Glenboden M & A Originations

M&A options around UK’s no.2 breakfast cereal player Weetabix

Priority Rating priority rating 4
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Origination Status proprietary deal origination, October 2008
Asset Weetabix Ltd (UK), no.2 domestic branded breakfast cereals producer by value
Buyer candidates include Kellogg, ABF and De-Vau-Ge
Seller Lion Capital (UK), private equity firm focused on consumer products
Buyer Rationale synergies in the UK (Kellogg), grocery brand portfolio expansion (ABF), European consolidation and margin enhancement (De-Vau-Ge)
Seller Rationale acceptable valuation and structure, timing
NBs Lion Capital acquired Weetabix, through Latimer vehicle, in February 2004
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It’s nearly five years since Lion Capital acquired Weetabix, so finding an exit route is probably a high priority now. This won’t be easy, as Weetabix is a highly indebted company, and a mature business, in a category with few international acquirors. On the other hand, it has a strong brand portfolio and EBITDA margin. Kellogg is back on the acquisition trail in 2008; ABF recently entered the breakfast cereal category; De-Vau-Ge is emerging as the consolidator of independent cereals businesses across Europe.

With leading brands such as Weetabix, Alpen musli, Weetos for kids, and Ready Brek in the hot cereals category, Weetabix Ltd is the no.2 branded and private label producer in the UK. It had total revenues of 375 mln GBP in 2007, and has become a lean operation with an underlying EBITDA margin in 2007 of about 25%.

On the negative side, however, sales only grew by 1% in 2007; nearly 70% of sales are generated in the UK, with its north American and European sales in decline overall, so it’s not particularly international; the company is staggeringly indebted, a legacy of its leveraged M&A history, with net debt of 680 mln GBP and an interest cover ratio of less than one.

So, who could Lion Capital turn to as a strategic buyer for Weetabix?

In theory Nestle should be keen to become the no.2 RTE cereals player in the UK, to match its global status in that category. However, the group hasn’t made any significant M&A moves in cereals for 10 years, and we can’t see that changing because (i) recent M&A has focused on demographic growth areas (Gerber for babies, Novartis for the elderly), or on BRIC countries; (ii) Nestle’s global cereals business is managed in a JV with General Mills, which makes M&A activity hard to co-ordinate (as Nestle’s parallel JV with Coca-Cola, in RTD coffee & tea, demonstrates so emphatically).

Kellogg, the global no.1 RTE cereals producer, re-entered the acquisition fray in 2008, after an absence of at least six years. The group first entered the Russia market in January, by acquiring United Bakers Group, the leading domestic crackers, biscuits and breakfast cereals producer. Then another BRIC acquisition came in June, that of Zhenghang Foods in China, a leading cookies and crackers producer in that country. Then in September Kellogg made two smaller acquisitions, in the US cookies and crackers market and in the Australian natural foods segment.

Weetabix would be a larger acquisition for Kellogg than all of the above combined, but it would enable the group to extract huge synergies as it is already the no.1 player in the UK. However, anti-monopoly hurdles will be high.

Associated British Foods, the diversified UK group with businesses ranging from agriculture to retail, is a strong tip to acquire Weetabix. The group’s grocery products division, which contributes nearly 40% of its total revenues of 6,8 bln GBP, contains a portfolio of legacy UK dry foods brands spanning hot beverages to bread and bakery products.

A year ago, ABF acquired a strategic 20% shareholding in Jordan’s, a family –owned RTE cereals business in the UK; the acquisition of Weetabix would be a far more emphatic portfolio expansion move into that category domestically.

Last but certainly not least is De-Vau-Ge, Germany’s no.1 private label breakfast cereals producer. Through a vehicle called Cereals Holding Group, it merged with the slightly smaller Dailycer, private label market leader in France and Spain, earlier in 2008. CHG is now the pan –European private label cereals champion, with combined revenues of about € 500 mln, market leadership in Germany, France, Spain and Holland, and significant positions also in the UK and Switzerland.

Weetabix would be provide an excellent add-on to the group in the UK, where CHG only generates 10% of its sales so far. It would also double the group’s size, taking it to the € 1 bln turnover level.

However, the financial reality of this scenario is as problematic as the strategic rationale is compelling. De-Vau-Ge is not only a private company, with strong links to the Seventh Day Adventist church and its mission of healthy living; it is also quite highly leveraged itself.

Any deal with Lion Capital over Weetabix would probably need to be heavily structured, therefore; but there is a clear recent precedent in the cashless merger of Ralcorp’s private label foods with Post branded RTE cereals in the US. In this case, even if it starts with a majority economic interest in the new entity, Lion Capital could have a buy-out formula agreement with De-Vau-Ge.

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Size (€ mln) 690
Sector breakfast cereal
Asset Quality UK no.2 branded /PL
Seller private equity
Buyer private corporate
P/S n/a
P/Ebitda 10,0
Type estimated value
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