Glenboden M & A Originations

Ruza acquisition shows that Nestle continues to invest in unhealthy food in emerging markets

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Origination Status company acquisition announced, November 2007
Asset Ruza Confectionery Factory (Russia), one of top 3 premium chocolate players in Moscow market (‘Ruzanna’ and ‘Comilfo’ brands)
Buyer Nestle Rossiya, local subsidiary of Nestle Group (Switzerland), multinational food group
Seller owners of RCF (Sergei Vorobyov and Rustam Suleimanov)
Buyer Rationale acquisition of proximity brand, expansion in BRIC markets
Seller Rationale attractive valuation, good timing
NBs Ruza only has 3% value share in Russian confectionery, overall
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We earlier predicted that Hershey would acquire Ruza, in response to the Hershey Foundation’s insistence that the company pursues international growth more aggressively. Senior executive departures at Hershey may have prevented that from happening. We certainly didn’t think Nestle would emerge as the buyer; it seems their strategy of investing in the big developing markets has overridden their focus on ‘health and wellness’, this time. But unlike Hershey, Nestle doesn’t need to acquire a platform in Russia. So, their other rationale would be to acquire a scalable bolt -on brand; in this respect Ruza’s credibility is possibly weak.

Nestle Rossiya is already a big company, with 13 factories, sales of € 1 bln and leading positions in Russia’s coffee, chocolate, culinary products and infant nutrition markets. Ruza would make sense, as an acquisition for Nestle, if it was a strong and scalable local brand, that the group could commercialise better, and distribute beyond Moscow and St. Petersburg. But is that the case?

The first demerit is that Ruza is focused on the ‘gift’ boxes and ‘at home’ segments of chocolate confectionery, and so on pralines. These ‘legacy’ segments are, or certainly will be, in decline in eastern Europe, just as they have been for a long time in developed markets. It’s very difficult for a premium pralines brand to achieve ‘breakthrough’ into growth areas like indulgence or snacking.

The second issue is authenticity and provenance. Just like A.Korkunov, which Wrigley acquired in Russia earlier this year, Ruza was established only in the late 1990s. What’s more, its identity is not entirely Russian; its main brand, ‘Comilfo’, is clearly derived from a French term applicable to civilized giving - ‘comme il faut’.

Thirdly, no matter how big Ruza’s market share is in the premium chocolate segment in Moscow, the fact remains that it only has 3% value share of Russia’s total chocolate market. Okay, so it’s growing this year by 40%, but from such a low base that’s no big deal. Where is the critical mass ?

There’s a risk that the only scalable aspect of Ruza is its industrial capability (big shiny factory).

In terms of valuation, Wrigley paid a P/S of 3,0 for Korkunov; analysts predicted that Ruza would go for a P/S of 4,0. With Ruza’s 40% growth rate, the difference between these two benchmarks might be ‘fudged’ by taking prospective year and not, as in the case of Korkunov, previous year sales. Given the fundamentals, we think this is already a high valuation; possibly the real deal was at a lower price, especially if there wasn’t as much buyer competition as expected.

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THIS LEAD'S VALUATION
Size (€ mln) 170
Sector confectionery
Asset Quality Moscow no.3 branded
Seller individuals
Buyer large plc
P/S 3,4
P/Ebitda n/a
Type total consideration
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