Glenboden M & A Originations

Arla should merge Swiss dairy champion Emmi

Priority Rating priority rating 4
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Origination Status proprietory origination, February 2010
Asset Emmi Group (Switzerland), no.1 domestic dairy processor
Buyer candidates include FrieslandCampina, Lactalis, Arla, Parmalat
Seller co-op members and public shareholders of Emmi
Buyer Rationale position and platform as global Swiss cheese leader, value-added concepts
Seller Rationale bigger partner to fulfill international ambitions, domestic competition, growth constraint
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Emmi's record of continuous growth seems to have ended in 2009, as competitive pressures in Switzerland take their toll. At the same time, the group has been unable to turbo -charge its international expansion. We believe that the case is strengthening for Emmi, the Swiss cheese ambassador, to become absorbed into a bigger European group. Arla is the most appropriate.

Emmi in domestic decline ...After achieving a medium -term CAGR of about 10% up to 2008, Emmi saw its total sales decrease by 2% in 2009. This was due to a 5% drop in domestic sales, which couldn't be offset by a 10% increase in international sales.

For a while competitive pressures had been gnawing at Emmi's business in Switzerland; these crystalised with the loss of a major customer in 2009.

... foreign growth targets not being met ...Meanwhile, foreign sales growth has fallen short of expectations. The group's strategy is for international sales to constitute 50% of the total. In practice, however, the proportion has remained static, at around 25% of sales, over the last five years.

Efforts to grow internationally, through acquisition, have been on a relatively small scale. Since listing on the Swiss Stock Exchange in 2004, Emmi has acquired or taken stakes in Kaiku in Spain, Roth Cheese in the US, Trentinalatte and Ambrosi in Italy, and small companies in Germany and Belgium.

However, and five years after becoming a public company, Emmi has still not made a major acquisition in Europe or beyond.

... in spite of a sound balance sheetThat's despite having financial headroom. With EBITDA of around € 150 mln in 2009, and a net debt ratio of about x1,5 EBITDA, Emmi could safely invest € 200 - 300 mln in significant dairy businesses in attractive European geographies.

On the other side, there are much bigger and more international groups, in Europe, that would surely be very interested in acquiring Emmi (see chart).

Emmi attractive to the big European groups ...As well as being the largest dairy processor in the high -value Swiss market, Emmi is the 'ambassador' of legacy Swiss cheese in foreign markets; notably Kaltbach, famous for its holes and fondue -making.

It has also innovated to create its successful Caffe Latte drink, in fresh products.

The privately -held French giant Lactalis, with its notorious appetite for acquisitions, now derives 60% of its revenues from foreign sales. The purchase of Italy’s Galbani, in 2006, demonstrates that group's appreciation of the value of ethnically authentic ‘ambassador’ brands like Emmi's.

FrieslandCampina is another potential buyer. After its merger in 2008, that group has set upon expanding its consumer business into new European geographies. Emmi would fit well, in terms of categories and proximity to Holland and Germany.

One also shouldn't discount Parmalat. Emerging from its financial woes, it should be remembered that historically Parmalat is the most international of the big European dairy groups. Its apparent interest in buying Ebro Puleva in Spain suggests that it's back on the acquisition trail.

... with Arla arguably best placedOur tip however is Arla. The biggest dairy processor in the Nordic region and the UK, that group is targeting new core geographies in Europe, with Germany and Poland held up as options so far.

One advantage of Arla, certainly over Lactalis and Parmalat, is that, like Emmi, it's essentially a co-operative. (60% of Emmi's shares are still held by the ZMP).

One relatively painless option, therefore, is for Arla and Emmi to merge. That would create an entity big enough to compete with FrieslandCampina for European hegemony (see chart).

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THIS LEAD'S VALUATION
Size (€ mln) 1.800
Sector dairy
Asset Quality Swiss no.1 branded
Seller co-operative plc
Buyer co-operative
P/S 1,0
P/Ebitda 12,0
Type merger value estimate
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