Glenboden M & A Originations

Another low valuation in Mueller's bid for Robert Wiseman

Priority Rating priority rating 5
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Origination Status recommended cash offer, January 2012
Asset Robert Wiseman Dairies plc (UK), top 3 domestic fresh milk producer
Buyer Unternehmensgruppe Theo Mueller S.e.c.s (Germany), European food group
Seller founders and public shareholders of Robert Wiseman
Buyer Rationale product range diversification, distribution, synergies, valuation
Seller Rationale competitive pressures, declining profitability, growing debt
NBs Mueller has until February to announce a firm intention to make an offer for Robert Wiseman
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Mueller is not an M&A 'animal', but the acquisition of Wiseman allows it to diversify its fresh dairy portfolio in the UK to resemble more its business in Germany. As with the proposed Lactalis - Skanemejerier deal, the valuation might also be an incentive for the buyer.

Group's first big foreign acquisition ...Mueller cemented its position in the UK yoghurt market in 1992 by building a dairy, not through acquisition. Indeed the group's avoidance of acquisitions in its other markets, like Poland, give it the reputation of shunning M&A.

.... compelling strategic rationale ...Mueller has 35% share and market leadership in yoghurts and potted desserts in the UK, its no.2 market after Germany. Wiseman, with about 30% market share in fresh milk, allows Mueller to become a more diversified fresh dairy player in the UK.

By our estimates, Mueller UK combined with Wiseman will have a larger turnover than Mueller Group in Germany. It will also have more dairies there - seven in total (six from Wiseman), compared with only three in Germany.

It appears Mueller has been trying to acquire a major UK dairy player since at least 2010, when its shareholding in Dairy Crest exceeded the 3% threshhold, triggering takeover rumours. Wiseman is arguably only its second choice.

... misleading valuation justification ...In the Offer Document it's written that "the acquisition represents an EV/LTM EBIT multiple of 11.5x as of 2 October 2011, which is broadly in line with previous transactions in the sector". We believe there's a sleight of hand there.

The norm in food manufacturing M&A is for the price multiple to be presented on the basis of EBITDA, not EBIT. Taking the former, the multiple is around x6 in this Offer, which is arguably below comparable deals (e.g. Lactalis - Parmalat).

Wiseman is essentially a private label business, in the sense that its model is based on winning contract tenders for the multiples, which might justify such a lower multiple. On the other hand it's a large business, with over € 1 bln turnover.

... but Mueller needs an incentive ... Given that Mueller generally shuns M&A, may have to restructure Wiseman to extract synergies, and would have preferred the more -diversified Dairy Crest, the valuation needs to be attractive for the group.

Plus Wiseman's operating profit is deteriorating, being squeezed by the big retail chains in competitive tenders with Arla and Dairy Crest. Apparently retail milk sales increased 2% in the UK by volume, but fell 4,5% by value, in 2011.

... and may see Skanemejerier as benchmarkAs a footnote, in parallel Lactalis is in exclusive negoitiations to acquire Skane, the no.2 dairy player in Sweden. The rumoured price in that deal also reflects a valuation of about x0,3 sales.

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THIS LEAD'S VALUATION
Size (€ mln) 370
Sector dairy products (fresh milk)
Asset Quality UK joint no.1
Seller mid-size plc
Buyer large private group
P/S 0,3
P/Ebitda 5,9
Type enterprise value estimate
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