Could Kraft buy Leaf as a bolt-on to Cadbury ? - October 03, 2010

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In 2009, before being acquired by Kraft, Cadbury made a bid for Leaf International that was rejected. With the fire-power of Kraft now behind it, the same if not greater strategic and financial rationale, and another year of history, maybe that deal will re-appear soon.

Leaf leaner and stronger but smaller ...The private equity firms that acquired Leaf, the sugar confectionery division of CSM, have tried to add value through restructuring and selective divestments. However it looks like they've run out of steam now.

In the years after buying Leaf 2005 -8, CVC and Nordic Capital sold weaker brands, factories, distribution and private label businesses in Poland, north America, Russia, Holland, France.

The group also acquired Cadbury's Italian business, Saila, and built a new factory in Slovenia, ultimately to serve all of its European markets.

Thanks to these measures, Leaf International is a more profitable and efficient organisation, focused on its top brands and geographies.

However, it's also smaller, with sales falling by about 25%, to € 550 mln, by 2008. Innovation and new launches have also been limited in this period.

... time for private equity exitGiven these constraints, and having arguably completed their job of streamlining, as private equity investors, maybe the time is now ripe, five years after acquisition, for Leaf to revisit the strategic sale option to Cadbury.

Attractive geographies, categories and brands ...Leaf's biggest markets are the Nordic region and Holland; it also has a strong category presence in Italy and the UK. These are high -value geographies.

On top of that, Leaf is strong in the non -chocolate categories of confectionery (chewing gum, pastilles, bagged and pocket candies), where Kraft is still relatively weak.

These factors, plus Leaf's market leading brands, make that group an attractive acquisition target for Kraft, as it switches its strategic focus to snacking products.

... consistent with Kraft's snacks focus'Snacks', defined as confectionery, biscuits and savoury snacks, especially those sold in 'instant consumption' channels, now make up about 50% of Kraft's global turnover (2009 pro-forma).

In M&A history terms, the group's acquisition of LU in 2008, and Cadbury in 2010, confirm this strategic emphasis on snacks. Partly that's because snacks, especially confectionery, are relatively resistant to private label penetration.

Meanwhile Kraft shrank its grocery business significantly, by selling its US frozen pizza brands to Nestle in 2009; plus its beverage and cheese divisions seem to be treated as cash-cows, with the former having seen selective divestments.

Could be squeezed -in financiallyKraft is quite highly indebted, in the wake of the Cadbury deal (see profile).

However given its massive scale, an illustrative US$ 1,5 bln price tag for Leaf (see valuation), would still allow the group's net debt ratio to come in at below x4,0, even before synergies and free cashflow generation effects.