Further M&A options for Nomad after Iglo deal - May 08, 2015

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Nomad Holding has appeared from nowhere to acquire Iglo Group. It could be described as a 'me-too' consolidator, in the wake of 3G, of mature food businesses. The question now is which add-on acquisitions could or should Nomad make, to build on the Iglo platform. We look at potential strategy and candidates.

In the image of 3G ...Nomad came into being a year ago, as an acquisition vehicle, through a placement and listing on the London Stock Exchange. Its remit was bold and broad; to acquire an as-yet unidentified, branded business, that generates stable cashflows, and to build on that platform through add-on acquisitions.

It's easy to identify 3G Capital's recent acquisition strategy, that has merged Burger King with Tim Hortons and HJ Heinz with Kraft, as Nomad's model; especially when one of its founders is a co-investor with 3G in Burger King, and sits on the latter's board.

We believe however that Nomad's task will be more difficult than that of 3G. In Heinz and Kraft, 3G bought publiclly -listed businesses that had a lot of 'low-hanging' upside to be gained through cost -cutting and streamlining, as well as an arsenal of defensible brands. That won't be the case with Iglo.

... the challenge of frozen foods ...Iglo, having been previously owned for eight years by private equity group Permira, is already a streamlined business. That's reflected in an EBITDA margin that has grown to 20% of net sales, which is high for a general frozen foods player. Private equity -ownership of the frozen food segment in Europe is quite common, so streamlining opportunities are generally limited.

Post -Iglo, and for fundamental business reasons to do with supply-chain, Nomad's destiny is likely to be limited to that of a consolidator of the frozen segment of the branded foods universe. The potential of that segment is arguably poorer than that of the branded ambient segment; that's reflected in Iglo's low growth rate (see profile), and in the quite low EBITDA multiple that Nomad is paying for a group with Iglo's market position and brands (see valuation).

There are some categories of frozen food, like desserts or potato fries or bake -off, that are attractive and defensible. However, as the recent troubles of General Mills and Nestle in the US demonstrate, the more 'wholesome' frozen categories, like vegetables or ready meals, are permanently under pressure from chilled or fresh alternatives.

... geographic expansion is key ...Given the above challenges for Nomad with Iglo, the group's strategy should focus not only on further cost -cutting and new categories, to add value, but also on expanding Iglo's geographic footprint, through add -on acquisitions in countries where that group's presence is so far weak.

That's particularly important given Nomad's objective, stated in its prospectus, of re-admitting its enlarged group, post -acquisition, to the public equity market. The broader the geographic base of any public group, the lower the perception of political risk and the higher the premium that the group's share price can command.

Iglo is overall market leader in frozen food in Europe, with 10% share, and the group reports that it has achieved leadership in seven out of the 12 countries in which it trades. On the other hand, 85% of Iglo's sales are concentrated in the UK, Germany and Italy. So, where should the group look to expand and who could it acquire ?

... plenty of candidates ...A 'low hanging' target is probably Kerry's frozen ready meals business; number one supplier in its categories in the UK, with strong brands like Bisto. Kerry was reported to be actively looking for a buyer for that asset, as recently as late 2014. However, that business is relatively small, and doesn't expand Iglo's geographic footprint much.

Another option, which does tick the box of attractive new geography, is Hortex in Poland. That country has a relatively large population and high growth rate, yet low per capita frozen foods consumption to date. Hortex is the largest producer of frozen fruit & vegetables in the CEE region, and is a strong legacy brand in Poland. Its private equity owner, Argan Capital, has owned the business for many years, and will eventually succeed in exiting it.

The big one for Iglo, however, is undoubtedly the Findus Group, which has also been owned by private equity (Lion Capital) for many years. Findus is no. 2 in European frozen food, behind Iglo; together they would have about 15% market share. What's more, Findus is a market leader in Scandinavia, Spain and France; high value markets where Iglo is so far weak.