Predicted outcome of confectionery consolidation in Poland
- February 20, 2010
||proprietory origination, February 2010
||ZPC Mieszko SA (Poland), no.5 domestic branded confectionery producer
||candidates include Jutrzenka and Wawel
||Central European Confectionery Holding BV (Unicredit Bank), minority public shareholders
||market consolidation, synergies, praline and sugar confectionery brands
||sale of shares ceded by troubled debtor (Alta Capital Partners)
||in parallel Kraft will be selling the 'Wedel' confectionery brand
The local ramifications of the Kraft - Cadbury merger, as well as the likely sale of Mieszko by its new majority owner UniCredit, are forcing a consolidation round in the fragmented Polish confectionery sector. We look at the potential outcome, and at an 'end -game' scenario.
Roughly, the confectionery market in Poland, excluding chewing gum and biscuits but including impulse wafers, is around 5 bln zloty in value terms p.a.
On the foreign side, Cadbury-Wedel-Leaf is no.1 with about 15% share, followed by Kraft with 10%. The other big international groups (esp. Nestle, Ferrero, Mars, Storck, Perfetti, Haribo) enjoy a further 25% of the market between them.
In addition there are three premium independent branded players, namely Jutrzenka (10% share), Wawel and Mieszko (5% each). Also a number of small local players, without ambitions to premiumise or build national brands (remaining 30% combined).
At the international level, the consolidation story is all about local ramifications of Kraft - Cadbury. Meanwhile at the domestic level, the pressure is focused on Jutrzenka, Wawel and Mieszko. All three are publicly -listed in Warsaw, which adds to the likelihood of eventual consolidation.
As a result of acquiring Cadbury, Kraft will have a dominant position in the Polish market for chocolate tablets, through a portfolio of brands covering Milka, Alpen Gold, Cadbury and local champion Wedel.
Consequently, the European Commission requires that Kraft divest part of this portfolio and, predictably given Kraft's renewed focus on international brands, the group has opted to sell Wedel.
This decision has major implications for Poland's confectionery market since Wedel, with a legacy going back 150 years, is consistently ranked as that country's most valuable food brand.
In parallel, a second consolidation story is developing around one of Poland's big three independent confectioners, Mieszko.
The owner of 66% of Mieszko, Estonian private equity firm Alta Capital, facing financial issues, has ceded its shares to Italy's UniCredit. Being a retail banking group, not a fund, UniCredit is certain to want to sell that shareholding soon.
We think it's unlikely that an international group will acquire Mieszko. 60% of its sales are of gift /at home pralines, which are in long -term decline and don't appeal to younger consumers.
By contrast, the acquisition of Mieszko would give its local rival Jutrzenka the opportunity to become the no.2 confectionery player in Poland, behind Kraft - Cadbury, and to extract synergies by the fistful.
Jutrzenka is by nature an acquisitive animal, having a holding structure that includes companies in confectionery and biscuits (Jutrzenka, Goplana and Kaliszanka), culinary products (Ziołopex) and soft drinks (Hellena).
With consolidated 2009E sales of 600 mln zloty, <80 mln zloty in EBITDA, and a net debt ratio of x1,0, Jutrzenka can afford the est. 150 mln zloty cash needed to add Mieszko to its family, without asset sales (see chart and valuation). The group would have an est. net debt ratio of < x3,0 EBITDA post -deal.
Coming back to Wedel, we believe that brand will also be bought by a domestic player. Sales are mostly of chocolate tablets; there isn't much appetite amongst the international confectionery groups for purely local brands in that segment.
Given the above, plus the fact that Kraft won't endeavour to maximise its exit value from Wedel, plus the probability that it includes the baggage of an old factory in Warsaw, we believe the brand will be sold relatively cheaply.
That brings us squarely back to Jutrzenka. Assuming it acquires Mieszko, then its total confectionery sales, excluding biscuits but including impulse wafers (a big category in Poland), will come to over 600 mln zloty.
With another est. 400 mln zloty delivered by the Wedel brand, Jutrzenka's confectionery sales could reach the 1 bln zloty mark. That would make it the clear market leader with upwards of 25% share.
The deal should be financially feasible for Jutrzenka. Given how Cadbury has milked Wedel for cashflow, its incremental EBITDA margin is likely to be very high, say 25% for the sake of illustration.
Together with a modest valuation, say x1 sales, that could mean the purchase wouldn't lift Jutrzenka's net debt beyond the important bar of x4,0 EBITDA.
If necessary, Jutrzenka could sell assets to help fund the acquisition. Its strong 'Jeżyki' biscuits brand, for example, could be sold to Kraft as part of the Wedel deal. (Kraft, through LU, is already market leader in branded biscuits in Poland).
The other serious contender to acquire Wedel is Maspex, Poland's largest diversified food group, with 2009E revenues of 2,5 bln zloty.
That group has a history of acquiring legacy Polish brands, at attractive valuations; notably 'Kubuś' and 'Tymbark' in juices, and 'Lubella' in pasta. Wedel falls squarely into that category; Maspex the maximiser is surely itching to buy it.
But railing against Maspex is the fact that, in contrast to Jutrzenka, the group doesn't have an existing confectionery business. That means it won't be able to factor major synergies into its price offer, and it won't easily be able to mothball the obsolete Wedel factory in Warsaw.
In conclusion we think that lucky Jutrzenka has a 'clear path' to creating Poland's leading confectionery player, with 1 bln zloty in sales. Whether they succeed depends on the quality of their strategy, decision -making and execution.
As for the 'end -game' market structure in Poland, Kraft is sure to remain at least the strong no.2 player in confectionery. It will have about 20% share, the no.1 position in the adjacent category of biscuits, and four factories in that country.
These factors, together with a market growth rate of >10%, will ensure that Poland remains a strategic market for Kraft in sweet snacks.
With Jutrzenka and Kraft carving upwards of 50% share between them, the other half of the Polish confectionery market will include the other international groups, plus a plethora of niche or price -fighting local players.
Mid -sized Wawel, with its brand, 300 mln zloty sales, <20% EBITDA margin and conservative strategy, will remain as the last significant consolidation target.