Glenboden M & A Originations

Lebedyansky's Russian baby food business teed up after juice sale to Pepsico

Priority Rating priority rating 2
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Origination Status joint announcement of company acquisition, March 2008
Asset Lebedyansky JSC (Russia), no.1 domestic fruit juice producer
Buyer Pepsico Inc (USA), multinational food group
Seller four main shareholders of Lebedyansky
Buyer Rationale expansion of portfolio beyond CSDs, growth in major BRIC market
Seller Rationale attractive valuation, timing
NBs Lebedyansky’s baby food and mineral water businesses are excluded from the deal
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We earlier predicted this deal would happen, because the timing was right for both the seller (high valuation environment) and the buyer (‘on a roll’ in fruit juice acquisitions in eastern Europe). At that time we predicted a valuation of x3 Sales. The deal has taken longer than expected, and the shine has come off the valuation somewhat, but finally Pepsico has made the breakthrough, and secondary deals might be in the pipeline. Anticipate later acquiror interest in the company’s baby food business, once that gets spun off as part of the deal.

The lower valuation than we’d earlier expected probably results from a decline in Lebedyansky’s growth rate and EBITDA margin in 2007. Although Lebedyansky’s performance was still very impressive in 2007, by western standards, it was less stellar than in 2006. Fruit juice net sales grew by 30% last year, but that was lower than in 2006 and slightly below the overall market growth rate. Even though net prices grew by 10%, the EBITDA margin actually declined because of a major increase in supply chain costs; the company has had to extend its distribution reach, and its direct sales function, in order to keep growing. This perhaps convinced the owners that they should sell up while the going was still good.

Obviously the investment in distribution was something that Pepsico was prepared to pay for. In terms of brand equity, however, the portfolio seems to be made up of numerous sub-brands, catering to each market segment, without an umbrella brand. So, Pepsico is not really paying for a brand, but rather for the high entry barrier of Lebedyansky’s production and distribution footprint.

Lebedyansky’s baby food business, which isn’t part of this deal, is a real jewel that is bound to attract acquirer interest. A market leader, with over 30% share in Russian baby fruit and puree, this business grew by 40% in 2007, to reach $ 125 mln in net sales, and has an EBITDA margin of over 25%. The growth potential of this market is massive in Russia, with very low per capita consumption currently. It’s a big enough opportunity for both Nestle and Danone to consider as a regional bolt –on to, respectively, Gerber and Numico. Expect a valuation in the x2,5 Sales range or above.

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Size (€ mln) 935
Sector fruit juices
Asset Quality Russia branded leader
Seller mid-cap plc
Buyer large plc
P/S 2,5
P/Ebitda 17,0
Type enterprise value
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