Glenboden M & A Originations

Orkla likely to continue to sell its foods businesses in CEE

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Origination Status deal origination in April 2008
Asset candidates are Kotlin (Poland), Orkla Foods Romania, Guseppe (Czech)
Buyer candidates includey Heinz (USA), Rieber & Son (Norway), Maspex (Poland), Baxters (UK)
Seller Orkla Foods (Norway), subsidiary of Orkla Group, Norwegian conglomerate
Buyer Rationale acceptable valuation, strong brands, consolidation, maybe geographic expansion
Seller Rationale underperformance, high cost environment, timing
NBs last autumn Orkla sold its Polish seafood business, Superfish, for only x0,3 Sales
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Orkla has recently denied rumours that it’s to sell its central European businesses, which underperformed last year. Given longer term trends at the group, however, combined with an environment where there’s still strong buyer interest in grocery products businesses, Orkla might be wise to organize a tender with a timeline to end 2008. They might also add their Russian confectionery businesses, SladCo and Krupskaya, to the divestment list.

In recent months Glenboden's identified a market situation, taking examples from Ireland and Australia, in which there are major buyers out there for grocery or ‘dry’ products assets, albeit at valuations that aren’t very high. These are buyers for whom such categories are their core business, who can therefore extract synergies and wait for better times. Given the high commodity cost environment, and on top of that tighter credit markets, there’s a good chance that the M&A market will be poorer for sellers of such businesses next year.

Orkla is a diversified conglomerate, in an era when such a structure is unfashionable to say the least, at least in developed countries. It’s shedded some major businesses in recent years, including its stake in Carlsberg and Orkla Media, and has focused its international foods businesses on organic growth and efficiency gains. Last year it made the small but significant divestment of Superfish in Poland – significant because the very low valuation could presage further sales.

The rationale is strengthened by the fact that, with producer fragmentation, ‘me-too’ small producers putting pressure on margins, and retail sector consolidating in central Europe, Orkla is far from being ‘no.1 or strong no.2’ in most of its categories there, in contrast to its core Nordic markets.

Superfish was bought by the market leader in that category, Graal, as a consolidation play. Could the same theme play out with these larger businesses? If so then the obvious buyer is Heinz, who is back in acquisition mode now. Orkla, through Kotlin in Poland and a string of brands in Romania, has attractive market positions in ketchup, cook-in sauces and ambient meals, which are core categories for Heinz in the region. They might also be interested in the Guseppe frozen pizza business in Czech.

The other obvious potential acquirer is Rieber, who already has a significant ambient foods and pouched foods presence in Poland (Delecta) and Czech (Vitana). Orkla’s businesses would complement their portfolio nicely, and they have the advantage of being Orkla’s compatriots.

As for indigenous buyers, we tip the Polish food conglomerate Maspex, which has made acquisitions in neighbouring CE countries and is generally opportunistic about ‘adjacent’ categories.

Another, more distant candidate is Baxters, the family –owned Scottish soups and preserves company, which has announced that it will make an overseas acquisition in 2008.

Orkla should also consider selling its two Russian confectionery businesses, SladCo and Krupskaya. It could raise a lot of cash from the sale, in the current environment. Orkla has had problems in integrating these two companies, which are based in different regions of the country and occupy different segments. On the other hand, with combined sales of nearly € 200 mln, it’s a big business by Russian standards; bigger than both Ruza and A. Korkunov, which were bought respectively by Nestle and Wrigley in 2007. Last autumn, we tipped Hershey as a potential buyer for Orkla’s two companies. Now we're favouring Nestle to try a roll-up in Russia. Or Cadbury to catch up its position there.

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