Our tips for potential M&A deals in 2016
- February 11, 2016
||selected M&A originations, January 2016
||candidates include Wessanen, Kellogg's, Vinamilk
||strategic investors in sustainable foods, ambient grocery and dairy products
||public and state shareholders
||new frontier foods, consolidation, emerging market growth
||the three candidates span Europe, US and Asia
2016 is set to be another year of strong M&A activity and high valuations, in the food sector around the world. We identify three transactions that could or should happen this year, across three key M&A drivers and geographies - sustainable foods (Wessanen), consolidation of mature businesses (Kellogg's) and emerging market growth (Vinamilk).
Long-suffering Wessanen has achieved its turnaround goal in the last year or so, with the group now a ‘pure-play’ organic and healthy foods company enjoying rising profitability and top-line growth, and with balance sheet strength for add-on acquisitions (see profile).
Wessanen's long-term positioning is enviable for the 'legacy' food majors. Take the group's 'key innovation themes' - meat alternatives, milk alternatives, healthy snacking and healthy breakfast - which read like a wish-list for any modern, balanced ambient foods strategy.
Most of Wessanen's ordinary shares are bearer shares, so it's not clear who the significant shareholders are. However it's a majority free-float company, with an estimated 80% of shares held by institutional investors. So, the group is likely to attract the continuous attention of potential acquirers in 2016, especially given the precedent of Annie's in the US in late 2014.
Annie's has a similar business model to Wessanen, given its diversified portfolio of natural and organic branded products. General Mills paid around x4 sales for that business which, if applied to Wessanen, would result is a valuation of around 2 bln EUR - more than three times the group's current market capitalisation of around 600 mln EUR.
Even if we were to take a more down-to-earth valuation multiple, such as the x17 EBITDA that Snyder’s-Lance paid for Diamond Foods a few months ago (according to Bloomberg), then the resulting price would translate into a textbook 30% premium over Wessanen's market capitalisation (see valuation).
We also believe that it's likely that another consolidation play will occur, involving one of the food majors in the US, following in the pattern of 3G and Berkshire Hathaway's deals in the last few years with HJ Heinz and Kraft.
Many commentators including ourselves have pointed to General Mills as the chief lame duck and takeover candidate. However, the group's performance has rallied somewhat in recent months, with reported operating profit (6M to Q2 2016) growing by over 40% to reach US$ 1,4 bln. Clearly, the group's cost-cutting measures, including factory closures, are paying off.
Also in terms of M&A activity, General Mills is revitalising its portfolio. In Q2 2016 it divested its mature 'Green Giant' branded vegetables business to B&G Group; a year earlier it acquired the high-growth Annie's business. The purchase consideration was similar in both cases (around US$ 820 mln). Now that's what you call a balanced M&A strategy in action.
Arguably a more vulnerable US food major at this time is Kellogg's. In contrast to General Mills, that group's latest financial report, for the 9M to Q3 2015, booked a 22% drop in reported operating profit, to US$ 1,1 bln.
Kellogg's point to adverse currency translations as being largely to blame for this decrease. However the group could be doing more to diversify its earnings through M&A activity. In the time when General Mill's bought Annie's and sold Green Giant, plus a few smaller deals, Kellogg's have only acquired two relatively small businesses, both in Egypt.
So, Kellogg's is one to watch in terms of consolidation -driven food sector M&A in the US, in 2016. The potential buyers include, of course, the acquisition vehicles managed by 3G /Berkshire Hathaway, and possibly Nomad (to the extent that the latter's ambitions stretch from frozen to ambient foods).
Moving to Asia, an M&A transaction to watch in 2016 is the sale of a controlling, 45% stake in Vinamilk, Vietnam's largest dairy group, by the Vietnamese State through its investment vehicle SCIC. The plan for that sale was announced in October 2015, so a privatisation tender process is already ongoing.
The Vietnamese economy is fast -growing, with annual GDP rising on average 6,5% since 2000. It's a country with over 90 mln inhabitants, where foreign investment, exports and the middle class are all growing. Within that macro -context, Vinamilk's revenues and operating profit both grew in the strong double-digits in Q3 2015.
That's the profile of a privatisation which should attract a who's who of the biggest global dairy players, including Nestle and FrieslandCampina who already have a presence in the Vietnamese dairy market.
Currently, the largest single foreign shareholder is the Singapore conglomerate Fraser and Neave, with a stake of around 10%. By acquiring the SCIC's 45% stake, any new strategic investor will have effective control of Vinamilk, without breaching the politically -sensitive 50% threshhold.