Glenboden M & A Originations

Cloetta's M&A future may be as consolidation target

Priority Rating priority rating 4
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Origination Status proprietory origination, May 2015
Asset Cloetta AB (Sweden), top 10 confectionery producer in Europe
Buyer candidates include Perfetti Van Melle
Seller Svenfelts family foundation and public shareholders of Cloetta
Buyer Rationale European consolidation especially in Italy and Holland, Nordic market share
Seller Rationale attractive valuation
NBs Cloetta's private equity shareholders, CVC and Nordic Capital, exited the company in 2013
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A recent handover of the CEO position at Cloetta has prompted M&A Watch to assess that company's future M&A trajectory. Although there's potential for one or two more add-on acquisitions in Europe, there's a bigger case for a consolidation -led takeover before the end of this cycle.

Financial targets focus ...Cloetta's financial announcements emphasise the achievement of defined targets: increasing organic sales at least in line with market growth; reaching an underlying EBIT margin of at least 14%; reducing the net debt ratio to around x2,5 EBITDA; an end -game of a dividend payout of 40 –60% of net profit.

It seems that the key objective which underlies these targets is for Cloetta to attain the status of a stable, free -cashflow generative business, that will win the approval and long -term loyalty of its shareholders, most of whom are institutional investors.

However there's an alternative scenario; that by achieving some or all of the above targets Cloetta turns into an attractive acquisition case, for both buyers and sellers, in the context of consolidation in the European confectionery market.

... financial institutions in the majority ...After the merger with Leaf in 2012, the resulting shareholder structure saw Leaf's private equity owners, CVC and Nordic Capital, jointly hold 57,6% of the share capital of the enlarged entity. They subsequently sold down those shares, mostly to Swedish institutional investors, finally exiting Cloetta in 2013.

Currently, 41,3% of Cloetta's voting rights are indirectly held by a foundation established by the Svenfelts family, that has owned the company for 100 years. Another 9,3% of the voting rights are held by AMF, a large Swedish non-private pension fund group (including trades unions). The rest if free-float.

Potentially, Svenfelts and AMF would act in concert to prevent any takeover of Cloetta. On the other hand if a major liquidity opportunity was to present itself, then AMF would be obliged to vote in favour of it, in the interests of its members. Cloetta operates in highly competitive markets in which stable cashflows cannot be guaranteed; it is not a utilty or telecom company.

... increasingly attractive takeover candidate ...Given the above, it's reasonable to assume that Cloetta will continue on the path to its financial targets, including further bolt -on acquisitions that generate growth and synergies without compromising the debt reduction agenda.

There may come a point, though, when the value of Cloetta to a potential buyer will reach such a level that a takeover bid for the group, especially in the form of an all -cash offer, would be hard for Cloetta's institutional shareholders to refuse.

Also, a takeover attempt is made more likely if Cloetta continues to grow its top -line above the rate of the overall confectionery market growth, as it did in FY2014 when it booked a sales increase of 10,1%, and again in Q1 2015 (8,6%). That bites into the market share of rivals, including giant rivals like Perfetti Van Melle.

... stand-out potential acquirorIndeed, Perfetti's sales revenue declined in 2014, for the first time in a decade, by 2% to the level of € 2,44 bln. That's disappointing, but it still means that Perfetti is four times bigger than Cloetta in top -line terms; a very healthy ratio, from a cash -only takeover bid perspective.

Also, Perfetti is a clear nominee for future consolidation moves in the European confectionery market. The third largest sweets company in the world, it already earned the mantle of chief consolidator in sugar confectionery, when Perfetti of Italy acquired Van Melle of Holland in 2001, followed by the purchase of Chupa Chups of Spain in 2006. Cloetta is in the same territory as the above, being also focused on sugar confectionery (chocolate products accounting for under 20% of group sales).

Then there is the strategic rationale story, with respect to geographic overlap. Perfetti and Cloetta compete fiercely in the markets of Italy and Holland, both of which are in decline or flat at best; that's a classic consolidation scenario. In addition, Perfetti is bound to covet Cloetta's leading market position in the Nordic region, which accounts for 60% of the group's total sales; Perfetti is so far relatively weak in the Nordics.

Transaction issues ? Obviously anti-monopoly concentration in Holland and Italy, where a combined Perfetti and Cloetta group would control about 40% of the sugar confectionery market in both countries. Plus the small matter of valuation; Cloetta's trading enterprise value is quite toppish by mid-cap M&A standards (see valuation).

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THIS LEAD'S VALUATION
Size (€ mln) 1 130
Sector confectionery
Asset Quality Europe top 10 branded
Seller mid-cap plc
Buyer private corporate
P/S 2.0
P/Ebitda 12.0
Type current enterprise value
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