Glenboden M & A Originations

Sigma stands out as attractive cheese acquisition for Lactalis in Mexico

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Origination Status announcement of Q4 2008 financials, January 2009
Asset Sigma (Mexico), largest domestic processed meats and cheese producer
Buyer cheese candidates include Lactalis (France)
Seller Alfa Group (Mexico), leading domestic conglomerate
Buyer Rationale acquisition momentum, expansion into Mexican dairy market, platform for region
Seller Rationale financial losses, focus on core businesses of auto parts and petrochemicals
NBs Sigma contributes 25% of Alfa’s total revenues
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The Mexican packaged food market is increasingly attractive for global food groups. Alfa, a local conglomerate that made a net loss of over US$ 800 mln in 2008, owns a leading chilled foods company, Sigma, that sits incongruously next to petrochemicals and auto parts in the group’s portfolio. The sale of Sigma would allow Alfa to focus on these latter businesses, which require major investment. The timing might also be good for big, acquisitive Lactalis to make a bid.

With a population of over 100 mln, and a forecast CAGR for packaged food sales of 7,5% in 2008 -13, Mexico has attracted major investments from the likes of Pepsico and Callebaut recently. For Euro –zone food groups, with ambitions in the Americas, the timing is made better by the strength of the Euro against the Mexican peso. Lactalis is in that category, as is the much smaller Groupe Bel.

Alfa’s biggest subsidiary, Alpek, is Mexico’s largest private petrochemical company and a global exporter of polyester compounds. The group’s second biggest entity, Nemak, is the global leader in the production of aluminium heads and blocks for the automotive industry. Together these divisions accounted for two –thirds of the group’s US$ 10,5 bln revenues in 2008.

These are two businesses that require a lot of investment, in new technologies, products and capacities. In spite of that, Alfa cut its capital expenditure and acquisition budget drastically, from US$ 2 bln in 2007 to under US$ 600 mln in 2008, because of huge losses caused by inventory write-downs, forex trading and interest rate, energy and equity swap derivatives.

It’s in the nature of Alfa’s core businesses to have exposure to financial risks and instruments. However, the group would arguably be better advised to strengthen its risk management and treasury functions, rather than rely on the steady earnings generated by its food and telecom businesses, to act as a counter-balance, as it has done in the past.

Sigma is Mexico’s largest processed meats and cheese producer. It also controls the country’s biggest chilled food distribution network. Total sales grew by 15% in 2008, to reach US$ 2,4 bln; within this foreign sales grew by nearly 40%, to reach nearly 20% of the total. Sigma sells products in central America, the Caribbean and to the Hispanic population in the USA; in 2007 it acquired a Mexican –style cheese maker in Wisconsin, to better serve the US customer.

Sigma’s cheese and dairy division contributes about 30% of total sales, so about US$ 700 mln. This includes a portfolio of established local brands. This, together with the chilled distribution system, and the regional platform, could make it a very interesting acquisition target for the ever-hungry Lactalis.

Privately –held Lactalis has grown spectacularly in recent years, to exceed € 10 bln in revenues in 2008, of which over half is derived outside France. Traditionally a branded cheese specialist, owning the big French brands President and Societe, it created a 60:40 JV with Nestle’s European chilled dairy business, and acquired the Italian cheese group Galbani, both in 2006.

Amongst Lactalis’s numerous smaller acquisitions include several in the USA, where the group claims to now be a significant dairy player, especially in Italian –style cheeses. In the 1990s it established a subsidiary in that market Sorrento, and later bought Concord Marketing and Simplot Dairy. More recently it purchased the US specialty cheese brand Rondele in 2004, and Mozzarella Fresca in 2007.

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Size (€ mln) 460
Sector cheese
Asset Quality Mexico no.1 branded
Seller large plc
Buyer private corporate
P/S 0,8
P/Ebitda 7,5
Type value estimate
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