Glenboden M & A Originations

Bolt-on options after Hain buys ambient spreads from Premier

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Origination Status buyer and seller announcements, August 2012
Asset sweet spreads and jellies business of Premier Foods
Buyer The Hain Celestial Group Inc (USA), leading domestic organic food and personal care products company
Seller Premier Foods plc (UK), leading domestic ambient foods group
Buyer Rationale expansion in ambient grocery category in UK, brands
Seller Rationale sale of non-core businesses to reduce debt
NBs portfolio includes legacy brands Hartley's, Sun-Pat, Gale's, Robertson's and Frank Cooper's
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To further reduce its debt, Premier Foods is selling its non-core sweet spreads and jellies business, including legacy brands Hartley's, Sun-Pat, Gale's, Robertson's and Frank Cooper's, to Hain Celestial. The valuation seems justifiably low; Hain clearly needs the incremental revenue and established brands in Europe; bolt-on acquisitions in UK ambient foods may follow.

Low valuation ...It looks like Hain bought the business at a low multiple (see valuation). Wait - the acquisition was on an incremental basis - Hain bought the factory and its production workers, and the EBITDA measure used excludes selling and general & administration costs.

Basically Hain's buying the revenues and the cost of goods sold, so the EBITDA measure here is more like what's normally called gross profit. That's understandable - they already have a business in the UK; they need incremental revenue to lay over it.

It's significant that the de facto gross margin of the acquired business is only 23%, about half of what you'd expect. So Hain has bought a low-margin operation - nota bene 40% of its sales are non-branded - which further justifies the low valuation.

... trusted grocery brands ...Why is Hain Celestial, focused on 'natural and organic' fresh and frozen foods, buying a portfolio of legacy grocery brands ? The answer must lie in the fact that its European operations, constituting 15% of group sales, are loss-making (see chart).

Those operations were subject to intangible asset impairment charges - Hain badly needs not only the incremental revenues but also the tried-and-trusted brands that the acquired portfolio brings.

The challenge is to re-position the brands as natural and/or organic - Hain announced its need to 'expand into Ambient Grocery, where we have seen health and nutrition gain traction with consumers'.

... further acquisitionsAccording to our rough calculation on the basis of pro forma 2011 numbers including the acquired business, Hain's post-transaction net debt comes to around x2,5 EBITDA, leaving some headroom for bolt-on deals.

In ambient products in the UK, candidates include Nairn's, a leading Scotland -based producer of branded natural and healthy oatcakes and biscuits, that a few years ago was on sale but failed to find a buyer.

Although growing 10% in 2011, to reach 16 mln GBP in sales, Nairn's EBITDA margin dropped to 14%, having consistently been above 20% in previous years. Raw materials costs were partly to blame.

The other cited reason for the decline were start-up costs of Nairn's subsidiary in the USA - Hain, primarily a US group, is very well placed to take up Nairn's foray into that market, and make a success of it.

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THIS LEAD'S VALUATION
Size (€ mln) 250
Sector ambient grocery
Asset Quality UK branded category leader
Seller large plc
Buyer mid-cap plc
P/S 1,2
P/Ebitda 5,2
Type cash & shares consideration
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