Germany?

Permira was quick to point out that three of Iglo Bird’s Eye’s markets, UK, Germany and Austria, constitute 81% of total turnover. No doubt Permira began the process of divesting the businesses in the other six markets, almost before the ink was dry on the deal documents with Unilever. If these are worth anything (and they may well not be), then the money can be used to repay some of the debt used for the LBO. Then it’s a numbers game of ‘debt service coverage ratios’, plus the hard work of rooting out other consolidation assets around Europe. Unless Permira find some growth story in frozen foods, which strategic investors, that didn’t try to buy the business, obviously could not see.

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THIS LEAD'S VALUATION
Size (€ mln) 1700
Sector frozen foods
Asset Quality UK & Germany no.1 branded
Seller large plc
Buyer private equity
P/S 1,4
P/Ebitda 9,9
Type business unit
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