Glenboden M & A Originations

Kraft’s acquisition of LU gives critical mass for secondary snacks purchases

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Origination Status business unit acquisition completion, November 2007;
Asset Biscuits and Cereal Products division of Groupe Danone, leading global biscuit player esp. Europe;
Buyer Kraft Foods Inc. (USA), multinational food group;
Seller Groupe Danone (France), multinational food group;
Buyer Rationale enhanced international footprint, leading global brands, high-growth snacks focus;
Seller Rationale refocusing portfolio into ‘pure-play’ healthy nutrition;
NBs deal subject to Kraft covenant not to close any French factories for min. three years.
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The only surprise with this deal is that it took so long for Danone to divest its biscuits business. Perhaps the group had to wait until Kraft completed its demerger from Altria. Certainly this has liberated Kraft in terms of its acquisition activity, as this deal confirms. After it, biscuits will represents more than 20% of Kraft’s sales revenue, and the global footprint will grow to 20 core markets. Kraft will now be emboldened to make additional acquisitions in biscuits; the caveat however is that only brands with global or at least pan-regional position or potential will be considered.

This division, with LU as its flagship but bringing together a whole stable of regional and national brands, had for long been in the shadow of Danone’s chilled dairy and beverage businesses. It’s not that its performance was any worse; indeed, in terms of both sales growth and operating margin, LU out-performed the Group as a whole in 2006.

Strategically, however, the business was being milked for cash, and not invested in, because biscuits etc could never meet the health criteria set by Danone.

We believe the valuation is quite attractive for Kraft and, assuming no major post –deal execution problems, it’s likely to be seen as delivering excellent shareholder value in the mid-term.

The EBITDA multiple, in the low teens, is very reasonable given the strength of LU’s brands, its strong presence in both developed and developing markets, and the many cost synergy benefits.

On the sales multiple side, the valuation is similar to the two confectionery deals covered in recent months by Glenboden: Wrigley-Korkunov and Hershey-Godrej. These two deals may have been in high-growth markets (Russia and India respectively), but they were only national and not global assets, and carried a certain amount of political risk.

While political risk ‘per se’ may be lower in the case of LU, there is significant execution risk especially in the area of manufacturing consolidation. LU’s 36 manufacturing facilities are on average less efficient, and operate on a smaller scale, than those of Kraft, so it is easy to see where cuts will occur. The three year moratorium on factory closures might be just putting off a big problem until later.

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Size (€ mln) 5.300
Sector biscuits
Asset Quality global branded leader
Seller large plc
Buyer large plc
P/S 2,7
P/Ebitda 13,6
Type total consideration
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