Spainâs Ebro Puleva released for rice /pasta buys after sale of sugar business to ABF
- November 24, 2008
||seller announcement of preliminary agreement, November 2008
||Azucarera Ebro SL (Spain), no.1 sugar producer in Iberia with 50% market share
||Associated British Foods plc (UK), diversified international agriculture, food and retail group
||Grupo Ebro Puleva (Spain), no.1 domestic food group
||European expansion, and greater critical mass, for subsidiary British Sugar
||weak performance, absence of scale, strengthened balance sheet for acquisitions in core businesses
||consideration split between cash component (âŹ 385 mln) and compensation for loss of EU sugar subsidies (âŹ 141 mln)
Commodity sugar is a scale business, and Azucarera Ebro was too small to be sustainable alone. With Ebro Pulevaâs tagline being âgoing with the grainâ, the cash from this divestment will allow the group to focus on further acquisitions, in its core businesses of branded rice and pasta, in Europe and north America. One plausible prediction is that the group will make a bid for Uncle Benâs, which we believe will be divested by Mars in the wake of its merger with Wrigley.
Ebro Puleva is, after divesting its sugar unit, a âŹ 2,4 bln turnover business with operations in rice, pasta and dairy products.
The dairy part contributes about 20% of total revenues, and is mostly focused on the high-end categories of functional foods and infant nutrition, where it enjoys strong market share and brand recognition. However, itâs mostly a domestic business, whose EBITDA performance has been in decline recently and now stands at under 10% of sales.
Dairy wonât be the business segment in which Ebro Puleva will concentrate its acquisition strategy. Its rice and pasta businesses, each of which deliver about 40% of turnover, are much more promising and international.
The group claims to be the biggest branded rice producer in the world, and historically this has been the biggest and most global activity for the group. After a string of acquisitions over the last 20 years, Ebro has top âthree rice market positions in Spain, Portugal, France, Germany, Belgium, USA and Canada.
The groupâs pasta business doesnât have the same provenance as its rice one, being mostly based on the acquisition of Panzani in 2005, the leading dry pasta brand in France and Canada. However, that segment is growing the quickest for Ebro, with a CAGR in 2006 -8 of over 30%, compared with only 15% for rice.
We believe however that Ebroâs priority will be to acquire a rice brand next, rather than a pasta one. Thatâs because its profitability has been stronger, with an EBITDA margin increasing from 9% to 13% in the last two years, while that of pasta has decreased from 15% to 9% in the same period. The group clearly has greater critical mass in rice, allowing it to pass on cost increases more easily; a company should always focus investment behind whatâs most profitable.
How big might this acquisition be ? With proceeds from the divestment of Azucarera Ebro of over âŹ 500 mln, the group could reduce its net debt to about âŹ 750 mln by YE 2008. If it reaches its forecast of âŹ 275 mln EBITDA in FY 2008 (excluding sugar), then its net debt ratio will be about 2,7.
Given the steady âcashflow profile of its operations, and a growth rate of over 10%, Ebro could raise another âŹ 1 bln for a strategic acquisition (credit markets âpermitting). That should be sufficient to acquire a majority stake in Uncle Benâs, if not all of it.
Earlier in 2008, Glenboden predicted that the subordinated debt taken on by Mars, to acquire Wrigley, would need to be repaid with proceeds from the sale of its Uncle Benâs business which, with $ 1,5 bln in sales in 2007, only contributed 7% of the groupâs turnover and is therefore non-core.
The Uncle Ben's brand, which is stretched across rice, meal solutions and cook-in sauces, would fit very nicely into Ebroâs portfolio given that it spans both rice and pasta. Although there might be anti-monopoly issues in certain markets, notably in the US where Ebro is already strong after its acquisition of Riviana Foods in 2004, the global synergies from such a merger would be very compelling.