Glenboden M & A Originations

Who's next after Annie's in innovative foods M&A in the US ?

Priority Rating priority rating 4
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Origination Status proprietory origination, September 2014
Asset Lifeway Foods Inc. (USA), no.1 domestic kefir dairy producer
Buyer candidates include Groupe Danone
Seller founders and public shareholders of Lifeway
Buyer Rationale brand, route to growth, in line with US strategy
Seller Rationale attractive valuation given dairy market trends
NBs Danone Foods Inc holds a 21% strategic alliance stake in Lifeway
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The over 25x EBITDA valuation in General Mills' recent acquisition of Annie's clears the path for Groupe Danone, a main rival in dairy, to pay top -dollar for another innovative food business in the US, which it has targeted as a growth geography. A clear candidate is Lifeway Foods, in whom Danone has had a stake for many years and whom the group could feasibly grow by x3 within a few years.

Long-term relationship before marriage ...Danone has been Lifeway's 'ally' in the US dairy market since taking a 20% equity stake in 1999. Since then relations have been governed by board representation for Danone and non-compete agreements.

Of course there's continuous speculation that Danone will one day acquire 100% of Lifeway. Although there wasn't always consumation (viz Bakoma in Poland or Wimm-Bill-Dann in Russia), Danone has a history of taking 'wait and see' stakes with a view to full acquisition one day.

With Lifeway, the timing may now be right for a deal because of two key factors (i) 'market' valuation multiples as applied in the General Mills - Annie's deal; (ii) the effect of market conditions in US dairy on Lifeway's results and Danone's ability to add value at this time.

... a question of valuation ...Like most big companies, Danone justifies highly-priced acquisitions on the basis of comparative transactions. That was the case when the group paid significantly north of x20 EBITDA for Royal Numico in 2007. This cycle -round they have a good precedent in x27 EBITDA paid by rival General Mills for Annie's.

Although Lifeway's a relatively small business with a low EBITDA margin (see profile), another justification for a high value multiple is Danone's ability, as a dairy leader in the US, to multiply Lifeway's sales and boost margins, in a relatively short time. Plus of course we have significant cost synergies between two highly -overlapping businesses.

One always has to be cautious about the scalability of niche players like Lifeway; but given Danone's resources and track-record in valorising probiotic products, complete with health claims, there's surely a strategy within the group to take kefir to a new level in the functional foods space.

... they need each other nowAnother key factor is the trend in Lifeway's performance. Although a business with strong growth and low debt (see profile), the company's operating profit has been hit hard in H1 2014, partly because of higher selling costs. That suggests there's brand equity there, but a scale problem.

In the past, Julie Smolyansky has shunned big companies like Danone, for not being as 'quick and nimble' as small players. In its latest 10-K however, the company admits that big competitors like Danone can introduce innovative products more quickly than Lifeway, and can be more effective marketers.

The tide has thus turned against Lifeway; but maybe its not too late to be on-boarded by Danone. For Emmanuel Faber, Lifeway could represent a low-hanging acquisition option - to make his mark as the group's new CEO, and to deliver on Danone's target of enhanced growth in north America.

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THIS LEAD'S VALUATION
Size (€ mln) 160
Sector dairy products
Asset Quality US branded innovator
Seller mid-cap plc
Buyer large plc
P/S 1,9
P/Ebitda 30,0
Type enterprise value estimate
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