Glenboden M & A Originations

What's a fair value for the rice business of SOS ?

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Origination Status simultaneous announcements of acquisition, April 2010
Asset Dakota Growers Pasta Company (USA), no.3 dry pasta producer in north America
Buyer Viterra Inc. (Canada) leading international food ingredients producer
Seller public shareholders of DGBC
Buyer Rationale enhanced food processing business, entry into fast-growing pasta market
Seller Rationale acceptable valuation
NBs valuation provides recent comparable for ongoing sale of SOS rice business in Spain
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The financial troubles at Grupo SOS of Spain have attracted a flurry of offers for its rice business. Looking at the fundamentals of SOS Arroz, and taking the Viterra - DGPG deal as a comparable in the 'parallel' pasta category, we suggest a fair value. We also look at potential strategic buyers, with the focus being on ABF.

Under financial siege ...Grupo SOS aims to sell its rice business, SOS Arroz, to help reduce its corporate debt by 50% by 2013. Credit Suisse has been retained to handle the divestment.

Accounting for just over 20% of the group's turnover, SOS Arroz delivered revenues of about € 300 mln in FY2009. Its underlying EBITDA came to € 18 mln, so about 6% of sales, in that year.

Taking advantage of the fact that Grupo SOS booked losses, even at the EBITDA level in FY2009, caused by € 228 mln in extraordinary provisions, a number of private equity players have apparently made bids for SOS Arroz, priced in the region of € 175 - 200 mln.

... management wants higher price ...Given the fundamental value of SOS Arroz, and the recent comparable of DGPC (see chart and valuation), we're not surprised that Grupo SOS' management are holding out for a higher price, adding that they have 'no deadline'.

SOS Arroz is the no.1 branded rice player in its homeland Spain (17% share), and in Holland under the 'Lassie' brand (30% share).

... with strong growth in the US ...But it's the US side of the business that's delivering most of the growth. After the acquisition of American Rice International (ARI) in 2004, SOS has invested in its brands and distribution reach, signing over 30 new distribution agreements and now delivering to nearly 4.000 points of sale in the US.

Thanks to these efforts, ARI's sales have more than doubled since the takeover, and SOS Arroz now claims to have 7% national branded rice share, with leadership in certain regions.

In 2009, the US market accounted for 55% of total SOS Arroz sales.

... depressing margins short -termGiven this expansion in the US, it's not surprising that the EBITDA margin of SOS Arroz in 2009 was only 6%. Once the US side of the business matures, to the level of its brands in Spain and Holland, one can expect that margin to double.

To back that up, one can take a look at SOS' closest peer, the Spanish food group Ebro Puleva. The EBITDA margin in recent years in its rice business, which like SOS Arroz is a market leader in Spain and elsewhere including the US, has been in the range of 10-15% of sales.

DGPC provides a comparative transaction ...Turning now to an appropriate multiple for valuing SOS Arroz, we believe the recent acquisition of Dakota Growers Pasta Company in the US, by Viterra of Canada, provides an instructive benchmark (see chart and valuation).

Pasta and rice businesses are comparable, in our view. Staples; commodities but with upsides in terms of varieties and value-added concepts; same shelf space, occasions and target consumers; similar growth and margins profile.

... adjusted for branded premiumA correction needs to made however, to reflect that fact that SOS Arroz is a branded business, while DGPC is not. In retail, private label products are typically priced at a 30% discount to branded ones. We take the same discount and apply it to enterprise valuation.

This gives us an EBITDA multiple for SOS Arroz of x10. Applied to a 'mature' EBITDA margin of 12%, we arrive at a valuation of about € 350 mln. That's also equivalent to a Sales multiple of x1,2.

Ebro is a potential buyer ...Turning now to potential strategic buyers, Ebro Puleva, Grupo SOS' peer in Spain, has naturally been tipped. However anti-monopoly issues in Spain and the US could make that deal problematic.

Besides, after selling its dairy business to Lactalis, earlier in 2010, for over € 600 mln, Ebro may now be looking to acquire something more transformational than SOS Arroz, in the 'meal solutions' universe.

Strategic fit for ABF ...We think SOS Arroz could provide Associated British Foods with an opportunity in an adjacent business to its existing grocery portfolio, as well as a stronger platform for its US business.

In terms of strategic fit, packaged rice is arguably adjacent to existing core categories for ABF. It's as grainy as bread, has the same commodity backdrop as sugar, and is as easy to manufacture as tea (prepare it, pack it and market it).

... enhancing its US businessThis deal could also provide a boost to ABF's US operations. The leader in that market in premium vegetable oil (Mazola), and in herbs and spices (Tone's, Spice Islands and Turkee brands), ABF could benefit from the extra logistics and sales platform that ARI, SOS Arroz's US subsidiary, would bring.

As well as rice, ARI distributes Grupo SOS' olive oil brands in the US (mainly 'Bertolli'). By combining ARI with ABF's existing distribution system and portfolio, a much stronger entity could be created in that market.

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THIS LEAD'S VALUATION
Size (€ mln) 180
Sector dry pasta
Asset Quality USA no.3 unbranded
Seller mid-cap plc
Buyer large plc
P/S 0,8
P/Ebitda 6,7
Type enterprise value
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