Glenboden M & A Originations

Dairy Crest exit from JV in UK sets up Yoplait for sale

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Origination Status announcement of exit from joint-venture in UK, March 2009
Asset Yoplait Group (France), no.2 domestic chilled dairy producer and no.1 in the US
Buyer potential acquirors include Sodiaal (buy -back), Lactalis, Friesland Campina
Seller Sodiaal Union, no.1 domestic dairy co-operative and PAI Partners, private equity firm (both France)
Buyer Rationale expansion in Europe, major position in large French market
Seller Rationale liquidity event for members (Sodiaal), exit after 7 year investment (PAI)
NBs valuation based on Kirin acquisition of Dairy Farmers, August 2008
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PAI has held its 50% stake in the Yoplait strategic alliance for nearly 7 years now. Dairy Crest’s announcement that it’s to sell its 49% stake in the YDC joint venture in the UK, back to Yoplait, suggests that the latter is being readied for PAI’s long –awaited exit from that investment. The timing isn’t bad, with there being at least two strong buyers in Europe, but the valuation may not be stellar.

Separation motivated partly by Dairy Crest …Yoplait Dairy Crest has, since 1991, distributed Yoplait chilled dairy products in the UK, where the brand has a strong presence in certain value –added market segments, like homogenized cheese snacks for infants (‘Petits Filous’). Dairy Crest has justified its exit, three years earlier than the 2012 termination provision in the JV agreement, by the need to reduce debt and focus on brands that it owns outright.

… but moreover by need to enhance sellability of YoplaitIt looks likely, given the small impact this deal will have on Dairy Crest’s balance sheet (exceptional profit of 50 mln GBP), that the deal was more driven by Yoplait’s desire to gain full control of its profitable UK business, in order to simplify its corporate structure and enhance its sellability. A recent precedent in another sector, Carlsberg’s acquisition of Scottish & Newcastle, famously demonstrates how big an obstacle joint-ventures can be to M&A transaction completion (Baltika in Russia case).

Sodiaal is obvious acquirer of the 50% Yoplait stake …The most obvious exit route would be for PAI to sell its 50% back to its partner in Yoplait, the giant Sodiaal co-operative in France. After all, most joint-ventures are terminated by buy-backs of that kind. However, that group’s recent M&A moves suggest that it’s not at all in acquisition mode now; besides which the weaknesses of Yoplait mean it would make more sense for a group with a large existing chilled dairy business, elsewhere in Europe, to acquire that brand.

… but chilled dairy isn’t best suited to its business model …With annual sales revenue of about € 2,2 bln, Sodiaal is the no.2 processor of milk in France (after Lactalis). Yoplait’s turnover constitutes less that 50% of that amount, and perhaps only 25% of Sodiaal’s total purchased milk volumes. The other parts of that group, spanning Candia (retail milk), Riches Monts (cheese) and Nutribio and Beuralia (ingredients and formulas), are arguably much more sustainable under a co-operative model than chilled dairy, because they use more milk and are less marketing –driven. So they should be Sodiaal’s focus.

…. and Sodiaal is not in acquisition modeOn top of that, Sodiaal’s most recent M&A activity has seen it contribute both its cheese business and its non-consumer assets into 50:50 joint ventures with, respectively, Bongrain (Compagnie des Fromages) and Entremont, in 2007. That suggests a weak appetite for acquisitions.

Finally we have Yoplait’s weaknesses, which should also discourage Sodiaal from regaining full control of it. Although the brand has a strong position in France, where it’s no.2 behind Danone, and in the US where, through a JV with General Mills, it’s market leader in certain categories, Yoplait is weak in Europe outside France, where its franchise model has had mixed success. Also, since PAI’s investment in 2002, the group hasn’t made any significant acquisitions.

Yoplait is more suitable for a big chilled dairy producer in Europe ….We believe therefore that Yoplait would add most value to a large European chilled dairy producer, that wishes to acquire a major position in the large French market. Sodiaal’s members should recognize this, and focus instead on securing milk supply contracts with Yoplait’s new owner.

… who would pay a full price to Sodiaal and its membersTaking note of the Dairy Farmers precedent in Australia, where another co-operative was sold outright to a strategic investor (Kirin Holdings), Sodiaal should elect that its members, too, deserve a lucrative ‘liquidity event’ after all their years of toil. Their interests will then be aligned with those of their partner PAI, in terms of value maximization from the sale of Yoplait.

Lactalis is a candidate but it should focus on cheese instead …In theory Lactalis heads the potential buyers list for Yoplait. It has the scale, ambition and acquisition track record to win a tender, and will no doubt wish to challenge Danone more strongly in the French chilled dairy market, where it currently competes through a joint-venture with Nestle chilled dairy.

However we believe that, at this time, Lactalis’ priorities might lie elsewhere. Armed with the strong Euro, the group should continue its acquisition drive in emerging Europe; Ukrproduct in Ukraine is a good example candidate in our view. Also, and in the face of a newly –ascendant Arla, it should seek out low -hanging cheese acquisitions elsewhere on the continent; Synnove in Norway is one option.

… leaving Friesland Campina as a more likely buyer …The prime buyer candidate of the moment is arguably Friesland Campina. After its merger, that group is keen to develop its consumer branded business in new geographies. In spite of a dominant market position in Benelux, and a strong one in Germany, the group’s consumer products western Europe division grew in revenue terms by only 1% in 2008, lower than any other division and compared with 5% for the group as a whole. By acquiring Yoplait, F-C would add a third core geography to its west Europe operation, and increase that division’s turnover by 25% to nearly € 4 bln.

The problem for F-C might be financial. It saw a significant decline in its operating profit in 2008 and, with net borrowings of € 1,5 bln, its net debt ratio to EBITDA is about x3,2. On the other hand, the group has reserves in its cost structure, not least from future synergies. Also, cash is being raised by a spate of divestments. In the last few months alone, F-C has sold Nijkerk in Holland to Arla, the Prenzlau dairy in Germany to a local firm, and its Romanian ice cream business to Unilever.

… with more long-shot candidates including Muller of GermanyA potential surprise buyer is Muller of Germany, whose portfolio fit with Yoplait would be strong. With revenues of some € 2 bln, Muller is big enough to make the acquisition, to finally extend its geographical strength beyond its domestic market and the UK. On the other hand, it could be that the group has too monolithic a focus on just one brand, and is too reluctant to invest through acquisition rather than just capital expenditure, to make a bid for Yoplait.

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THIS LEAD'S VALUATION
Size (€ mln) 600
Sector chilled dairy products
Asset Quality France no.2 branded
Seller private equity
Buyer large co-operative
P/S 0,75
P/Ebitda 12,0
Type value estimate
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