Glenboden M & A Originations

Synnove offers route into Norwegian dairy after improved results

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Origination Status announcement of FY 2008 results, February 2009
Asset Synnove Finden ASA (Norway), no.2 domestic cheese brand
Buyer candidates include Arla, Campina Friesland, Lactalis
Seller shareholders of Synnove (listed on Oslo Stock Exchange)
Buyer Rationale unique option for entering high-value Norwegian market
Seller Rationale acceptable valuation after lengthy turnaround
NBs investment vehicle Scandza made unsuccessful bid for Synnove in late 2007
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After financial difficulties, and the development then divestment of non –dairy businesses, Synnove seems to finally have turned itself around. Having a strong no.2 position in the Norwegian market, after the giant co-operative Tine, Synnove represents a unique opportunity for pan –European dairy groups to enter the high –value but quite impregnable Norwegian market. Some of the company’s public shareholders might now welcome a bid from the likes of Arla, Campina Friesland or Lactalis.

Synnove is a legacy cheese brand in Norway, dating back to 1928. It’s the no.2 player in hard

cheese, with a market share of over 25%, and is significant also in spreadable Norwegian ‘brown cheese’. It presents itself as the only dairy business in Norway that’s independent of the co-operative system in that country, since it commercialized in 1995.

The company embarked on a diversification programme in the early 2000s which, combined with continued investment in its core cheese business, caused it to over-reach itself financially.

Synnove’s main investments were in poultry and eggs, where it saw an opportunity in Norway’s relatively low per capita consumption, and in ‘time critical’ ready meals, a fast-growing category in all developed countries.

Synnove’s poultry and eggs venture, Den Stolte Hane, posted strong growth but, in the end, did not have the critical mass to be ‘stand alone’, and was merged into Norway’s no.2 poultry player, Cardinal Foods. Meanwhile Synnove’s project in ready meals, Nordic Lunch, also grew very quickly, creating a nationwide chilled distribution system, and expanding into the Swedish market. Again, after such a promising start, the business had to be ceded – this time through sale to Bama Gruppen, in 2006.

In both cases the key problem was that, rather than treat its core cheese business as a ‘cash cow’ to finance its new ventures, Synnove decided to increase market share in cheese through innovation, advertising and new capacity. The company succeeded in this, at Tine’s expense, but at a price. The company became heavily indebted and broke covenants with its banks; even a new equity issue and a bonds-to-equity swap were not enough to recapitalize it sufficiently.

Attempting to exploit this, the investment company Scandza made a bid for Synnove in October 2007, at an enterprise multiple of x1,0 Sales. This was rejected by management; in spite of its temporary financial issues, the company was a well –invested asset, with strong market share, a high –recognition legacy brand, and modern facilities.

In FY 2008 Synnove, as a slimmed –down and high –productivity entity, returned to financial health. EBITDA increased by nearly 300%, to exceed € 5 mln equivalent. In the same period, sales revenue grew by 5% to come in at just below € 100 mln.

No longer in the turnaround category, Synnove more easily enters the radar screen, as an acquisition candidate, for the pan –European dairy groups. The company’s narrow portfolio arguably makes it vulnerable, even in Norway, as a ‘stand-alone’ dairy business; it would have greater value within a bigger dairy group, that could treat it as a platform in that country.

In terms of candidates, Arla must figure highly. It’s already the largest dairy producer in Sweden, Denmark and Finland; Norway would be an obvious next step in that region. Although the group prioritized Germany and Poland for strategic acquisitions, in 2008, Norway would be a more ‘low-hanging’ target. In addition, Synnove’s portfolio fits Arla’s focus on cheese brands.

Friesland Campina had its merger approved by the EU competition authorities in late 2008. The merger was cash –free, between the two co-operatives, so the combined balance sheet is ready for the group’s mission to expand its consumer business in Europe beyond existing core geographies (that don’t include the Nordic region).

Last but not least is Lactalis, the privately –held French giant that seems to have an insatiable appetite for acquisitions in all parts of Europe. Synnove would add to its admirable collection of cheese brands.

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THIS LEAD'S VALUATION
Size (€ mln) 125
Sector dairy
Asset Quality Norway no.2 branded
Seller mid-cap plc
Buyer co-operative
P/S 1,25
P/Ebitda 18,0
Type value estimate
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