Glenboden M & A Originations

M&A surge in frozen foods - Poland's Hortex next ?

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Origination Status proprietory origination, July 2010
Asset Polski Ogród division of Hortex Holding S.A. (Poland), no.1 domestic branded frozen food producer
Buyer candidates include Lion Capital and Permira (both UK), private equity firms
Seller Argan Capital (UK), private equity firm
Buyer Rationale growth potential of frozen foods in Poland
Seller Rationale exit after more than 10 years
NBs Hortex is also the no.3 branded producer of FJND in Poland
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There's been an upturn in frozen food M&A in Europe, including higher valuations, with private equity firms Lion Capital and Permira as the main players so far. We look at Hortex, frozen market leader in Poland, as a next potential target after deals in Italy and France.

Market leader in Poland ...Hortex is a Communist -era legacy brand, with a history dating back to the 1950s. Its sales are roughly split 50:50 between frozen foods and fruit juices, nectars and drinks (FJND).

It remains market leader in frozen foods in Poland (see chart - source Euromonitor International). NB. We believe that given the group's total sales revenue it's unlikely that its market share is as high as 50%.

... frozen a popular category now ...In developed markets, frozen food has expanded in recent years, owing to greater emphasis on value -added products especially frozen meals, and the fact that the consumer recognises the value for money that frozen foods offer in times of economic hardship.

This has been reflected in heightened M&A activity. Earlier in 2010, Nestle acquired Kraft's US frozen pizza business, and Permira acquired 'Findus' in Italy from Unilever. Lion Capital is said to be close to buying 'Picard Surgeles' in France from BC Partners.

... high valuations ...In fact frozen could be described as a seller's market now, especially in Europe with strong buyer competition mostly between Permira and Lion Capital.

That's evidenced by relatively high valuations. Permira acquired Findus Italy for an EBITDA multiple which we estimate at 12,5, the same as that paid by Nestle for Kraft's US pizza brands. Whereas in 2006, Permira paid only x10 EBITDA for Unilever's 'Bird's Eye' in the UK and Germany.

... high potential Polish marketIn Poland, the frozen market is still dominated by commodity vegetables, which is reflected in Hortex's relatively low EBITDA margin (see chart). So there's a lot of potential for growth in value -added products like frozen stir fry or ready meals.

Then there's the volume growth story. Per capita consumption of frozen food in Poland is estimated at around 4-6 kg, compared with e.g. 40 kg in Germany.

Hortex ripe for sale ...Inclusive of its previous incarnation as the private equity arm of Bank of America, Argan Capital has owned Hortex for more than 10 years now, which is very long by private equity standards.

... common brand issue ...Argan has tried on more than one occasion to sell Hortex; the main stumbling block appears to be that the brand covers both frozen food and FJND.

That's an issue when there are no major buyers for both businesses together, and splitting the brand rights has been problematic.

But surely it's legally feasible to split the brand rights in a satisfactory way, between Hortex's frozen subsidiary, Polski Ogród, and its FJND business.

Common brands have been divided before in Poland, in the tobacco industry and with respect to 'Wedel' biscuits and confectionery businesses.

... investment is neededAnd Hortex certainly needs a new owner that's prepared to develop the frozen business more aggressively than Argan has done.

The group's sales fell by nearly 5% in FY 2010; management has a plan to invest € 50 mln in the next four years, especially in export markets where the brand is well recognised (like Russia). The money needs to come from somewhere.

A big question is whether Hortex frozen foods would be acquired by another private equity group, which has been the pattern so far in Europe, with Permira and Lion Capital as the main contenders, or by a strategic investor.

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THIS LEAD'S VALUATION
Size (€ mln) 125
Sector frozen food
Asset Quality Poland no.1 branded
Seller private equity
Buyer private equity
P/S 1,3
P/Ebitda 12,5
Type value estimate frozen segment (50% of total)
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