Glenboden M & A Originations

Nestle’s latest chocolate outsourcing deal suggests a phased exit from that category

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Origination Status announcement of strategic production outsourcing agreement and asset sale, Feb. 2007;
Asset long-term supply contracts and Nestle’s production facilities in Italy, France, Russia;
Buyer Nestle Group (Switzerland), multinational food group (customer);
Seller Barry Callebaut AG (Switzerland), international manufacturer of cocoa products (supplier);
Buyer Rationale part of programme to disinvest from non-health portfolio;
Seller Rationale extra capacity, scale economies, expansion in southern Europe and Russia;
NBs Nestle has recently sold coffee, cocoa and dairy production facilities worth >$1 bln
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That Nestle is moving away from primary cocoa transformation is no surprise. Most of the brand-managing food multinationals are keen not to have to deal with suppliers of ‘primary’ inputs. What’s perhaps less obvious is for this deal to include the sale of finished product manufacturing assets – the French factory in Dijon, to be transferred to Callebaut, produces the legacy ‘Lion’ bar brand. Although there are no brands or portfolios actually being sold here, we believe this deal adds to the evidence that Nestle is gradually, maybe systematically, exiting from non-health categories and brands.

Sales of Lion bar have apparently declined by about 50% over the last 10 years, so clearly Nestle hasn’t been investing much in it, and this outsourcing move has not been accompanied by a statement on how Nestle will now focus on marketing of the brand.

This process is ‘disinvesting’, rather than straight ‘divesting’ or ‘exiting’. Other examples include the transfer of Nestle’s European chilled dairy business into a 40:60 joint venture with Lactalis, in 2005, and the sale of its dairy business in Turkey in 2003; both of these show that the group is prepared to cede or half-cede entire branded portfolios. If Nestle can do that in dairy, then they could readily do that in chocolate as well, over time.

By handing over the plant to a specialised and state-of-the-art producer like Callebaut, efficiency gains might well be made; but can unit manufacturing costs be reduced sufficiently for the producer to make an attractive margin ?

It’s likely that the real deal here is that Nestle wanted to transfer a redundancy burder at Dijon to ‘uncle’ Callebaut. In that case, ‘deferred restructuring costs’ will be factored into the transfer price of lion bar, from Callebaut to Nestle; this might cause the decline of the brand to accelerate.

Eventually Lion bar, and possibly other Nestle chocolate brands later, will be replaced by Callebaut’s own brands at the plant; at that point Nestle will sell the trademark rights to Lion bar etc. to some private equity firm that rolls up such portfolios.

This deal underlines Barry Callebaut’s ambition to become a ‘surrogate’ manufacturer for customers whose mandate has shifted to investing in brands and service instead. Their stated aim is to be ‘the outsourcing partner of choice for co-manufacturing brand packaged consumer products’.

The ‘of choice’ part is code for ‘subject to conflicts of interest’. It must be challenging for Callebaut to produce e.g. countlines for both Nestle and Masterfoods, not to mention private label or their own brands (acquired with Stollwerke in 2002). Strategically, it would be wise for Callebaut not to lose sight of its semi-products or Stollwerke businesses, by focusing too much on outsourcing.

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