Glenboden M & A Originations

Candidates for piecemeal acquisition of Leaf's confectionery portfolio

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Origination Status proprietory origination, July 2009
Asset Leaf International BV (Holland), leading confectionery group in Benelux, Nordic region and Italy
Buyer candidates include Cadbury, Perfetti, Katjes, Fox's
Seller CVC Capital Partners (UK), Nordic Capital (Sweden)
Buyer Rationale market leadership in selected geographies, brands
Seller Rationale acceptable valuation
NBs Cadbury's bid for Leaf's portfolio was rejected as too low in June 2009
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The private equity firms that acquired Leaf, the sugar confectionery division of CSM, have endeavoured to add value through restructuring and selective divestments. However, as their rejection of Cadbury's bid for the portfolio indicates, they haven't added enough value to achieve their targeted return. We believe that a piecemeal sale approach may now be optimal for Leaf; the sum of the brands being worth more than the whole portfolio. There are buyer candidates in most geographies and categories.

Private equity acquired Leaf at a reasonable valuation ...CVC and Nordic bought Leaf, in early 2005, for € 850 mln. That represented a P/S of 1,1 and a P /EBITDA of 8,3 (2004A). That seemed a reasonable valuation for the buyer, given the portfolio's strong branded position in several key sugar confectionery categories and geographies, and its EBITDA margin of nearly 15%.

... then sought to add value through restructuring and right-sizing .... The buyers immediately implemented a strategy of keeping only those businesses that were no.1 or no.2 in their markets, and to achieve 100% branded sales.

This entailed a string of divestments. First to go was Leaf Polska; perennially loss making, over-staffed in its sales function and operating in an obsolete city -centre factory. Other sales followed of brands, factories, distribution and private label businesses in north America, Russia, Holland and France.

In parallel, the group acquired Cadbury's Italian business, Saila. It also built a new factory in Slovenia, ultimately to serve all of its European markets. Measures were also taken to streamline the business in terms of supply-chain optimisation, lean manufacturing and central media purchasing.

... resulting in greater efficiency but smaller scale ...As a result of the above, profitability improved, and the number of brands and SKUs was reduced; in 2008 strategic brands constituted 80% of sales value.

But there's a problem; the private equity owners of Leaf have been good at the 'craft' of streamlining the business, but weak at the 'art' of growing it.

... with an absence of new product developmentThe only significant innovation in the portfolio, since 2005, has been the 'Truly' concept, which attempts to add a 'natural' image, appearing as a sort of sub-brand to products like Malaco bagged candies.

Over a period of nearly five years, this isn't much of an NPD achievement; Leaf claims that 20% of sales are now from new products, but these are mostly just line extensions.

Not surprisingly, therefore, the group has shrunk in revenue terms, booking only € 550 mln turnover in 2008, a decline of 25% since acquisition in 2005.

This made it palpably hard for the owners to achieve IRR targets ...Even if the EBITDA margin has been increased to 20%, high by confectionery standards, then the owners would have to achieve an exit EBITDA multiple of over 15, in order to 'double their money' (which they would surely seek to do after a five year holding period, even gross of leverage).

So, it's not surprising that Cadbury's bid for the Leaf portfolio was rejected as being too low. That group is unlikely to agree to pay such a high EBITDA multiple, which translates into a P/S multiple of over 3, especially when it's not interested in the Italian part of the business.

... suggesting a piecemeal sale approach might work betterAssuming that CVC and Nordic will now take a piecemeal approach to selling the portfolio, what are the most attractive brands and who are the likely buyers ?

Chewits might go to a local independent ...Chewits, the iconic brand of chews in the UK, is problematic because it has no innovation story, other than containing 'less fat than its peers', which is hardly rocket science. Certainly Storck, Leaf's distribution partner in the UK, is unlikely to be interested in a brand that brings so little new knowhow.

We believe that Chewits could be a contender for the existing portfolio of a local player, that's rolling up legacy brands in the UK. The obvious candidate is Fox's Confectionery, an independent group that already owns the Fox's hard candy and Sugar Puffs /Honey Monster breakfast products brands.

Leaf's biggest markets are Scandinavia and Holland, where it derives two-thirds of its profits. Its three big categories are chewing gum, pastilles and candies.

... chewing gum to an aggressive Cadbury ...Leaf claims to be leader in chewing gum in Holland and Finland, through its Jenkki and Sportlife brands; it's also a leader in fresh-breath dental chewing gum innovation in Holland, through its impressively -endorsed Xylifresh brand.

It's likely that Cadbury is most interested in these brands, and will pay a premium for them. That group is aggressively challenging Wrigley in that category, in geographies including Turkey and CEE.

Leaf also claims to be leader in the pastilles market in Sweden, Norway and Finland, through its Lokerol and Mynthon brands. In addition, it's a leader in bagged candy in Sweden and Holland, with its respective Malaco and Red Band brands, recently re-styled to have the same look and feel.

... the candies brands to an acquisitive Perfetti ...Perfetti is the obvious potential buyer for Leaf's candies business; that category (including chews) accounts for 60% of the Italian giant's total sales, with the remainder being chewing gum.

With turnover of nearly € 2 bln in 2008, Perfetti is the world's third largest sugar confectionery player. It also has a strong presence in Holland, and a big-ticket acquisition track record through its purchase of Van Melle in 2002, and Chupa Chups in 2006.

... and the pastilles to an ambitious KatjesPastilles are arguably a more attractive category than candies, however, with the latter being in relative decline globally. Perfetti does not cite pastilles as one of its strategic categories.

This may provide an opportunity for family -owned Katjes of Germany, to buy Leaf's pastilles brands, especially gum -based Lokerol (historically gummies has been Katjes' core business). That mid-sized company is keen on buying brands in Europe, and aims to maintain its high growth trajectory.

In addition to the pastilles, Katjes might be interested in Leaf's Venco, the no.1 liquorice brand; market leader in Holland, it has a strong legacy and a high top-of-mind recognition rate.

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Size (€ mln) 1.100
Sector confectionery
Asset Quality Europe no.4 branded
Seller private equity
Buyer large plc /private corporate
P/S 2,0
P/Ebitda 10,0
Type value estimate
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