Glenboden M & A Originations

Wessanen adopts risky branded strategy by divesting key private label businesses

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Origination Status binding offer received for subsidiaries’ acquisition, December 2006;
Asset Dailycer (private label breakfast cereals), Delicia (b2b chocolate);
Buyer One Equity Partners (USA), private equity arm of JP Morgan;
Seller Royal Wessanen NV (Holland), multinational food group;
Buyer Rationale attractive valuation; JP Morgan introduction ?
Seller Rationale exit from private label; focus on branded business expansion;
NBs Dailycer represents >80% of the combined revenues of the two businesses.
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On the face of it, this is an obvious divestment for Wessanen to make. Private label tends to be lower margin than branded products; it’s harder to manage growth there; you’re constantly at risk of a competitor under-cutting you on price and taking away your business. Besides which, these are old businesses in Wessanen’s portfolio (there since 1970 and 1963 respectively). In theory, it’s far better to cash-in and invest the money in building up Wessanen’s premium-authentic and health foods divisions. On the other hand, the groups branded strategy is ambitious at best, and possibly ill –defined, which might make it vulnerable to takeover in future.

By private label standards, both Dailycer and Delicia have quite defensible positions (as you might expect from businesses that have survived for so long).

Delicia is a global leader in its obscure niche of chocolate ‘vermicelli, flakes and pajets’ for industrial customers. Dailycer is a market leader in the UK and France, in premium private label breakfast cereals and muesli bars. The tricky manufacturing of these value-added products makes it expensive and risky for a competitor to attack an incumbent like Dailycer.

Besides which, although Spain and France make up two-thirds of its turnover, Dailycer is present in about 10 European countries, where it provides an attractive growth platform for consumers switching from branded to private label, if/when quality breakfast cereals commoditise.

There is also major potential with new consumers in central Europe, who might well adopt premium private label straight away, and ‘leap-frog’ branded cereals, as they climb the income curve.

Then there are the financials. These businesses have a regular operating margin of upwards of 10%. Within Wessanen’s global business, they contributed 10% of sales revenue but all of 20% of EBITDA (2005), so they weren’t exactly underperforming.

Is there enough financial rationale to sell these businesses, at multiples which are at such a discount to branded comparables? The businesses are possibly in decline, but surely not to the extent suggested by the valuation?

To be fair though, on the marketing side Dailycer doesn’t fit Wessanen’s strategy. Breakfast cereals are generally not region-specific, so they don’t fit the premium foods division’s emphasis on authentic ethnic foods. Nor are they particularly fashionable from a health foods point of view; in this age of obesity and fresh foods, fibre-rich dry foods don’t quite hit the mark.

If and when Wessanen sells these businesses, they may invest the proceeds in an acquisition. Premium authentic foods appear to have more ‘key brand’ potential than health food ones, so maybe another Mediterrananean lifestyle provider, like the Italian Righi acquired in 2005? Or something Pacific Rim for the US market?

One Equity Partners is not an obvious partner for these businesses. A generalist investor, captive to JP Morgan, this appears to be their first investment in consumer products. Also, they are very US-weighted and don’t have an office in any of the three countries in which Dailycer and Delicia are based.

Perhaps this offer stems from an introduction from the banking side of JP Morgan, which maybe finances Wessanen in the US? Whatever the background, it looks like the type of buyer that will hold onto the assets only for a short time, before flipping them to another strategic investor.

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THIS LEAD'S VALUATION
Size (€ mln) 105
Sector breakfast cereal
Asset Quality Europe private label leader
Seller mid-cap plc
Buyer private equity
P/S 0,5
P/Ebitda 6,6
Type total consideration
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