Glenboden M & A Originations

Wrigley makes double breakthrough by acquiring Russian chocolate company

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Origination Status share purchase agreement signed, January 2007;
Asset A. Korkunov, no. 2 in Russia’s premium-boxed chocolate market segment;
Buyer Wm. Wrigley Jr. Company (USA), global no. 1 chewing gum producer;
Seller founders Andrey Korkunov and Sergey Lyapuntsov (Russia);
Buyer Rationale brand value, growth rate, centre-of-store merchandising nationwide;
Seller Rationale timing, attractive valuation, upside of remaining 20% shareholding;
NBs this deal marks Wrigley’s global entry into the chocolate confectionery market
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Driven somewhat by Cadbury’s muscling into the chewing gum business, Wrigley began to diversify beyond chewing gum in the early 2000s, with its biggest milestone being the acquisition of most of Kraft’s sugar confectionery business in 2004. It’s no surprise that Wrigley should go as far as chocolate confectionery, given its scale, but it is intriguing that they should choose a developing market, Russia, as their launch-pad.

This might mark a new trend for multinationals to choose fast-growing developing countries as ‘test cases’ for brave new portfolio diversifications. The entry cost, in absolute terms, is after all relatively low in those markets, making potential failures less costly.

This seems quite a high valuation, for a niche one-country chocolate producer, even if the market is as exciting as Russia’s. What are the drivers? Growth is one of them - with sales of $100 mln in 2006, A. Korkunov has doubled in size in under five years. Another might be the company’s shelf-presence, which seems consistent with Wrigley’s global concentration on improving marketplace execution.

It seems however that the main value is in the brand. In their press release Wrigley, citing external sources, says that A. Korkunov is a ‘top ten’ brand in Russia, and the only native Russian brand with a consumer awareness level on a par with leading global consumer goods brands.

Glenboden, a believer in ‘local heroes’, applauds major investments in local brands. We know that Russians don’t like to be compared with their former satellites, but in assessing A. Korkunov, Wrigley might well been influenced by the story of the ‘Wedel’ chocolate brand in Poland.

Owned by Wrigley's arch-rival Cadbury, Wedel is consistently ranked as the most valuable domestic food brand in Poland. That brand on its own was worth > € 150 mln in 2006, according to the ranking of record in that country (Rzeczpospolita).

What is different here, perhaps surprising, is that the A. Korkunov brand value has been created in a relatively very short time. Although the logo and image are inspired by 19th century motifs, the A. Korkunov company was only established in 1999, a fact that never fails to impress people who visit Moscow and sample the company’s fine chocolates.

If that’s how fast things happen in Russia, then it must indeed be a very exciting place to work.

A niche focus on premium-boxed chocolates is surely not where Wrigley intends A. Korkunov’s mandate to end. Historically, Wrigley has never been positioned in gifts or ‘sharing at home’ or anything like that. So, one can assume that this brand is the ‘platform’ for a major portfolio development strategy for Wrigley in Russia.

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THIS LEAD'S VALUATION
Size (€ mln) 300
Sector confectionery
Asset Quality Russia no.2 branded
Seller individuals
Buyer large plc
P/S 3,0
P/Ebitda n/a
Type equity value
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