Glenboden M & A Originations

Potential buyers for United Biscuits

Priority Rating priority rating 4
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Origination Status reports of exit intent, July 2010
Asset United Biscuits Topco Ltd (UK), global no.3 biscuit producer
Buyer candidates include, Premier Foods, Kellogg's, Grupo Bimbo
Seller Blackstone Group LP (USA) and PAI Partners (France), private equity firms
Buyer Rationale branded market position in high -value European geographies, entry into higher -margin categories
Seller Rationale acceptable exit valuation
NBs PAI is said to contemporaneously be looking to sell its stake in the Yoplait fresh dairy business
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The private equity owners of United Biscuits, estimated to be the no.3 global branded biscuits producer, are reportedly tempted to seek a buyer for it at this time. We examine selected potential acquirers, for whom UB would be an adjacent diversification into higher -margin categories and/or new high -value geographies. The timing isn't great however in terms of buyer debt levels.

Strong market presence and potential ...UB is the no.1 branded biscuit and savoury snacks producer in the UK, with a portfolio of iconic legacy brands that have been consumed for generations.

UB also holds strong segment positions in its other core markets, namely Holland, France and Belgium. Overall its products sell in 100 countries, and the group has recently invested in the markets of India and Nigeria.

Packaged biscuits are not the most attractive M&A category these days, but UB has the potential to grow more quickly, through aggressive expansion in developing markets, where its brands like McVities digestives have appeal.

... resilient brand portfolio ...Also UB's performance counters the common argument, that branded biscuits are becoming depremiumised and superceded by private label.

90% of the group's sales in 2009 were of branded products, compared with e.g. 65% in the case of its compatriot in culinary products, Premier Foods.

... valuation could be highThus we believe UB to be an attractive M&A candidate, in terms of growth potential and brand equity, whose valuation could be quite high.

Taking Kraft's acquisition of LU in 2007 as a comparative transaction, Blackstone and PAI could hit the 2 bln GBP equity value they're said to be seeking from the deal (after net debt of 1,2 bln GBP; see valuation).

On the other hand, some of the most obvious potential acquirers at this time could find it difficult to raise the funds for such a large deal, especially taking into account the high level of UB's net debt (see chart).

Excellent fit for Premier ...UB could be a good adjacent transaction for Premier Foods. Market leader in ambient foods in the UK, like UB it also owns many iconic legacy brands.

However its portfolio, spanning culinary products, packaged bread and dried foods, does not have significant biscuit or savoury snacks assets.

UB would allow Premier's ambient foods market share in the UK to rise from 7% to 10%. The fit would also be good culturally, since the two groups have a very similar business model.

... boosting growth and margins ...On top of that, UB's categores are generally higher -margin than Premier's, as demonstrated by the former having an EBITDA margin of nearly 18% (see chart), while the latter only delivers 14%.

Finally there's the growth story. Premier only grew by 2% in 2009; UB would increase its top line by nearly 50% on day one.

... debt a problemIn spite of the attractions, Premier might have trouble financing such a large acquisition, since its net debt ratio was x3,6 at the end of 2009. The group might need to sell its underperforming 'Hovis' bread business, before acquiring UB.

Kellogg could afford to buy UB ...The Kellogg Company's business model is generally more focused on strong cashflow, dividend payments and share repurchases, than on growth through acquisitions. It has however quite rightly been tipped as a buyer for UB.

It certainly has the scale and 'lungs' for the deal. In FY2009 it booked net sales of US$ 12,5 bln, an EBITDA margin of 19%, and a net debt ratio of x1,9 EBITDA.

With continued debt reduction in 2010, it could afford to buy UB more readily than most other acquirors. The business model fit is also positive; like Kellogg, UB focuses on cashflow generation.

... needs the growth, category and geography boostAnd the deal would give a welcome boost to Kellogg's top line, which shrank by 5% in Q2 2010 largely owing to a 'deflationary trend' in the cereals markets in the US and UK.

UB would not only grow Kellogg's turnover by 15% on day one, it would also provide a better category and geography balance for the group.

North America accounts for 67% of Kellogg's sales, and its snacks business is very small beyond that region. UB would give it a strong international snacks business, and increase Europe's share of group turnover (currently only 20%).

Mexican champion as favoured acquirer ...Grupo Bimbo is the leading bakery products group in Mexico, south America and, after its acquisition of Dunedin from Weston Foods in 2008, in the USA also.

The group's sales have grown quickly in the last few years, to reach US$ 9 bln in 2009. Grupo Bimbo can now be described as truly pan –Americas, with over 50% of sales derived outside its native Mexico.

.... expansion platform in Europe ...UB' strong presence in the UK, France, Holland and Belgium could now provide a platform in another major market for Grupo Bimbo, in high -value geographies.

Also the move wouldn't entail overreaching into new categories, since the group's portfolio already includes biscuits and savoury snacks.

... not so indebted and much largerIn addition, and thanks to an improved EBITDA margin, the group's net debt ratio was reduced to x2,0 EBITDA at y/e 2009.

That makes a deal on the scale of UB financially plausible, especially when Grupo Bimbo is twice as big as Premier Foods in EBITDA terms.

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THIS LEAD'S VALUATION
Size (€ mln) 3.650
Sector biscuits and savoury snacks
Asset Quality global no.3 branded
Seller private equity
Buyer large plc
P/S 2,4
P/Ebitda 13,5
Type enterprise value estimate
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