Glenboden M & A Originations

Who should Nestle be stalking in US specialty leaf tea ?

Priority Rating priority rating 4
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Origination Status proprietory origination, November 2010
Asset specialty leaf tea producers in the USA (e.g. Hain Celestial, Mighty Leaf Tea)
Buyer Nestle Group (Swizerland), global no.1 food group
Seller founders, public shareholders
Buyer Rationale high growth, 'healthy hydration' properties
Seller Rationale strategic partner for mainstream and nationwide expansion
NBs Nestle made its first RTD tea acquisitions in the US in 2009
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In a recent Reuters interview, the CEO of Nestle Waters North America tipped tea as an M&A priority in the group's 'healthy hydration' space. We argue that specialty 'hot' leaf tea should be targeted, not just bottled RTD tea, given the growth trend of the former.

Making acquisitions in RTD tea ...Nestle already owns 35% of small RTD tea brands Sweet Leaf and Tradewinds, and plans to buy them outright within 18 to 24 months. We believe that Nestle should also take a similar 'punt' on a specialty leaf player or two.

Nestle is already in the branded coffee business, so the commodity and forex volatility of leaf tea would be nothing new for the group.

... hot tea as attractive as RTD ...US tea market size estimates range from US$ 5 to 15 bln. Broadly, iced or RTD tea makes up 80% of that market; hot tea makes up the remainder, mostly conventional bagged but also premium specialty teas.

Like RTD tea, specialty leaf tea has a double-digit growth rate in the US market, with a historical consumer shift from hot coffee to hot tea.

Ever since the American Revolution 200 years ago, the US consumer has defied global norms by drinking more coffee than tea. That may be reversing.

Partly that's because of the health and wellness benefits of tea over coffee for an ageing population. Other factors are increasing multiculturalism, and improvements in the quality and variety of teas served in foodservice channels.

... specialty tea overtaking conventional black bagged...Within tea, there's a trend away from conventional black tea, which accounted for 67% of US consumption in 1999, towards a diverse market where specialty teas have a major share (see chart; source: Tea Connexions).

So, there seems to be a strong case for Nestle to target specialty leaf tea (for older consumers), alongside RTD tea (for younger ones).

... candidates big and small ...One candidate is Hain Celestial's tea division (see valuation). Formerly Celestial Seasonings, it's the largest independent producer of specialty teas in north America, but delivers only 10% of group sales.

A smaller, more 'owner-managed' option, something more like Nestle's two RTD 'punts', could be Mighty Leaf Tea, established by a husband-and-wife team in 1996 in California.

That brand strikes the quality and authenticity notes, with its whole-leaf teas from around the world, that are so important in specialty tea.

... incubator modelIn 2009 the founders faced internal disagreements with their sales director over the decision to diversify from niche channels into mainstream ones.

As with Sweet Leaf and Tradewinds, there's a case for Nestle to acquire a stake in Mighty Leaf, take an 'incubator' approach, and provide it with the necessary clout in mainstream distribution channels nationwide.

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THIS LEAD'S VALUATION
Size (€ mln) 145
Sector specialty leaf tea
Asset Quality US leader branded
Seller mid-cap plc
Buyer large plc
P/S 2,2
P/Ebitda n/a
Type value estimate
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