Glenboden M & A Originations

New JV in India signals greater internationalization for Hershey

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Origination Status joint-venture agreement announced, April 2007;
Asset Nutrine Confectionery Company Private Ltd (India). no.1 domestic confectionery producer;
Buyer The Hershey Company (USA), largest confectionery producer in the USA;
Seller Godrej Industries Ltd (India), diversified industrial group (ultimate parent company);
Buyer Rationale expansion move outside USA into a large developing market;
Seller Rationale attractive valuation with strategic alliance upside;
NBs Hershey’s only comparable strategic move in last five years was JV with Lotte in China.
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Hershey is not a company that has been aggressively expanding globally, with its acquisitions in the last five years have mostly been limited to niche businesses in the USA. This deal, in the exciting Indian market, brings Hershey into the limelight as potentially making a breakthrough into being a truly international business. If so, then we can expect further JVs of this kind by Hershey, or even bolder moves to acquire local brands, in major developing geographies like Russia.

Nutrine is the market leader in confectionery in India, with a 25% market share. Given the massive per capita consumption potential of that market, this valuation can be said to be in line with comparatives, notably with Wrigley’s acquisition of Russia’s A.Korkunov.

Undoubtedly Wrigley also provides a strategic precedent for Hershey. Like Wrigley in its own Russian deal, Hershey’s clear intention to use Nutrine as a platform for its own brands, given the company’s strong distribution reach (1,6 mln outlets in India).

The deal includes licencing of the rights to key Hershey brands; unusually, the royalty fee has been disclosed, at 5% for domestic sales.

Press reports have said that Hershey’s investment will be at the level of Godrej Beverages & Foods Ltd, an entity that sits between Nutrine and the ultimate parent Godrej Industries.

We think this is unlikely, for valuation reasons but mostly because GBF’s portfolio also includes tea, juices, soya milk and edible oils – not obvious categories for Hershey, whose ambitions beyond confectionery have hitherto stretched only as far as biscuits and coated nuts. Hershey itself just refers to the JV being called Godrej Hershey Food & Beverages Ltd.

The deal seems an attractive one for Godrej both financially and strategically. It acquired Nutrine from another Indian family only nine months ago, reportedly paying about $55 mln for 100%. If that’s the case, then Godrej has quickly recouped its investment and still kept nearly half of Nutrine’s successor business.

On top of that it has brought in a strong confectionery partner, which is consistent with its apparent strategy of forming alliances with international FMCG players – the group also has a strategic alliance with Sara Lee in homecare products. This is a wise strategy, given that Godrej’s main focus is on chemical products (which represent two-thirds of the group’s total revenues).

Another impetus behind Hershey’s decision to wake up and grow internationally has come from market rumours about a possible merger bid from Cadbury. This deal in India is a departure from Hershey’s hitherto focus on cost reductions and new products in existing markets. So, Hershey’s main shareholder and management might now be telling the world that it has a right to remain independent.

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THIS LEAD'S VALUATION
Size (€ mln) 40
Sector confectionery
Asset Quality India no.1 branded
Seller family group
Buyer large plc
P/S 2,5
P/Ebitda n/a
Type equity value
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