Glenboden M & A Originations

Assessment of Raisio as an M&A candidate

Priority Rating priority rating 4
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Origination Status proprietory origination, August 2014
Asset Raisio plc (Finland), international grain-based products company
Buyer private equity firms with food and agri-products portfolio companies
Seller public shareholders of Raisio
Buyer Rationale break-up value of brands, manufacturing and agri-products businesses, synergies
Seller Rationale acceptable valuation given stand-alone prospects
NBs Raisio's sales and EBIT are down in H1 2014
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Raisio's EBIT is down by nearly 75% in H1 2014, including one-off items which are inherent in Raisio's business model that's based on M&A activity. We believe that the group's strategy since 2009 of transformation into a modern business, through M&A and innovation, has not been successful. One scenario is for shareholders to sell to a private equity firm.

Weak underlying businesses ...Raisio's sales are split roughly 60:40 between its Brands Division (covering Benecol, cereals, snacks and confectionery), and Raisioagro (animal feeds, vegetable oil, grain trade). Half of the group's sales are outside its native Finland.

Arguable the Brands Division is sustained by the stalwart 'Benecol' and 'Elovena' brands in Riasio's domestic market. Internationally (principally the UK), 'Brands' is something of a misnoma - 50% of snacks and cereals sales, and 75% of confectionery sales, are private label or third-party brands.

As for Raisioagro, it booked a significant EBIT loss in H1 2014, and has only been at break-even in recent years. That begs questions over whether Raisio has the scale to be competitive in supplying to the farming sector, and whether the downsizing strategy might make things worse.

... major M&A disappointments ...Raisio's weak business profile is largely the result of its M&A activity. The strategy since 2009 has been to exit from mature businesses, where gains can be made on their sale, and re-invest the money in 'healthy' snacking or other grain-based consumer foods categories.

Hence the divestment of the group's margarine business to Bunge in 2009, and its malt business to Viking in 2011; hence the acquisitions in 2010 -12 of Glisten and Big Bear (UK), Candy Plus (Czech) and Sulma (Poland).

The trouble is that rather than exciting better-for-you snacking brands, Raisio has bought a string of under-invested brands in traditional confectionery and cereals categories, with a large private label component on top.

It's like selling property because the offers were good, with the aim of then buying new properties with high potential; only to find that you can't find what you'd imagined on the market, but have to put the money somewhere.

... private equity takeover prescriptionArguably Raisio does not have a future as a stand-alone entity, and should be sold to a private equity player that can unlock value through a break-up and re-sale of the brands, contract manufacture and agri-business assets.

One barrier to that is valuation. Historically Raisio's shares have traded at an enterprise value north of x10 EBITDA. In our view however the M&A multiple should be lower, given the prevalence of unbranded and commodity sales by the group (see valuation).

Another barrier is shareholder structure; over 80% of Raisio's voting rights are exercised by restricted shares, owned largely by entities linked to the group's history as a farming co-operative.

Question is, for how long can Raisio's management continue to drip-feed those shareholders with dividend payments ?

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THIS LEAD'S VALUATION
Size (€ mln) 390
Sector grain-based products
Asset Quality international semi-branded
Seller mid-sized plc
Buyer private equity
P/S 0,7
P/Ebitda 8,0
Type enterprise value estimate
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