Glenboden M & A Originations

Bongrain cheese group ripe for a public to private transaction

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Origination Status proprietory origination, May 2009
Asset Bongrain SA (France), leading European branded cheese producer
Buyer Bongrain family, private equity investors, Sodiaal ?
Seller public shareholders of Bongrain (35% of total shares)
Buyer Rationale greater management flexibility, pathway to 100% family ownership
Seller Rationale low earnings and prospects of cheese manufacture by plc standards
NBs in 2008 Bongrain formed a 50:50 cheese joint-venture with the Sodiaal co-operative
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Bongrain is arguably the only major European cheese producer that’s also a public company. This reflects the fact that the category is not well suited to public ownership. After a sharp decline in profitability in 2008, and given longer-term factors, we believe that Bongrain is ripe to be taken private again, by the founding Bongrain family, who still control the group, most likely with the backing of a private equity investor or consortium.

2008 financials may catalyse public-to-private initiativesBongrain’s 2008 results confirm that it’s a low-growth business. Sales revenue of € 3,6 bln grew by 4% over 2007, but only 2% organically; the group’s mid-term CAGR is also only 2%. On top of that, the group’s operating profit fell by over 40% in 2008, and the EBITDA margin is a mere 5%. Financially the time might be ripe now for Bongrain’s adventure, as a public company since 1980, to end.

Bongrain is a strong international branded cheese business …Bongrain is the global leader in branded soft mould cheese, with a strong pipeline of innovation. It’s also been successful, over several decades, in becoming a truly international company; two-thirds of sales are now outside France, mainly across Europe but also beyond that.

but other big cheese players are private or co-operatives …

However, two-thirds of Bongain’s sales are of packaged cheese, and the other third are of butter, cream and ingredients. These are categories in which virtually all of the group’s biggest rivals in Europe are either privately held, like Lactalis, or co-operatives like Friesland Campina. These corporate forms do not have the earnings growth pressures that Bongrain does as a public company.

… under less pressure to deliver short-term earnings growth

This issue is particularly salient now. The major drop in Bongrain’s profitability in 2008 was caused largely by the group’s inability to fully pass increased milk costs onto its customers. One remedy for that, announced by the group, is to increase cheese prices in 2009. But what if e.g. the largest cheese producer in France, Lactalis, decides not to follow suit, because it doesn’t have to report earnings growth to any public shareholders ?

Nor is it easy for a public Bongrain to grow its profitability through restructuring efforts. The group plans to focus sales efforts on its main brands in 2009. This makes sense, as the portfolio is very broad. In the short-term however this could cause a significant further drop in profits, in absolute terms at least. Any restructuring or even divestment of its non –cheese businesses, the biggest drag on profitability in 2008, would have the same effect.

It would be easier for Bongrain’s management to ‘take one step backwards for two steps forward’, in terms of increasing enterprise value, if it were a private company. Many of the pre-conditions, for that to fly, are in place.

The pre-conditions for Bongrain to be taken private are in place …

Fundamentally, Bongrain is a large and stable business, with a low debt ratio (see chart). It does not require significant investment at this stage; net capex and acquisitions were at the same level as depreciation and amortization in 2008. In terms of share ownership, the free float is relatively small, at less that 35% of total outstanding shares.

… but private equity needs to be attracted …

Nonetheless, the Bongrain family, and other long-term shareholders, are likely to need to raise private equity financing, in order for a public-to-private deal to succeed. That would require a sound growth and exit story for such partners.

The premium segment of soft mould cheese, where Bongrain excels, has been resilient to the economic downturn in 2008, and is growing in relative terms in major geographies in Europe. On top of that, there's scope for restructuring the group’s brand portfolio, geographic coverage and non –cheese assets.

In terms of specific private equity partners, one can start by identifying firms with recent experience of investing in dairy assets in France. The two clearest candidates are therefore PAI, who currently owns 50% of the fresh products company Yoplait; also 3i, who recently exited a minority stake in Senoble, through a buy-back deal with the Senoble family.

… unless Bongrain merges with Sodiaal instead

Another option, if private equity proves too expensive or reluctant, is for Bongrain to merge with the giant dairy co-operative Sodiaal. A first step to such an outcome may have been taken at the beginning of 2008, when the two groups formed a joint venture, Compagnie des Fromages RichesMonts, thus pooling a significant proportion of their cheese assets.

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THIS LEAD'S VALUATION
Size (€ mln) 2.350
Sector mould cheese
Asset Quality Europe leader branded
Seller large plc
Buyer private equity
P/S 0,67
P/Ebitda 12,5
Type value estimate
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