Glenboden M & A Originations

Acquisition options for Wimm-Bill-Dann in Russian dairy, baby food and juices

Priority Rating priority rating 4
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Origination Status management announcement of acquisitions intent, November 2008
Asset candidates include Lebedyansky (baby food), Nidan (juice), Campina Russia (dairy)
Buyer Wimm-Bill-Dann (Russia), no.1 domestic branded chilled dairy producer
Seller Lebedyansky JSC, Lion Capital (Nidan), Campina BV
Buyer Rationale market leadership, critical mass, opportunism, financial leverage headroom
Seller Rationale acceptable valuation, defensive timing
NBs WBD reports EBTDA of $ 400 mln with debt of only $ 600 mln
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Wimm-Bill-Dann’s management has repeatedly announced its intention of acquiring ‘two or three’ enterprises in 2008, most recently in the wake of harsher credit conditions which, it claims, have strengthened its negotiating position with sellers over price. Certainly there are some targets in Russia whose acquisition would allow WBD to make a step-change in its market position and long-term viability; we identify some of them in infant feeding, fruit juices and chilled dairy.

Helped by domestic inflation and a weak US dollar, WBD has continued its growth surge in H1 2008, in all three of its business units.

In dairy, which constitutes 75% of the group’s turnover, and where (in chilled) it’s Russia’s market leader with 30% share, sales grew by nearly 30%, helped by WBD’s ability to pass on cost increases through higher prices.

In beverages, where the group seems to be feeling the pinch of competition more strongly than dairy, sales grew by just over 20%; meanwhile in baby foods, where WBD benefits from the market’s overall high growth from a very low per capita base, revenue increased by a staggering 65%.

We prefer, however, to use margins as our key to predicting WBD’s acquisitions strategy, rather than growth. The group’s overall EBITDA margin in H1 2008 was 12%, which isn’t very high considering WBD’s strong market position and growth environment.

For this reason it’s likely to focus non-organic growth in areas with the highest profitability; gross margin in the period was, respectively, 47% - 38% - 28% (baby food - beverages - dairy). So, this becomes the order of acquisition priority in our view.

The obvious baby food candidate for WBD is Lebedyansky’s business unit. Russia’s market leader in its categories, with over 30% share in baby fruit and puree, its sales grew by 40% in 2007 to reach $ 125 mln. However, the EBITDA margin actually fell by 6% because of a major increase in supply chain costs; the company has had to extend its distribution reach and increase penetration in order to keep growing.

As market growth rates slow, and competition intensifies, this business will feels its lack of critical mass even more; for this reason the rationale for a merger with WBD’s baby food business is very compelling. That would also provide United Capital Partners, the investment boutique that acquired a 24% stake in this business earlier in 2008, with its exit.

Moving on to fruit juice, WBD sits in an uneasy joint -third place, beside Nidan Soki, in a domestic market in which the big two are Pepsico and Coca-Cola. The obvious move here would be for WBD to merge with Nidan. As they both control about 15% of the market, their combined share would challenge that of the market leaders, who respectively acquired Lebedyansky and Multon in 2008 and 2005.

Also supportive of this outcome is Nidan’s ownership – it was bought a year earlier by a private equity firm, Lion Capital, who undoubtedly is open to an exit at the right price.

The rationale behind a further acquisition in dairy, by WBD, is arguably weaker than in baby food and juices, given the group’s existing market leadership and critical mass in dairy (as demonstrated by its pricing power). Here, WBD is more likely to seek a bolt-on acquisition in value-added categories that increase its relatively low profitability.

For that reason, our tip is for it to buy Campina out of its Russian business. With a strong market position in yoghurt and drinking yoghurt, an emphasis on value-added themes (low-fat, functional food, out-of-home segment), as well as support behind its Nezhny and Fruttis brands, Campina Russia is a high –margin business that would complement WBD’s portfolio very well.

By taking such a cherry-picking approach, with no intention of competing in more basic dairy categories, Campina may find that, as in Poland, it can’t achieve critical mass in Russia. It might then sell its facilities and licence its brands to a local incumbent with a broader-based business, like WBD.

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Size (€ mln) 300
Sector infant nutrition
Asset Quality Russia leader branded
Seller mid-cap plc
Buyer mid-cap plc
P/S 2,5
P/Ebitda 10,0
Type estimated value
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