Glenboden M & A Originations

Potential buyers for the business units of Slovenian food group Droga Kolinska

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Origination Status owner announcement of divestment intention, November 2008
Asset Droga Kolinska Group (Slovenia), leading domestic food & beverages group
Buyer potential bidders include Nestle (hot drinks, culinary, baby food), Pepsico (snacks and soft drinks)
Seller Istrabenz d.d. (Slovenia), domestic tourism-to-energy holding co.
Buyer Rationale brands and market share in Slovenia, SE Europe regional platform
Seller Rationale to reduce parent company debt
NBs Istrabenz, owning 90% of DK’s equity, de-listed the group in 2007
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Droga Kolinska is one of a handful of food conglomerates in the former Yugoslavia, alongside e.g. Podravka and Agrokor in Croatia, that have so far resisted pressures to specialize in core activities, and retain ambitions to become the biggest food group in south-east Europe. However, if its owner Istrabenz succeeds in selling DK to strategic investors, then it’s likely that the group will be split up, given the diversity of its operations spanning tea & coffee, soft drinks, snacks, culinary products and speads. We look at the relative attractiveness of these business, and at potential buyers.

Formed by the merger of Droga d.d. and Kolinska d.d. in 2005, DK is a diversified food & beverages group with combined sales of € 360 mln, and a healthy EBITDA margin of 14%, in 2007. Turnover is split between tea & coffee (35% of total), sweet and savoury snacks (20%), soft drinks including bottled water (15%), pate spreads (10%), culinary aids (10%) and baby food (5%).

DK’s strong points are the top –three market positions of its main brands, strong growth especially in hot drinks and snacks, as well as its regional presence in former –Yugoslavia.

DK is already in the middle of a divestment plan for non-core brands; in recent months it’s sold its RTD cereals business to Croatia’s Podravka, its dehydrated products brands to Dr Oetker, and its vegetable preserves unit to a local company Orka. Other minor culinary and confectionery operations are also slated for sale. However, in the light of its parent company’s need to raise cash, these disposals are just the tip of the iceberg.

Given the weakness of public equity markets, its likely that Istrabenz’s only realistic option is sale to strategic investors; in that case a more fundamental split up of DK is likely, in view of the shortage of global players whose portfolio is compatible with the group’s.

Arguably DK’s most attractive divestment candidate, in terms of market position and growth rate, is its snack business. ‘Smoki’ claims to be the no.1 player in extruded savoury snacks in Slovenia, Serbia, Bosnia Herzegovina and Macedonia, and the overall sales of that division grew by over 25% in 2007.

Pepsico is likely to be interested in acquiring this; its purchase of Star Foods in Poland in 2006 shows that it’s not above buying local snacks brands. That group might also pick up DK’s soft drinks business; its ‘Cocka’ brand (cola substitute) is no.2 in sparkling non-alcoholics in Slovenia, and well established in neighbouring countries, and its ‘Donat’ mineral water is recognized not only in the region but also in Austria and France.

Hot drinks, DK’s biggest business, grew by 12% in 2007. Its ‘1001 Cvet’ is the no.1 tea brand in Slovenia; Barcaffe and Grand are top –three coffee brands in Slovenia, Serbia, Bosnia Herzegovina and Macedonia, and the company is making inroads into the premium and out-of-home segments.

Although Nestle is not really prioritizing hot drinks, the group might be tempted to bid for them if they came together with DK’s culinary and baby foods businesses. ‘Maestro’ is the no.1 spices and condiments brand in Slovenia; moreover ‘Bebi’ is no.2 in the dehydrated baby porridge segment in Russia, with 25% share, and has strong potential in that fast-growing market.

The one strong brand in DK’s portfolio that might be orphaned, in the event of a split-up of the group between Nestle and Pepsico, is its tinned pate unit ‘Argeta’. Being no.1 in its category in Slovenia, Bosnia Herzegovina and Macedonia, and even no.2 in Austria, will not save it from the fact that tinned pate is a very unfashionable business for the global players; perhaps this is something that private equity or a local investor will pick up instead.

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