Glenboden M & A Originations

Private equity most likely buyer of Slovenia's Droga Kolinska

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Origination Status BNP Paribas hired as sell-side advisor, March 2010
Asset Droga Kolinska d.d. (Slovenia), leading domestic and SE Europe food & beverages group
Buyer candidates include CVC Capital Partners, other private equity
Seller Istrabenz Group (90%) and minority shareholders of DK
Buyer Rationale portfolio split -up, development of spreads business
Seller Rationale debt reduction, focus on other activities (energy, tourism)
NBs Istrabenz rescheduled its € 470 mln debt with a new long-term facility in January 2010
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Preliminary offers for the purchase of Droga Kolinska are to be submitted to the Istrabenz Group by the end of April 2010. DK has a portfolio of leading brands in Slovenia and other ex -Yugoslavia. Given the diversity of its operations, we believe private equity will acquire it, rather than a strategic investor. An obvious contender is CVC Capital Partners.

In a previous origination about DK, we argued that Poland's largest food group, Maspex, was a likely acquirer. However, that group is now said to be targeting the Wedel confectionery brand, one of the most valuable in the Polish food industry, which is to be divested by the Kraft - Cadbury merger.

DK has leading brands and market positions ...Coffee is DK's strongest business. Its 'Barcaffe' is the no.3 coffee player in Slovenia, with 20% share, behind Nestle and Kraft. 'Grand Kafa' is the no.1 in the Serbian and Bosnia Herzegovina markets, and no.2 in Macedonia.

In snacks, ‘Smoki’ is the no.1 player in extruded savoury snacks in Serbia and Slovenia, with 67% and 40% shares respectively. 'Najlepse Zelje' is the no.2 chocolate brand in Serbia, after Kraft's 'Milka'.

In soft drinks, ‘Cockta’ is the no.2 cola brand in Slovenia, behind Coca-Cola, with 30% share, and no.3 in Croatia with nearly 10% share. Donat is also a leading functional water brand in Slovenia, significant also in Austria.

Finally in meat spreads /pate, 'Argeta' is the no.1 player in Slovenia, and significant in other ex -Yugoslavia.

... but has a diversified portfolio ...Overall, DK's turnover is split between coffee (40% of total), sweet and savoury snacks (20%), meat spreads (15%), soft drinks including bottled water (10%), and other including dietary supplements (15%).

That's a very diverse portfolio; few if any international food groups are acquiring that range of categories now. That makes the job of finding a buyer for the whole group difficult; arguably narrowing the options to private equity.

... and is undergoing a restructuringIn addition, DK has rescheduled its debts, and has undertaken a divestment programme, of non -core businesses, in order to focus on its strongest brands, with regional potential.

For this reason sales revenue in 9M 2009 fell by over 10%, compared with 9M 2008, and it's not clear whether further restructuring is required, in order to reduce net debt further (see chart).

Private equity might be attracted ...A number of private equity firms have a strategy, or at least a history, of buying groups that are present in various geographies and /or categories.

Arguably the most obvious contender, certainly in central and eastern Europe, is CVC Capital Partners. They acquired the Leaf International confectionery business, from CSM in Holland. That business, even today, five years after acquisition, is present in the UK, Holland, Italy and throughout Scandinavia, in various confectionery segments.

Then in 2009, CVC bought the CEE brewing operations of AB InBev, with brands in nine countries in the region, and renamed the business StarBev.

... with a portfolio break-up strategy ...The trick for CVC could be to acquire Droga Kolinska at a discount to its fair value or sum-of-parts value, then seek to divest the most 'low-hanging' business units, in order to focus on the categories where value can be added..

Pepsico could be interested in buying 'Smoki'; its purchase of Star Foods in Poland in 2006 shows it can buy local snacks brands. That group might also pick up DK’s soft drinks business; 'Cocka’ cola and ‘Donat’ water.

Both Kraft and Nestle could be interested in DK's Barcaffe and Grand Kafa coffee brands, although that could be problematic from an anti-monopoly perspective, at least in Slovenia.

... and the spreads business remainingThat would leave the 'Argeta' meat spreads brand as the remaining significant business. It could be a challenge for CVC to find a premium -paying buyer for 'Argeta', since it's not the most fashionable category for the big groups.

A premiumisation strategy could be pursued by CVC, where Argeta is spread into adjacent, higher value categories, such as fish or functional spreads.

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THIS LEAD'S VALUATION
Size (€ mln) 350
Sector dry products
Asset Quality Balkans diversified branded
Seller mid -cap plc
Buyer private equity
P/S 1,1
P/Ebitda 7,5
Type enterprise value estimate
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