Glenboden M & A Originations

Selected acquisition candidates in grocery products for a strong and growing ABF

Priority Rating priority rating 4
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Origination Status interim management statement, January 2009
Asset candidates include Weetabix, Hovis, Wessanen, Pickwick
Buyer Associated British Foods plc (UK), diversified international agriculture, food and retail group
Seller Lion Capital (Weetabix), Premier Foods (Hovis), Wessanen shareholders, Sara Lee (Pickwick)
Buyer Rationale attractive valuations, scale, scope and synergies in grocery division
Seller Rationale acceptable valuation, high indebtedness, portfolio refocusing
NBs ABF’s est. net debt at y/e 2008 stood at less than x1,2 EBITDA
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Associated British Foods has grown by over 20% in both 2008 and Q1 2009, with its grocery division being the best performer. The group also has a strong balance sheet, and likes to grow by acquiring complementary businesses. Given the difficulties faced by many of ABF’s peers in the grocery products arena, we foresee at least one high profile deal in the next few months. Our tips include Weetabix (RTE cereal), Hovis (bakery), Wessanen (ethnic foods) and Pickwick (tea).

ABF’s grocery division constitutes 40% of total sales of 8,2 bln GBP, and is growing at a slightly higher rate than the average. Operating profit also grew very strongly in grocery but, at 6%, it's still below the group’s average of 8%. Putting these factors together, one has a compelling case for more acquisitions to boost scale, scope and synergies in ABF’s diverse grocery business.

First on our hit list is Weetabix, because its private equity owner, Lion Capital, has held the business for five years and so will be looking to exit now. Weetabix is the no.2 player in the large RTE cereals business in the UK, with nearly 400 mln GBP sales and strong brands. With an EBITDA margin of close to 25%, this acquisition would enhance ABF’s grocery profitability hugely.

ABF recently became 62% owner of a merger between Ryvita and Jordans. However, Jordans is rather a high –end or niche brand, likely to be the poor relative of Ryvita crispbread in the venture; by acquiring Weetabix, ABF could become a strong no.2 player in RTE cereal in the UK behind Kellogg’s.

The bread bakery division of Premier Foods, Hovis, is a potentially ‘low-hanging’ acquisition target for ABF at this time. Premier is famously over –leveraged, and is looking to divest assets and/or raise private equity financing. So far the group has put its French frozen bakery businesses on the block, LPC, Sofrapain and Martine, but together these will only raise about € 100 mln.

When Premier merged with RHM in 2006, the latter’s bakery business was only secondary to Premier’s main target, RHM’s culinary and grocery brands. Hovis still remains a stand –alone entity within the enlarged Premier, ‘because of its different distribution model and milling operations’. However, that also makes it easier to divest; Hovis would bring 800 mln GBP in turnover, clear market leadership in the UK, and huge synergy benefits to ABF’s Allied Bakeries business.

Next up is Royal Wessanen of Holland, which Glenboden earlier identified as a takeover candidate because of the stagnant performance of that group’s key ethnic foods portfolio. ABF is also building a portfolio of authentic premium ethnic brands, and is more likely to have the scale to successfully commercialise them than Wessanen does on its own.

In the UK, ABF’s subsidiary Westmill Foods is the no.1 supplier to the ethnic wholesale trade, with a portfolio of noodle, rice, spices and condiments brands; it also acquired pan –oriental Blue Dragon brand in 2003, as well as the Indian meal accompaniments brand, Patak, in 2007. Wessanen’s ethnic and health portfolio would add over € 600 mln to ABF’s turnover, in Europe and the US.

Last but not least, Pickwick is an international tea brand owned by Sara Lee, the troubled US group. ABF’s specialty tea and infusions business, Twinings Ovaltine, is one of its star performers, growing by over 15% in 2008 and becoming the fastest growing tea brand in the USA.

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Size (€ mln) 600
Sector fresh bakery
Asset Quality UK no.1 brand Hovis
Seller large plc
Buyer large plc
P/S 0,6
P/Ebitda 12,5
Type value estimate
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