Glenboden M & A Originations

Recent soft drinks deals by Nestle underline structured deals trend in that category

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Origination Status joint venture licences over brands, production and distribution, December 2007
Asset ‘Jamba’ juices and smoothies brand (USA), mineral and purified water brands of CCU (Chile)
Buyer Nestle Group (Switzerland), multinational food group
Seller Jamba Juice Company (USA), ‘category –defining leader’ in healthy blended juices; Compania Cervecerias Unidas (Chile), diversified beverages group
Buyer Rationale to experiment with structured deals, given lack of outright acquisition opportunities
Seller Rationale resources of a global partner, defensive measures
NBs deals come at a time when soft drinks majors are complaining about a lack of scalable acquisition candidates and/or about excessive valuations
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In the early 2000s, when acquisition appetite was generally weak, ‘structured deals’ like these ones were much discussed in companies like Nestle. The idea of pooling brands, production and distribution assets with external partners, in new markets or categories, seemed just the remedy in conditions where nobody wanted to pay loads of cash for straight acquisitions. The trend for structured deals has returned in soft drinks, as not only Nestle but also Coca-Cola has demonstrated. That’s not because acquisition appetite has weakened; but rather a consequence of lack of deal-making accord now.

Soft beverages, especially ‘new frontier’ categories like healthier juices or enhanced waters, have been particularly affected by valuation inflation during this cycle. Glenboden has originated a number of deals, that did or didn’t happen, where the announced or implied valuation multiple was in excess of x3 Sales. Sooner or later, with the acquisition momentum of the big multinationals still strong, it’s almost inevitable that the straight acquisitions will stop, and that riskier or weaker structured deals would take over.

The Jamba Juice deal is an ambitious and creative project, which you might not have expected even six months ago. Jamba is like a Starbucks in soft beverages, in the sense that it sells exclusively through its own retail system (over 650 stores so far, owned or franchised). It’s mostly focused in California, and is a very premium proposition. Not the regular mass market, multi –channel consumer brand that you’d normally expect someone like Nestle to be interested in.

Jamba’s business model is notoriously difficult to manage profitably, as the company appears to have experienced in 2007. Its most recent financial report shows it to be barely breaking even, and growing in sales by only 4% this year. Its focus in 2008 will switch from opening new stores to more frequent visitors, relevance and ‘unit level economics’. Basically, they’re in trouble. Hence the deal with Nestle, to launch mass market products, under the Jamba brand, starting with the grocery channel in selected US states. From Nestle’s perspective, this is much cheaper than acquiring a strong brand, especially these days; on the other hand this strategy carries a low probability of success, and a big risk that the Jamba brand will just get lost in the big Nestle system.

The CCU deal in Chile is similar, in the sense that it’s probably not a first choice solution for Nestle, but in this case it’s Nestle’s brand that’s likely to get lost. CCU is a big diversified beverages business, with leading market positions in mineral water, soft drinks, beer and wine in Chile and Argentina. Nestle has succeeded here only in pulling the bottled water brands and assets out of CCU, and into a separate company. However, the group only has a 20% stake in this joint venture, with a call option to increase that to 49,9% - quite a pointless level of shareholding, for a big strategic player like Nestle. It looks like Nestle wanted to buy the whole business, but CCU demanded too high a control premium for it, or something equally frustrating.

What’s more, although Nestle is also contributing a licence for its Nestle Pure Life brand, to the joint venture, it’s likely that this premium brand will not receive much focus, and that it will be CCU’s proximity brands, Cachantun and Porvenir, that will really benefit from Nestle’s cash injection.

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