Glenboden M & A Originations

Acquisition options for Wessanen post turnaround

Priority Rating priority rating 4
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Origination Status proprietory origination, March 2015
Asset Cafedirect plc (UK), leading domestic fair trade coffee brand
Buyer candidates include Wessanen
Seller social investors and public shareholders of Cafedirect
Buyer Rationale strategic fit for fair trade portfolio
Seller Rationale on-boarding to partner with sustainable business model
NBs Wessanen ended its divestment programme, and generated net cash, at y/e 2014
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After years of financial difficulties and strategic identity -searching, Wessanen seems to have turned the corner and has now set itself up for further growth through selective acquisitions. We look for the optimal segment and candidate for the group, in the fascinating and promising world of healthier and sustainable foods.

Financial and strategic challenges ...Wessanen's M&A history has been rather precarious in the last decade. It set about exiting its European private label businesses, and US brands and distribution assets, in the mid- 2000s. As a result, by the early 2010s the group's revenues had halved over five years; at the same time, profitability was low and peppered with impairments and exceptional items.

Wessanen's strategy was to substitute its lost revenues through a switching of its focus to branded health, authenticity and ethnicity in Europe; to that end it made acquisitions in niche segments like dairy alternatives. However, the group faced an uphill task in taking such brands beyond the healthfood shelf and onto the mainstream grocery shelf.

Over time, Wessanen dropped the ethnicity part of its mission, and gradually evolved its focus and mission into the categories of organic, fair trade, free-from and vegetarian food & beverages. That strategy now seems to be working, looking at the group's financials.

... next acquisition maybe in fair trade segment ... Earlier in 2015, Wessanen completed its divestment programme, and transformation into a pure-play healthy and sustainable foods group focused on western Europe, by selling American Beverage Corporation in the USA.

In 2014 the group's sales had grown for the first time in many years, by over 6% to reach €434 mln (continued operations), and its EBITDAE increased to 7% of sales. Moreover from an M&A perspective, the group was in a net cash position for the first time in several years - €27 mln at year-end. That's a significant amount, given the small size of most potential targets in Wessanen's universe.

Looking at the group's most recent acquisitions, the fair trade segment seems to be in the ascendancy; they bought the Clipper tea business in the UK in 2012, and the Alter Eco grocery business in France in 2013. So, we plump for another, bolt-on purchase in that category as Wessanen's next M&A venture; especially given that Clipper enjoyed double-digit growth, and a roll-out into the markets of Holland, France and Germany, in 2014.

... Cafedirect arguably a good fit ...Clipper's focus is on tea, so the obvious add -on to it would be a complementary, strong fair -trade coffee brand. Yes, fair trade coffee has attracted many producers in recent years, and so is a competitive business; but if Wessanen wants to achieve its objective of being a 'European champion' in healthy and sustainable foods, then surely fair trade coffee is a box that must be ticked in the group's portfolio.

One potential target in that space in Cafedirect, the leading fair trade coffee brand in the UK. The strategic rationale is arguably compelling: 90% of that company's sales are in the UK, so it could benefit from Wessanen's European platform, just as Clipper has done, for expansion. Also, 85% of Cafedirect's sales are of coffee, and it's strategic priority is to boost its tea business; Clipper meanwhile is already strong in tea.

Another possible attraction is that Cafedirect is a brand management and trading company, without its own production facility. That might suit Wessanen, especially since the group is investing in Clipper's packing site in the UK.

... deal-making a challengeFrom an enterprise value perspective, Cafedirect has no value. Since 2010, Cafedirect's sales have been in decline (see profile). The company has also failed to make a profit in each year, at the EBITDA level, and is eroding its reserve capital. Arguably however there is value in the brand to a potential buyer, especially one that has synergies.

In that case, one option is for Wessanen to value Cafedirect at its net asset value (see valuation), and acquire the company with its own shares. That way, there is no cash outlay and Cafedirect's shareholders have the opportunity to get a return on their investment going forward.

Not that all of Cafedirect's owners are looking to make a financial gain; 36% of the shares are held by three social groups (Oikocredit co-operative, Oxfam charity, Cafedirect coffee growers). They together hold a 'guardians' share' in Cafedirect, which presumably comes with blocking rights over major decisions such as the potential sale of the business.

That is not a typical seller profile in the M&A world. However, Wessanen is not a stranger to acquiring businesses from social investors; in 2008 it bought the European business of 'So Good' from Sanitarium in Australia, which is owned by the Seventh -Day Adventist Church.

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THIS LEAD'S VALUATION
Size (€ mln) 7,5
Sector fair trade coffee
Asset Quality UK no.1 branded
Seller small -cap plc
Buyer mid -cap plc
P/S 0,4
P/Ebitda n/a
Type net asset value
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