Glenboden M & A Originations

Lawry’s sale by Unilever’s points to merits of brand deals for valuation accord

Priority Rating priority rating 3
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Origination Status brand divestments definitive agreement announced, November 2007
Asset Lawry’s and Adolph’s (USA), domestic seasonings and marinades brands
Buyer McCormick & Co. (USA), no.1 domestic sauces and seasonings producer
Seller Unilever (UK /Holland), multinational FMCG group
Financial Terms total cash consideration of $605 mln, represents P/S of 4,0 and incremental P /EBITDA of 9,0 (2006A)
Buyer Rationale part of strategy to increase sales 4 -6% p.a.; better fixed costs coverage
Seller Rationale portfolio restructuring to focus on strong brands with global reach
NBs as well as the brands, the deal includes inventory and some dedicated production equipment
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In the same month Unilever managed to sell both Boursin, and now Lawry’s, at a P/S of 4,0. These two deals, especially this second one, also demonstrate that ‘brand deals’ can be truly ‘win-win’, in the sense that the seller receives a high price but, at the same time, the buyer is getting good value because they are buying only incremental, and not stand-alone, EBITDA. This means that the profitability is very high – in this case, the incremental EBITDA margin is over 40%, thanks to the fact that McCormick is acquiring very few fixed assets and zero labour costs.

The high price might also have been the result of a heavily contested bid. Apparently Pinnacle Foods, ABF and even Heinz were also interested in the brands. A few months earlier, Glenboden predicted that Pinnacle would be the winning acquirer, for several reasons. First, its new owners Blackstone need to make an acquisition to justify their secondary buy-out of Pinnacle; second, Lawry’s would fill a gap in the company’s portfolio; third, a seasonings business would raise Pinnacle’s average operating margin. The fact that the company didn’t win the bid underlines private equity’s demise, perhaps.

Certainly we didn’t expect McCormick to emerge as the buyer. The group already has 250 brands, and 40-60% of the US market for sauces and seasonings. Lawry’s and Adolph’s are not ‘must have’ brands, so they’re likely to drown in this massive portfolio. Surely McCormick could have achieved the 10% top-line growth, which this acquisition brings them, more cheaply through e.g. bigger marketing spend behind its star brands?

The statement that Lawry’s provides an entry into wet marinades is, we believe, a red herring since this is only 23% of the brands’ turnover, and it would be quite easy for McCormick to stretch some of its existing brands into that category. Possibly the buyer’s real rationale was just to increase fixed cost coverage, given that they’re acquiring a 45% EBITDA margin and mostly variable costs. One can expect these two brands to be heavily to death by their new owner.

It’s interesting to compare this deal with Unilever’s other contemporaneous divestment, that of Boursin fresh cheese spread to Groupe Bel. In strictly financial terms, McCormick got a better deal than Bel, because the latter is acquiring a factory and its personnel, as well as a marketing function. So, Bel is paying the same x4 sales multiple as McCormick, but probably a significantly higher EBITDA multiple (we estimate x16, compared to x9). On the other hand, Bel is buying a platform in fresh cheese, which it plans to grow hugely, while McCormick is just buying brands that may decline for want of investment.

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THIS LEAD'S VALUATION
Size (€ mln) 430
Sector culinary
Asset Quality US branded
Seller large plc
Buyer large plc
P/S 4,0
P/Ebitda 9,0
Type total consideration
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