Glenboden M & A Originations

Lotus teed up as European bakery consolidation target after Nordic acquisition

Priority Rating priority rating 4
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Origination Status buyer announcement of purchase agreement, November 2008
Asset Annas Pepparkakor Holding AB (Sweden), authentic specialty Nordic biscuit producer
Buyer Lotus Bakeries NV (Belgium), leading European authentic specialty bakery producer
Seller Accent Equity (Sweden), private equity firm specialized in mid-cap buyouts in Nordic region
Buyer Rationale European expansion in authentic regional specialty bakery brands
Seller Rationale consolidation pressures, acceptable valuation after nearly 5 year holding period
NBs candidates to acquire Lotus include Lantmannen, Aryzta and Kraft
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In recent months Glenboden has highlighted consolidation activity in bakery products, identifying the Swedish co-operative Lantmannan and the newly –merged Aryzta in Ireland as major acquirors. Lotus’s purchase of Annas spotlights that company’s building of a European portfolio of high –growth authentic specialty biscuits and cakes brands. This undoubtedly makes it an attractive acquisition candidate for the above two groups, and potentially Kraft also. Lotus cannot ignore buyer interest, because sales of its value –added offering might be hit by greater consumer thrift in 2009.

Listed on Euronext Brussels, Lotus of Belgium began its European expansion when it acquired Holland’s Koninklijke Peijnenburg in 2006. That deal brought together the leading caramelised biscuits, waffles and galette producer in Belgium, and the dominant gingerbread maker in Holland. Thus a platform for further European expansion was created, in the high –potential category of authentic specialty biscuits and cakes.

Since then Lotus has achieved strong growth (turnover up 15% in H1 2008 to reach € 125 mln), as well as a healthy EBITDA margin (18% in the same period); but without becoming overly –indebted (net debt declined by nearly 25% in H1 2008, to only x2,0 EBITDA). In terms of sustainability, 80% of the group’s turnover is from branded sales.

If that wasn’t attractive enough, Lotus’s geographic expansion is building momentum. Although 70% of sales are still in the group’s home markets of Belgium and Holland, France now constitutes 15% of sales, and the acquisition of Annas marks Lotus’s entry into the high-value Nordic market. That company is market leader in traditional pepparkakor ginger biscuits in Sweden, and 70% of its sales are exported to the US and throughout Europe.

Lotus also acquired its Spanish distributor earlier in 2008, Lopez Market, and is investing in a factory in the Czech Republic and a joint-venture in the UK.

Lotus could decide to continue its acquisition trajectory now, since its net debt will still be low after this deal. However, it may not have the scale to take on more deals, in the current credit environment; in that case it might be wise to seek a buyer, while consolidation momentum still exists and before the consumer trades down to less premium alternatives.

Lantmannen Unibake, part of a Swedish farming co-operative giant, has ambitions to become Europe’s no.1 producer of frozen bakery products. Although its sweet portfolio is somewhat limited to Danish pastries, its growth rate and acquisition momentum are strong right now, with 20% top-line growth and three international purchases in H1 2008. What’s more, Lotus’s market entry into Unibake’s home market, through buying Annas, gives the group defensive rationale for buying Lotus.

Aryzta may be a stronger candidate however. It claims to be global leader in specialty bakery; with total revenues expected to exceed € 3 bln in 2008, it’s several times as big as Unibake. Also, it has a strong balance sheet, stock exchange listings so access to public equity capital, and continued appetite for acquisitions after its formation through the merger of IAWS and Hiestand earlier in 2008.

Lotus would complement Aryzta’s portfolio very well, with its emphasis on branded, fresh, sweet baked goods throughout Europe. Also, the group needs to regain its faltering growth momentum quickly.

The mighty Kraft Foods could outbid Aryzta, and almost any other buyer, if it wanted to acquire Lotus. Biscuits are now one of the group’s five core categories, after its acquisition of LU in 2007, and after its divestment programme in the last five years covering grocery products, RTD cereals, sugar confectionery, savoury snacks and fruit juices.

In theory Kraft could make more bolt-on acquisitions in biscuits, as ‘new incremental platforms’ in its turnaround plan to quote CEO Irene Rosenfeld. Arguably Lotus has the portfolio, growth and margin profile to add value to Kraft. It’s more likely however that the group’s emphasis on its ’10 core brands’ and ‘six scale markets’ will be too rigid.

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Size (€ mln) 15
Sector biscuits
Asset Quality Nordic niche branded
Seller private equity
Buyer mid-cap plc
P/S 1,0
P/Ebitda 8,0
Type enterprise value
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