Glenboden M & A Originations

Rationale for Lactalis' acquisition of Parmalat

Priority Rating priority rating 5
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Origination Status tender offer refused by board of directors, May 2011
Asset 71% of share capital of Parmalat Group (Italy), no.1 domestic dairy producer with global presence
Buyer Groupe Lactalis (France), no.3 global dairy producer
Seller shareholders of Parmalat
Buyer Rationale create largest global dairy business with revenues of €14 bln
Seller Rationale valuation too low for controlling stake
NBs takeover approved by Italian regulators
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Lactalis must be one of the most acquisitive food companies in the world now, having made about 15 deals in the last five years. We look at the rationale for buying Parmalat, and assess whether the takeover could succeed at the current valuation.

Synergies in Italy ...Lactalis' chairman aims to make Parmalat the 'Italian company of reference in the dairy market' worldwide. Certainly in Italy, where Parmalat is market leader, the buyer will benefit from synergies and a boader portfolio.

Lactalis is already no.1 on the Italian cheese market, having acquired Galbani in 2006. Parmalat's market leadership in white liquid milk in that country will complement that very well.

Also, Parmalat has experienced strong growth in lactose-free and flavoured milk in that country; categories of growing interest to Lactalis in Europe after its purchase of Puleva in Spain in 2010.

... stronger global reachIf the takeover succeeds, Lactalis will leafrog from no.3 to no.1 in global dairy rankings, growing by nearly 50% to create a group with revenues of € 14 bln. The share of sales outside France will grow from 60% to nearly 75%

The deal will also greatly strengthen Lactalis' business outside the EU, where it currently derives about 80% of its sales, since 75% of Parmalat's business is in Canada, Africa, Australia and south America.

The acquisition will also compensate, in terms of global growth ambitions, for Lactalis' recent failure to acquire the Yoplait yoghurt brand, which is being acquired by General Mills

Valuation too lowThe board of Parmalat has rejected Lactalis' public offer, to acquire the 71% of Parmalat's shares that it doesn't yet own, on the basis that the price doesn't include a takeover premium.

On a fundamental basis also, and not for the first time when Lactalis has appeared as a buyer, the valuation looks too low, at about x9 prior year EBITDA (after net cash).

Parmalat is now a virtually debt-free group, that's restructured its operations down from 70 operating companies to 33 since 2005. It has leadership in Italy, strong brands and a global presence (albeit in a handful of countries).

We believe that the valuation should be significantly north of x10 EBITDA, when looking at comparables such as Pepsico's acquisition in 2010 of Wimm-Bill-Dann in Russia.

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THIS LEAD'S VALUATION
Size (€ mln) 3.320
Sector dairy products
Asset Quality global branded
Seller large plc
Buyer private corporate
P/S 0,8
P/Ebitda 8,8
Type enterprise value 100%
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