Glenboden M & A Originations

Spain’s Ebro Puleva released for rice /pasta buys after sale of sugar business to ABF

Priority Rating priority rating 4
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Origination Status seller announcement of preliminary agreement, November 2008
Asset Azucarera Ebro SL (Spain), no.1 sugar producer in Iberia with 50% market share
Buyer Associated British Foods plc (UK), diversified international agriculture, food and retail group
Seller Grupo Ebro Puleva (Spain), no.1 domestic food group
Buyer Rationale European expansion, and greater critical mass, for subsidiary British Sugar
Seller Rationale weak performance, absence of scale, strengthened balance sheet for acquisitions in core businesses
NBs consideration split between cash component (€ 385 mln) and compensation for loss of EU sugar subsidies (€ 141 mln)
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Commodity sugar is a scale business, and Azucarera Ebro was too small to be sustainable alone. With Ebro Puleva’s tagline being ‘going with the grain’, 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 Ben’s, 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 € 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, it’s mostly a domestic business, whose EBITDA performance has been in decline recently and now stands at under 10% of sales.

Dairy won’t 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 –three rice market positions in Spain, Portugal, France, Germany, Belgium, USA and Canada.

The group’s pasta business doesn’t 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 Ebro’s priority will be to acquire a rice brand next, rather than a pasta one. That’s 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 what’s most profitable.

How big might this acquisition be ? With proceeds from the divestment of Azucarera Ebro of over € 500 mln, the group could reduce its net debt to about € 750 mln by YE 2008. If it reaches its forecast of € 275 mln EBITDA in FY 2008 (excluding sugar), then its net debt ratio will be about 2,7.

Given the steady –cashflow profile of its operations, and a growth rate of over 10%, Ebro could raise another € 1 bln for a strategic acquisition (credit markets –permitting). That should be sufficient to acquire a majority stake in Uncle Ben’s, 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 Ben’s business which, with $ 1,5 bln in sales in 2007, only contributed 7% of the group’s 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 Ebro’s 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.

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THIS LEAD'S VALUATION
Size (€ mln) 530
Sector sugar
Asset Quality Iberia no.1 commodity
Seller mid-cap plc
Buyer large plc
P/S 0,9
P/Ebitda 9,3
Type total consideration
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