Droga Kolinska an acquisition candidate for Poland's Maspex - December 08, 2009

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Maspex is planning to become a public company, apparently in order to raise capital for a large acquisition. Given the company's geographic ambitions, opportunistic history, eye for a bargain, and willingness to diversify, we believe that one candidate that ticks many boxes, including scale, is Slovenia's Droga Kolinska.

The leader in several ambient categories domestically ...Maspex is Poland's largest diversified food group, with 2009F revenues of 2,5 bln zloty. Domestically, it's the leader in fruit juices and drinks, through its 'Tymbark' and 'Kubus' subsidiaries. It's also joint market leader in pasta, through its 'Lubella' business. Maspex is also Poland's no.1 producer of 'instant' products (cappuccino, tea, creamer, cocoa, V&M tablets).

... an acquisitive animal expanding down central EuropeWith the exception of its instants unit, the group's growth has been mostly through acquisitions, with its main Kubuś, Tymbark and Lubella businesses acquired respectively in 1996, 1999 and 2003.

Since 2003, the group's deals have been elsewhere in central Europe, with a southerly migration, as Maspex seeks to become the regional heavyweight.

In 2004, the acquisition of Olympos in Hungary, and assets from Walmark in the Czech Republic, allowed Maspex to become the market leader in fruit juices and drinks in Czech, Slovakia and Hungary.

In 2005, the group acquired the no.3 juice player in Bulgaria, Queen's; that was followed in 2007 by the purchase of Arnos, the market leader in pasta in Romania.

Looking at an IPO and major deal ...Privately held, by its management, Maspex recently announced that it's considering a listing on the Warsaw Stock Exchange, with the underlying rationale being to raise public capital for a large acquisition, 'in the region of 1 bln zloty'.

... to become truly internationalWe think it's very likely that the eventual acquisition will be another foreign one. Given the magnitude, that would mean Maspex becomes a truly international food group, possibly the first originating from Poland.

In 2008 overseas sales accounted for 35% of the group's total of 2,5 bln zloty. With a 1 bln złoty deal size, and looking at the branded ambient shelf categories that Maspex inhabits, its likely that such a foreign purchase would take the group to the key milestone of deriving more than 50% of its revenues from overseas.

Not necessarily in core categories ...However, and if the group continues to target central Europe and the Balkans, it will be hard to find an acquisition candidate, of that scale, in those geographies, in Maspex's core categories of juice, pasta and instants.

But do the candidates have to be focused in the same core categories as Maspex ? When describing the potential target, management only mentioned the criteria of ambient shelf long-life products, and a similar distribution model to the group's own.

... possibly buying what's availableMoreover, two of the group's key acquisitions in Poland were opportunistic deals, in wholly new categories for the group. When it acquired the juice assets of Kubuś, it had previously been only in instant hot drinks; when it acquired Lubella in pasta, it had previously only been in instants and juices.

These deals had one thing in common - they were of leading brands being sold at attractive valuations.

A eureka momentPutting the pieces together - central Europe /Balkan location, 1 bln zloty scale, ambient shelf, leading brands, attractive valuation - one clear option is Droga Kolinska in Slovenia.

DK has the brands and the market positions ...Some portfolio highlights - DK's snack business ‘Smoki’ is the no.1 player in savoury snacks in Slovenia, Serbia, Bosnia Herzegovina and Macedonia; its soft drinks business ‘Cockta’ is no.2 in sparkling non-alcoholics in Slovenia; its Barcaffe and Grand are top –three coffee brands in Slovenia, Serbia, Bosnia Herzegovina and Macedonia.

... it also has the scale ...Conveniently, with total sales of € 390 mln in 2008 (see chart), and after some divestments completed by DK in 2009, that group should deliver the 1 bln zloty in sales revenue that Maspex is looking for.

NB. the above M&A profile does not take into account subsequent events in 2009, when disposals have had a significant impact on DK's financials.

... said to be for sale ...It's been reported in the past that DK's majority owner, the Istrabenz Group in Slovenia, intends to sell DK to a strategic investor, in order to raise cash to repay debt.

... possibly an attractive valuationGiven the diversified nature of DK, it's unlikely that the owner will find a top -dollar paying western food group to acquire the beast in its entirety.

Maspex has the potential therefore to purchase DK, as a whole, at a discount to its fair value or sum-of-parts value. That's the type of deal that Maspex likes.