Glenboden M & A Originations

Will Ebro Puleva buy 'Uncle Ben's' ?

Priority Rating priority rating 4
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Origination Status proprietory origination, July 2010
Asset 'Uncle Ben's' (USA), top-3 domestic rice -based products brand, with leading global presence
Buyer Ebro Foods S.A. (Spain), leading domestic foods group, major global rice producer
Seller Mars Inc. (USA), global no. 2 confectionery producer
Buyer Rationale global leadership in branded rice and meal solutions
Seller Rationale repayment of subordinated debt, sale of non -core business
NBs in 2008 Mars acquired Wrigley for US$ 23 bln
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Glenboden has recently experienced a lot of website traffic, from Spain, focused on our lead in 2008 that Ebro Puleva might acquire the 'Uncle Ben's' brand from Mars. The secretive Mars took a lot of subordinated debt from Warren Buffett, to buy Wrigley, and might be under pressure to sell what is a non -core business.

Increasing focus on rice and pasta ...In the last three years, Ebro Puleva has been a classic example of how to downsize in revenue terms, while at the same time ramping up profitability and securing focus; in its case focus on 'meal solutions' based on rice and pasta.

Once spanning rice, pasta, dairy and sugar, Ebro sold its sugar business to Associated British Foods in 2008, then sold its dairy unit to Lactalis in 2010.

... low growth higher profit no debt ...Consequently Ebro's mid-term sales growth has been low (see chart), and will be negative when the effect of the sale of its dairy business, which delivers over € 400 mln of annual sales revenue, kicks -in in 2010.

Meanwhile the group's profitability has been growing, as it focuses more on its core business. In Q1 2010, Ebro's EBITDA increased by 22%, to reach € 67 mln.

If that's sustained, then the EBITDA margin will reach the high -teens in FY 2010 (see chart).

In parallel, debt has been vastly reduced, owing to the proceeds from the sale of the group's sugar and dairy businesses.

Once the € 600 mln is received from Lactalis for the dairy operations, which waits upon clearance by the European antitrust authorities, Ebro's net debt will be reduced to zero.

... positioned for transformational M&A ...With EBITDA potentially reaching around € 300 mln in 2010, and no debt, the group is well placed to make a major acquisition in rice and/or pasta -based 'meal solutions'.

The most low -hanging candidate is SOS Arroz, the rice business of the troubled Grupo SOS, Ebro's main competitor in the Spanish market. That business generated about € 300 mln in sales revenue in FY 2009.

However, that combination would create significant anti-monopoly issues in the two groups' domestic market.

Besides which, Ebro may be in a position to make a more transformational acquisition in terms of size, value -added portfolio and international coverage.

... Uncle Ben's a potential target ...In 2008, Glenboden predicted that the subordinated debt taken on by Mars, to acquire Wrigley for over US$ 20 bln, would need to be repaid with proceeds from the sale of its Uncle Ben’s business.

Also that division, with around $ 1,5 bln in sales, only contributes about 5% of that confectionery giant's turnover and so is non-core.

The Uncle Ben's brand, which is stretched across rice, meal solutions and cook-in sauces, would fit very nicely into Ebro’s portfolio given that it spans both rice and pasta.

Although there might be anti-monopoly issues in certain markets, notably in the US where Ebro already has over 20% rice market share, after buying Riviana Foods in 2004, the global synergies from such a merger would be compelling.

... strong deal competitionEbro's main potential competitor, should Mars decide to divest Uncle Ben's, could be Associated British Foods.

With EBITDA of nearly 1 bln GBP, and a net debt ratio of only x1 EBITDA, ABF is financially even better placed to make the acquisition than Ebro is.

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THIS LEAD'S VALUATION
Size (€ mln) 1.000
Sector grain -based
Asset Quality global leader branded
Seller large corporate
Buyer mid -cap plc
P/S 1,0
P/Ebitda n/a
Type value estimate
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