Glenboden M & A Originations

Swiss dairy champion Emmi is an acquisition candidate in denial

Priority Rating priority rating 4
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Origination Status proprietory deal origination, April 2009
Asset Emmi Group (Switzerland), no.1 domestic dairy processor
Buyer candidates include Lactalis, Friesland Campina, Arla
Seller shareholders of Emmi
Buyer Rationale position and platform as global Swiss cheese leader, value-added concepts
Seller Rationale bigger partner to fulfill international ambitions, margin pressures of public company
NBs Emmi positions itself internationally as the Swiss cheese specialist of choice
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In the middle of 2008, we identified Emmi as an acquisition candidate, in view of its strong authenticity story as the leading supplier of Swiss cheese internationally. Recently, the company has announced plans for international expansion, including acquisitions of its own in key geographies. We believe however that Emmi will be at the receiving end of the consolidation process, because it lacks the scale and financial muscle of its bigger peers in Europe.

Emmi basically a domestic traditional dairy producer …Emmi is market leader in Switzerland in most dairy segments. In terms of its sales profile, 35% is cheese, which is Emmi's mainstay traditionally. Another 30% is basic dairy products (milk, cream, butter), and only 20% is fresh products with a premium and value-added aspect (caffe latte, yoghurt, musli, Benecol). So, generally, Emmi is a traditional dairy producer and national 'champion'..

…. with significant foreign sales in certain segments ….Just under 25% of Emmi turnover is derived from foreign sales, mostly in Germany, Italy and the US. This is spearheaded by its Swiss cheese brands, principally Kaltbach, famous for their holes and for fondue -making. The company's innovative caffe latte concept has also made an impact in foreign markets.

…. but its plans for further international expansion are unrealisticEmmi wants international sales to equal those of its domestic ones, in a few years' time; we believe however that this plan is driven by pressures in the Swiss market, and can only be realised if Emmi was absorbed into a bigger European group.

Emmi's turnover grew by 8% in 2008, to reach € 1,8 bln. However, more than half of this was through price increases, and its international business grew more slowly than domestic sales. The company predicts that this latter segment will decline by 5% in 2009, thanks to increased competition; hence the need to talk up prospects for foreign expansion (15% increase in 2009).

Emmi’s acquisition record is quite small –scale …It's hard to see what will drive this major overseas growth. In terms of acquisitions, Emmi made a few steps after its listing on the Swiss Stock Exchange in 2004 (minority stake in Spain’s Kaiku 2005; strategic co-operation with Roth Cheese in the US with full acquisition 2009; investments in Trentinalatte and Ambrosi in Italy 2006 -7, small purchases in Germany and Belgium 2008). However, there's been no evidence of a major acquisition so far, and sales growth has mostly been organic.

…. and its financial profile lacks ambitionEmmi's financial model is also not so impressive. Its EBITDA margin grew significantly in 2008, but this was largely thanks to cost reductions and greater efficiencies, which have their limits, and is still only 7% of sales revenue. Both marketing spend and capex have consistently been below 5% of sales, which doesn't give the profile of an ambitious company. The net debt ratio may be low, at x1,5 EBITDA, but the numbers involved are quite small by serious M&A standards.

The best route for international success is within a bigger group …If Emmi is to fulfil its potential of being the Swiss cheese of choice across Europe and the US then, in our view, this would most likely be achieved not as a mid-sized independent, but as part of one of the big three European dairy groups.

Lactalis, Friesland Campina and Arla are all several times bigger that Emmi (Arla, the smallest, had revenues of € 7 bln in 2008). They also have the advantage of being either privately held or co-operatives, so they don't have the same shareholder pressures for high margins that a public company like Emmi is under.

… with Lactalis being possibly the strongest candidateThe strongest contender of the three, in our opinion, is arguably Lactalis. That group has acquisition momentum now, as well as the scale to commercialise Emmi’s concepts internationally (turnover of about € 9 bln in 2008). As the acquisition of Italy’s Galbani in 2006 demonstrates, Lactalis appreciates the value of ethnically authentic ‘ambassador’ brands like Emmi.

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THIS LEAD'S VALUATION
Size (€ mln) 1.800
Sector dairy products
Asset Quality Switzerland no.1 branded
Seller large plc
Buyer large private
P/S 1,0
P/Ebitda 15,0
Type enterprise value estimate
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