How serious is Campbell Soup about buying United Biscuits ?
- September 08, 2010
||reported acquisition interest, September 2010
||United Biscuits Topco Ltd (UK), global no.3 biscuit producer
||candidates include Campbell Soup Company (USA)
||Blackstone Group LP (USA) and PAI Partners (France), private equity firms
||major expansion of snacks business beyond north America, strong EBITDA
||acceptable valuation, timing
||Premier Foods (UK) and The Kellogg Company (USA) are also reported to be interested in UB
Campbell Soup is reportedly interested in acquiring United Biscuits, from its private equity owners. The group is financially better placed than its main UK rival, Premier Foods, for the deal. Also UB would bring a needed growth boost to Campbell, in categories in which it has enjoyed success recently in north America. But the group's business model and strategy appear to be elsewhere.
Campbell defines itself as focused on 'healthy beverages, baked snacks and simple meals'. Within that, 67% of turnover is from sauces, soups and beverages, in the US and internationally.
Another 25% of Campbell's sales are generated by its baking and snacking division. That division booked the group's highest top-line growth rate in 2010, at 7%. It also delivered an EBITDA margin of nearly 20%; close to group average.
So, it makes financial sense to grow that part of Campbell. UB's portfolio would make a good fit, alongside Campbell's 'Pepperidge Farm' business. That brand covers breads and cookies, crackers and puff pastry.
UB would both provide a higher weighting in biscuits and, because Pepperidge Farm is mostly a north American busines, it would add the UK, France, Holland and Belgium as significant new geographies for Campbell in those categories.
From a financial perspective, Campbell could arguably pay the near US$ 4 bln in enterprise value that UB could be worth (see valuation), without issuing new shares or selling assets (see profile).
In that scenario, Campbell's net debt would rise to about x4,0 EBITDA, before taking into account UB's EBITDA contribution or synergies.
We have argued before that Campbell's main rival for UB in Europe, Premier Foods, would have to sell its Hovis bread business, to achieve such a net debt ratio pursuant to acquiring UB.
On the other hand The Kellogg Company, another potential bidder, has a balance sheet that's arguable as strong as Campbell's (see related origination).
On the negative side, Campbell's business model is to generate strong free cashflow, dividend growth and share repurchases. It hasn't made a significant acquisition in the last five years.
In fact the group has divested some non -core businesses, notably its 'Godiva' luxury chocolate brand, to Ulker of Turkey in 2007.
In addition, Campbell's stated international expansion strategy is focused on Russia and China, rather than on developed markets.
To underline that, the group sold its UK and Ireland culinary brands in 2006 to, ironically, Premier Foods. Would it make such a radical come-back into the UK market so soon ?