Glenboden M & A Originations

Is Mueller the right strategic partner for Pepsico in US dairy ?

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Origination Status media reports, October 2011
Asset new joint-venture in US yoghurt category
Buyer Pepsico Inc. (USA), multinational food group
Seller Unternehmensgruppe Theo Müller GmbH & Co. KG (Germany), largest domestic private dairy group
Buyer Rationale expansion into US yoghurt category, NPD in functional drinks
Seller Rationale marketing and distribution strength in USA
NBs US yoghurt category enjoying double-digit growth driven by Greek -style segment (>20% of total sales)
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A joint-venture with Pepsico as a route to penetrating the US yoghurt market makes sense for Mueller. However we question whether it provides a sustainable solution for Pepsico, and examine whether the real prize for that group in US dairy lies elsewhere.

Exciting functional drinks prospects ...With per capita consumption still well below western Europe, the US yoghurt market has grown by 50% since 2006, and is predicted to reach US$ 8,5 bln in 2016. The driver has been Greek -style yoghurt, with 'Chobani' and 'Total' dynamising that category (see chart).

Having made a grand entry into global dairy in late 2010, by acquiring the market leader in Russia Wimm-Bill-Dann, Pepsico is eager to enter that category in the US also, as part of its strategy of increasing its healthier products portfolio to 30% of group sales by 2020.

US chilled dairy is attractive not only because of its growth, but also because of its functional drinks potential, for example in whey protein and lactose based sports drinks; a healthier successor to Gatorade?

... Mueller a doubtful partner ...With 35% yoghurt market share in the UK, its no.2 market after Germany, the US is a natural next step in Mueller's strategy, especially when its reluctance to invest in its neighbouring countries restricts its growth in Europe. Mueller's likely to want to build a dairy plant in the US, as they did in the UK in 1992.

The technological excellence in dairy offered by Mueller complements the marketing and distribution power of Pepsico in the US. The limited success of Pepsico's own NPD launches in dairy drinks in that country underlines that it might not succeed alone.

However, we believe that Pepsico and Mueller will prove to be incompatible partners. Strategic differences, in key areas like portfolio focus, may be compounded by disagreements over JV partner buy-out intentions.

... acquisition alternativeA cleaner option for Pepsico would be acquisition. However of the bigger US players (see chart), the two independents are both focused on Greek yoghurt which, at 4 l. of milk for 1 kg. of yoghurt, is expensive to produce and hard to reconcile with high-margin dairy drinks for active people.

Smaller acquisition targets in US dairy include Lifeway Foods, market leader in the drinkable 'kefir' niche. That company boasts a sales CAGR of around 25%, but has seen profitability declines due to a lack of scale; Pepsico could provide that and develop Lifeway's healthy portfolio.

Lifeway is 20% owned by Danone, which perhaps demonstrates that the optimal road for Pepsico leads to that group, which it's been trying to acquire since the mid -2000s. Maybe the time is drawing closer, with Danone becoming a split -up candidate (viz. rumoured water business sale to Suntory).

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THIS LEAD'S VALUATION
Size (€ mln) 60
Sector dairy niche kefir
Asset Quality US no.1 branded
Seller large plc
Buyer small plc
P/S 1,2
P/Ebitda 12,0
Type value estimate
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