Glenboden M & A Originations

Indebted Refresco a candidate for private equity buy-out

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Origination Status press reports of potential private equity buy-out, December 2008
Asset Refresco Holding BV (Holland), no.1 European producer of private label fruit juices and soft drinks
Buyer reported candidates are Blackstone and Lion Capital
Seller Stodir Holdings (Iceland) and minority shareholders of Refresco
Buyer Rationale acceptable valuation, growth prospects in private label non –alcoholic drinks
Seller Rationale liquidation of holding company Stodir (49% owner), financial over-extension
NBs Refresco announced two further acquisitions in 2008, in spite of financial constraints
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Glenboden has previously commented that Refresco is growing too aggressively, and acquiring too much production capacity; that it should focus more on reducing its 18 facilities in Europe, to achieve greater efficiencies in the low-margin private label and co-packing business. It seems that a combination of its principal shareholder going into administration, plus tight credit markets, may now cause the group to be acquired by a private equity consortium. That might mean a stop to further acquisitions, at least in 2009; later, with improved margins, Refresco can renew its mission to consolidate the soft drinks business across Europe.

Refresco began life in 1999 as Menken Beverages, a spin-off from a large dairy group in Holland. Since that time it has implemented a ‘buy and build’ strategy, to create Europe’s largest producer of private label and co-packed soft drinks and fruit juices. This has meant nine acquisitions, and operations in 18 plants in eight different countries, from Finland to Spain.

The business model has a lot of merit : acquisitions bring new products, geographic reach and retailer relations; private label has strong growth prospects, since only about 15% of CSD sales are in that segment currently, when the figure for food products as a whole is more like 30%. On top of that, there are many production plants around Europe that have been or will be for sale, at attractive prices.

The problem is that Refresco has been in too much of a hurry to exploit this potential. In 2007 alone, it made four acquisitions, and increased its sales revenue by over 40% to reach € 950 mln. It now has nearly 100 filling lines, and the capacity to produce over 10 mln units per day. At the same time, it has embarked on a major capital expenditure plan, to install aseptic PET lines which is where the future lies in soft drinks and juice packaging.

All this under a low-margin private label financial model, with EBITDA in 2007 of only 8%. These factors make Refresco very vulnerable to adverse market changes, which materialized in 2007 in the form of weak summer demand and high raw material costs, causing the group to book a loss in that year.

As could be expected of a company with this profile, Refresco is heavily indebted, with a net debt to EBITDA ratio in 2007 of 6,7. In early 2008 the group underwent a debt refinancing, and raised nearly € 60 mln in new equity through a capital injection.

Now, with its largest shareholder, the Icelandic holding company Stodir going into administration, it looks like Refresco is seeking a new owner from the private equity community. But will that owner allow Refresco to continue its acquisition spree ?

We think that the priority has to be for the group to demonstrate improved operating margins, through restructuring, and channel and portfolio re-focusing. Only then should it be handed back the cheque book for more acquisitions and accelerated growth.

Apparently, Refresco’s average selling price actually decreased in 2007, as the result of a change in its sales mix after its four acquisitions that year; the EBITDA margin declined to below 10% accordingly. This could be improved through at least three measures.

First, capacity utilization needs to be optimized, which may mean the closure of some of those 18 plants. Secondly, the group needs to identify and focus on the channel which delivers the highest margin, whether that’s premium private label or co-packing for A –brand customers like Orangina. Thirdly, the group should increase the share of higher –margin juices in its sales; its latest deal, to supply Pascual with aseptic PET not-from-concentrate orange juice, from a factory in Spain, looks like a positive example.

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Size (€ mln) 600
Sector soft drinks
Asset Quality no.1 Europe private label
Seller private equity
Buyer private equity
P/S 0,6
P/Ebitda 8,0
Type value estimate
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