Glenboden M & A Originations

How committed are Hershey and Nestle to Wedel ?

Priority Rating priority rating 2
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Origination Status controlled auction in progress, June 2010
Asset 'Wedel' (Poland), no.1 domestic 'legacy' chocolate brand
Buyer candidates include Hershey, Nestle, Jutrzenka
Seller Kraft Foods Inc (USA), global no.2 food group
Buyer Rationale volume, market share and brand in Poland
Seller Rationale European Commission requirement to reduce dominance in Polish chocolate market; focus on international brands
NBs 'Wedel' was owned by Cadbury prior to Kraft takeover
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It's said that Hershey, Nestle and Jutrzenka are in the race to acquire Wedel, Poland's no.1 legacy chocolate brand. Apparent strategy and M&A history point to Hershey and Nestle as not fully committed; at best opportunistic here. Jutrzenka is best positioned strategically and in synergy terms; it has financial options in spite of its small scale.

Conservative M&A history ...Hershey, the largest confectionery player in north America, has never made an acquisition beyond Mexico. Its only significant ventures further afield were two relatively small JVs, namely Lotto in China and Godrej in India in 2007, where the principal attraction was local partners’ distribution of Hershey’s own brands.

Even if the Hershey Trust, the group's controlling shareholder, has finally forced Hershey to be more aggressive in overseas expansion, why start with Wedel in Poland ?

...high single-brand chocolate share...According to MEMRB, Wedel is the no.2 player in the Polish chocolate confectionery sector, with 25% share. That's attractive, especially when it's all under the Wedel brand, while Kraft's no.1 position is spread across 'Milka', 'Alpen Gold' and 'Cadbury'.

... a relatively small place to start ...But looking at the bigger picture, Wedel's sales revenue is likely to be under US$ 200 mln. That would add less than 5% to Hershey's existing turnover which exceeds US$ 4 bln.

It might be more appropriate for Hershey to start with either a much bigger acquisition in Europe or, as Wrigley did by acquiring Korkunov in Russia in 2007, launch its overseas M&A drive in a major high -growth BRIC geography.

Nestle not focused on chocolate M&A ...In the last five years, Nestle has made one chocolate acquisition, that of Ruza in Russia. That was a bolt-on buy that allowed the group to strengthen its leading position in Russia's chocolate market.

Nestle's position in the Polish chocolate market, in comparison, is very weak; there must be a reason for that.

That may derive from Nestle's stated strategy of continuing to acquire in the 'unhealthy' parts of its portfolio, notably ice-cream and mainstream chocolate, only in developing economies.

...'health and wellness' instead ...In developed markets, by contrast, the group's M&A strategy is focused on its 'health and wellness' drive. That's reflected in the fact that its most significant acquisitions in the developed world, in the last five years, were Novartis Medical Nutrition and Gerber baby food in 2007.

In fact, there's evidence that Nestle is exiting mainstream chocolate, in developed markets. There's no more ironic example than its sale of the 'Goplana' chocolate brand, to Jutrzenka in 2004; the geography being Poland.

Jutrzenka best positioned ...Of the three reported bidders, Jutrzenka has the strongest M&A history and strategic rationale to become the buyer of Wedel.

The largest domestic confectionery player, with 10% market share according to PMR, its impressive CAGR (see chart) has largely been down to two chocolate acquisitions in Poland, those of Goplana and 'Grześki'.

By acquiring the 12,5% overall confectionery market share held by Wedel (source: PMR), Jutrzenka's share would exceed 20%, allowing it to compete with Kraft for the no.1 spot.

Also, of the three cited bidders only Jutrzenka would develop Wedel to the full. Hershey and Nestle, just like Kraft, would focus more on promoting their international brands, at Wedel's expense over time.

The above, plus the fact that Jutrzenka is in a position to offer the highest price, by virtue of having the most synergy potential post -deal, all point to Jutrzenka as being the bidder that should acquire Wedel.

... financial options exist ...The problem for Jutrzenka may be financial (see chart). Although its net debt is currently only around x1 EBITDA, even a price tag of 600 mln PLN for Wedel would increase its indebtedness dramatically.

The balancing factor is the EBITDA contributed by Wedel itself, post -deal. The key here will be how quickly that EBITDA can become as incremental as possible for Jutrzenka.

That in turn will depend on how quickly it can extract synergies, notably by divesting one or both of the factories that will come with the Wedel brand, starting with the obsolete Warsaw plant.

Jutrzenka's bid could be supported by a mezzanine debt provider, who'd provide bridge finance for the acquisition until the group issues new public equity capital. Apparently that's on the cards.

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THIS LEAD'S VALUATION
Size (€ mln) 200
Sector chocolate tablets
Asset Quality Poland no.1 branded
Seller large plc
Buyer mid-sized plc
P/S 2,0
P/Ebitda n/a
Type value estimate
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