Glenboden M & A Originations

Post demerger from Kraft sets precedent for Cadbury - Cott deal in future

Priority Rating priority rating 4
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Origination Status definitive agreement announced for business unit de-merger, November 2007
Asset ‘Post’ cereals brand and business, no.3 cereals brand in USA
Buyer Ralcorp Holdings Inc. (USA), leading domestic private label foods producer
Seller Kraft Foods Inc. (USA), multinational branded foods group
Buyer Rationale premiumisation of portfolio through entry into branded segment
Seller Rationale refocusing of portfolio into faster –growing categories and brands
NBs grossed –up transaction value is $ 4 bln, i.e. nearly x4 P/S (had it been a taxable, cash deal)
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This is a very ingenious deal; a classic case of ‘turning a problem into an opportunity’. With private equity in retreat, there was no-one willing to pay upwards of x4 Sales for this business which, at the end of the day, is quite a weak no.3 player behind Kellogg and General Mills. So, a clever ‘win-win’ scheme is devised. Such a scheme could be replicated by Cadbury, to find a solution for its US beverages business; in that case the analogous partner to Ralcorp would be Cott.

Through this scheme, (i) Kraft management gets the ‘grossed up’ valuation it wants, and no longer has to manage this low growth business; (ii) Kraft shareholders gain 54% of a combined Post and Ralcorp entity; (iii) Ralcorp management and shareholders acquire a major brand, quite cheaply, to grow their business by 50% and to enter the higher –margin branded segment.

Other noteworthy point is that, a year earlier, private equity would almost certainly have bought Post. Obviously the cost of capital is now too high for full valuations paid. Also, this is a rare case of a private label producer acquiring a branded business; it will be interesting how the execution works, and how Ralcorp’s relations with its retail customers will be affected. Our guess is that this deal, ultimately, will result in Ralcorp just premiumising its private label business more, and that Post’s brands will fade away over time.

No doubt Cadbury will be talking to Cott, the largest private label soft drinks producer in the US market, about replicating such a structure for its US beverages de-merger – Cadbury, like Post, is no.3 in its category in that market. Expect an announcement once Cott has reached some key milesones in its turnaround plan, possibly still within 2008 or early 2009.

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THIS LEAD'S VALUATION
Size (€ mln) 3.000
Sector breakfast cereal
Asset Quality US no.3 branded
Seller large plc
Buyer mid-cap plc
P/S 3,6
P/Ebitda n/a
Type total non-cash consideration
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