Glenboden M & A Originations

Russian baby food champion Nutritek looks vulnerable owing to funding difficulties

Priority Rating priority rating 5
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Origination Status announcement of planned new share issue, December 2008
Asset OJSC Nutritek (Russia), leading domestic baby and specialist food producer
Buyer candidates include Nestle, Danone (Nutricia), Heinz
Seller Marshall Capital Partners and minority public shareholders of Nutritek
Buyer Rationale market leadership in fast –growing Russian baby food market
Seller Rationale funding problems, strategic partner for expansion in China and south -east Asia
NBs Nutritek’s shareholder assembly to vote on new share issue, to reduce debt, in March 2009
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In mid -2008 we described Nutritek as a rising star, in an attractive category in a BRIC country, that should attract strong buyer interest from global baby food majors. With its claimed 15% baby food market share in Russia, and continued fast growth, Nutritek is still a hot property, that might now become available owing to the liquidity problems which have accompanied its domestic and international expansion.

In the FY to March 2008, Nutritek’s total sales grew by 5% to nearly $ 400 mln. Within this lies a 40% increase in its baby food sales, comprising breast milk substitutes, purees and juices. That division now constitutes over 50% of total sales, and delivers an EBITDA margin in excess of 25%.

Growth in that category has continued in Q1 2009, with a 12% volume increase. The other half of sales was from dairy products, with a much lower margin and in decline, but overall Nutritek’s EBITDA grew by 11% in 2008 to just below 20% of sales.

Nutritek claims to be the only baby food supplier in Russia that’s present in all categories, and to be the only independent producer of BMS in Russia. Through its overseas arm, Nutritek International, the group is now launching businesses in China, Malaysia and other south –east Asia, based out of a Singapore head office, with the ambitious goal of reaching $ 200 mln in sales in that region in the next two years. The purchase of New Zealand Dairies in 2008 is integral to that strategy, as it is the site for a state-of-the-art vitaminised dry milk and base formulas plant.

At the same time, Nutritek is at risk of over-reaching itself financially. 2008 was its second consecutive year of negative operating cashflow, caused by expansion in working capital as the business grows. Nutritek also has significant capex commitments, with the New Zealand dairy absorbing $ 100 mln in 2008.

In order to fund these deficits, the group sold its dairy business in late 2007, for $ 200 mln, and drew a further $ 110 mln through a new share issue. This however has not been enough for the group to service its debts diligently; at the end of 2008 it was late in repaying $ 50 mln in loan notes, and Standard & Poor’s has revised its outlook for the business to negative. The group will now vote on an additional new share issue in March 2009, to reduce debt further.

Another problem that Nutritek will face in future is a squeeze on margins, as the Russian baby food market matures. In 2008, the group achieved a 20% increase in its baby food prices; at the same time, its total selling and administrative costs were kept below 10% of sales revenue.

We don’t think this is sustainable; as competition increases, Nutritek will face stronger pricing pressures and will need to spend a lot more on marketing and its supply chain function. Its EBITDA margin in baby food will therefore decrease, which will add to its liquidity problems. Income from increased sales in new markets in Asia may not come quickly enough to compensate for that.

The key question is whether Nutritek’s 53% shareholder, the Russian investment house Marshall Capital Partners, which was established by the group’s two founders, will feel pressured to sell now, while the company is still growing fast in a market with limited competition, and while the big corporate balance sheets are still strong and memories of hefty comparative transactions still fresh.

Arguably Heinz is best placed as acquirer, because Nestle and Danone are still digesting their respective acquisitions of Gerber and Numico. On the other hand, Heinz’s existing market position in Russia is relatively weak, and it might not have the stomach to fight its global competitors there.

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THIS LEAD'S VALUATION
Size (€ mln) 730
Sector baby food
Asset Quality Russia leader branded
Seller private equity
Buyer large plc
P/S 2,5
P/Ebitda 13,2
Type value estimate
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