Glenboden M & A Originations

Potential acquirors of vulnerable Bakkavor in convenience foods

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Origination Status proprietary deal origination, October 2008
Asset Bakkavor Group hf. (ultimately Iceland), leading fresh prepared food and produce player in UK
Buyer candidates include Kerry Foods, Chiquita, Greencore
Seller Gudmundsson family and public shareholders of Bakkavor
Buyer Rationale enhanced position in fast –growing convenience foods in Europe, synergies in UK
Seller Rationale declining profitability, weak capitalization, losses, need for greater scale
NBs in October 2008 Bakkavor relinquished its 11% stake in Greencore, for financial reasons
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It’s a short step, from observing Bakkavor relinquish its 11% economic interest in Greencore, on the basis that it’s ‘outside normal banking arrangements’, to concluding that the group has grown too fast, is undercapitalized and too dependent on a category whose margins are still generally low. It might now be a prime takeover candidate for longer-standing groups, with a more balanced portfolio, that are keen to enhance their presence and scale in the fast –growing chilled convenience foods categories. Potential acquirors include Ireland’s Kerry Group and Greencore, as well as Chiquita from the USA.

Bakkavor is the UK’s largest producer of fresh prepared foods and produce, with an international business adding another 10% to total sales. It’s grown very quickly from nothing, through multiple acquisitions; sales revenue in 2007, at 1,5 bln GBP, was 10 times as big as three years earlier.

However, although H1 2008 sales growth of 10% continues to impress, operating profit has tumbled by 35% in the same period, thanks to rising materials’ costs and consumers’ trading down. The group’s EBITDA margin is now only 7%, its equity ratio a very low 14%, and it’s loss-making.

At the same time, Bakkavor holds the UK’s no.1 or 2 market positions in most of the sub –categories in which it competes, spanning food to-go (sandwiches, salads), chilled meals, cooking sauces and pickles. These are areas of fast growth in both branded and private label segments. That’s an attractive proposition for other food groups that also have a significant and ambitious chilled convenience foods business. We have identified at least three.

Kerry Group is a well –established global ingredients, flavours and consumer foods group, based in Ireland. Its food division, which constitutes about 35% of total turnover of €4,8 bln, has grown from nothing, in the last 20 years, through about a dozen acquisitions, mostly of brands in the UK.

Its last three acquisitions, Hibernia ready meals and desserts in 2003, Noon Group in 2005 and Breeo Foods in March 2008, have all been focused on chilled foods. Kerry has also built a large chilled distribution function, which provides a lot of capacity.

Also, its brand portfolio is arguably too heavily weighted in meats now, with leading brands such as Mattesson’s, Wall’s and Richmond; Bakkavor would bring complementary leadership in areas like pasta, dips and fruit.

On top of the history and strategic rationale, Kerry’s financial performance and standing are quite sound. Its EBITDA margin exceeds 10%; its net debt to EBITDA ratio is a modest x2,5; and its strong global business in flavours and ingredients enhances the overall cashflow of the group. For all of these reasons, plus sheer opportunism, Kerry is a good candidate to acquire Bakkavor.

Chiquita’s recovery program has come a long way, with a return to profitability, debt refinancing, the divestment of Univeg in Germany, and a value -added products strategy. The company’s H1 2008 performance was the best in three years, with sales growth of 5%, and an EBITDA margin that grew from nothing to reach about 7%.

The group’s banana’s business still constitutes nearly 60% of sales, with about one-third of volumes sold in Europe. That has allowed Chiquita to benefit from higher banana prices, as well as a strong Euro exchange rate.

Chiquita therefore may now have the basis for following its declared strategy, of strengthening its salads and healthy snacks business, through a significant acquisition. So far, only 25% of total sales are from this division, and the group will be keen to double this for sure; that would easily be achieved through buying Bakkavor.

Additional benefits would be (i) a stronger presence in Europe; (ii) synergies from the merger of Geest, the UK’s no.1 fresh produce supplier that’s part of Bakkavor; (iii) potential for stretching the Chiquita brand into new categories in the UK; (iv) removal of a threat in its domestic market (Bakkavor made its first US acquisition, Two Chefs on a Roll in California, earlier in 2008).

Finally we present Greencore as a potential acquiror, and with some irony. The group is only about 60% of the size of Bakkavor in turnover. However, it’s stronger financially; it also has a more balanced business, in terms of geographies and categories. It can also said to be Bakkavor’s closest rival, in terms of direct competition, strategic ambitions and acquisition track –record.

Originally an ingredients producer in Ireland, Greencore has evolved into a leading chilled ready meals and snacks producer in the UK, with significant businesses also in Holland, Germany and Ireland. It claims to be the largest producer of packaged sandwiches in the world.

Earlier, given the size differences and Bakkavor’s 11% stake in Greencore, many including Glenboden tipped the former to acquire the latter; the tables may now have turned. Greencore’s H1 2008 sales grew by 10% to reach € 650 mln; its operating profit, in contrast to Bakkavor’s and in spite of a poor GBP exchange rate, also increased, by 12%; the group’s EBITDA margin comes in at about 9%.

The advantage that Greencore has over Bakkavor is that it’s not quite so heavily weighted in the UK and, more importantly, isn’t 100% focused on convenience food.

The group’s ingredients division grew by 30% in revenue terms in H1 2008, to reach 30% of total turnover; that division drove the group’s profitability growth, in the context of high materials’ costs compared with a tough trading environment for convenience foods. With an equity ratio of 50%, and decreasing net debt, Greencore may have the balance sheet to acquire Bakkavor; such an outcome may need to be heavily structured however.

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Size (€ mln) 1.150
Sector chilled foods
Asset Quality UK no.2 branded /PL
Seller mid-cap plc
Buyer large plc
P/S 1,0
P/Ebitda 10,0
Type estimated value
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