Glenboden M & A Originations

How viable is Northern Foods after selling its bakery businesses ?

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Origination Status business units divestment completed in January 2007
Asset specialty bread, chilled pastry, cakes and flour milling businesses; branded plus own-label
Buyer Vision Capital (UK) private equity firm
Seller Northern Foods (UK) diversified foods group
Financial Terms gross consideration of 160 mln GBP, representing P/S of 0,33 (2005)
Buyer Rationale part of strategy of acquiring portfolios of businesses rather than individual ones
Seller Rationale turnaround and downsizing programme
NBs deal marks completion of divestment plan for businesses representing 40% of sales revenue
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Earlier, in 2006, Northern Foods also sold its logistics business, NFT, to management. NFT has a leading position in the distribution of ‘time-critical’ foods in the UK. As a result of these two divestments, Northern Foods exceeded its target of raising 200 mln GBP in divestment proceeds. The trouble is that the businesses remaining in portfolio are quite diverse, spanning pizza, biscuits, convenience foods and desserts. A lot will depend on how successful the group is in withdrawing from private label frozen pizza and biscuits, and in growing its branded chilled foods segment.

The valuation in this deal is hard to fathom. A P/S of 0,33 is very low, even for mature businesses. On the other hand, these businesses appear to be only breaking-even in operating profit terms, as a whole, and not growing in revenue. The net book value could be relevant in such a case, but it’s not been disclosed. Gross assets are stated, at 270 mln GBP, but this isn’t too helpful since we don’t know how many liabilities Vision is assuming (Vision appears to be acquiring business units, not just assets). Feels like the valuation was attractive, possibly at quite a discount to recent comparables. Another clue is that Vision specialises in acquiring whole business portfolios, but has no food processing investment experience. Putting all this together, maybe there’s some ‘warehousing’ going on, behind the scenes ? Vision might have a side agreement with NF, whereby they take these businesses out of the latter’s balance sheet and management’s minds? A few years later NF gets to share some of the upside and protects Vision’s downside?

NF is now a slimmed-down company, nothing like the diversified group it once was. One can’t help thinking, however, that NF’s refocus is driven too much by financial returns criteria, and not enough by strategic ones. What do categories like frozen pizza and chilled salads have in common? Isn’t it a bit risky to rely on ‘time-critical’ foods, like sandwiches, if they’re sold under retailer labels? This second point especially pertinent, since their ex- logistics business NFT is now independent and presumably free to carry competitors’ products; logistics being a key entry barrier in the time-critical foods world.

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THIS LEAD'S VALUATION
Size (€ mln) 240
Sector bakery products
Asset Quality UK branded
Seller large plc
Buyer private equity
P/S 0,33
P/Ebitda n/a
Type business unit
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