Glenboden M & A Originations

Will anyone buy Ebro Puleva's dairy business in Spain ?

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Origination Status reports of buyer approaches, February 2010
Asset dairy business of Ebro Puleva (Spain), no.1 domestic fortified milk products player
Buyer candidates include Lactalis, Parmalat, Arla
Seller Ebro Puleva SA (Spain), leading domestic food group
Buyer Rationale significant market share in Spain, high -margin portfolio
Seller Rationale focus on growing international rice and pasta businesses
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Ebro Puleva doesn't have to sell its dairy business, strong in certain market segments and delivering above -average profitability. On the other hand it's in decline and seems to lack sustainability. Maybe Lactalis or Parmalat will come through in the end, but the price will need to be attractive to them.

Apparently a strong business ...Ebro's dairy unit contributed 20% of the group's total revenues in 2009. Its EBITDA margin, at 14%, is equal to the group's average (see chart).

The branded portfolio is focused on fortified and flavoured milk drinks, infant milk products, cream and butter. Ebro boasts 45% market share, and double-digit growth, in infant products in Spain.

On the face of it, this business is strong and Ebro, especially when its indebtedness is now under control (see chart), should hold onto it.

... but with fundamental problems ...But looking more closely, there are some underlying problems with this business, which both justify its sale and make finding a buyer, at the right price, a challenge.

Firstly, the business is in decline. Its average annual sales decrease in 2007 -9 was nearly 10% and, while dairy constituted 35% of Ebro's total revenues in 2004, that proportion dropped to 20% in 2009.

On top of that, the 14% EBITDA margin achieved in 2009 marks a significant increase over previous years, when the average was 10%. This suggests that Ebro is now 'milking' its dairy business, in which case sales could decline even faster in 2010.

Then there's the market situation. Ebro reports that its value -added milk drinks are not recession -resistant, and that the consumer is trading down to 'classic' milk and private label UHT substitutes.

... Ebro's focus is elsewhereSo it's understandable that Ebro should consider off-loading its dairy unit, to focus instead on its pasta and rice businesses. Those are international, while dairy is only domestic for the group.

They're also growing; especially pasta after the acquisition of Panzani in 2005 and Birkel in 2007, market leaders in pasta in France and Germany respectively.

Several potential buyers mentioned ...So who are the potential buyers for Ebro's dairy unit ? It's in decline, but on the other hand apparently still has nearly 10% market share in Spain, and is the leader in value -added milk drinks.

Lactalis, Arla and Parmalat have all been cited as bidders for this business.

... of which private Lactalis most likely ...We don't think Arla will come through, because Ebro's portfolio is not compatible with that of a dairy co-operative in general, nor with that of Arla in particular - that group is focusing on cheese and butter in its international expansion.

That would leave the private dairy groups, Lactalis and Parmalat, as the potential buyers. Apparently Parmalat has now withdrawn its interest so, if the reports are true, then the hard -bargaining Lactalis could be the only major bidder.

... although that group has other optionsTo illustrate how tough these negotiations are, Lactalis has in parallel been linked with the acquisition of the cheese business of Forlosa, also in Spain. A better option than Ebro in that geography ? Certainly Manchego cheese, made by Forlosa, is a serious Spanish 'ambassador' product.

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THIS LEAD'S VALUATION
Size (€ mln) 450
Sector dairy
Asset Quality Spain no.1 segment
Seller mid-cap plc
Buyer private corporate
P/S 1,0
P/Ebitda 7,0
Type value estimate
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