Analysts questioned price Barry Callebaut paid for Petra Foods cocoa ingredients arm

Analysts questioned price Barry Callebaut paid for Petra Foods cocoa ingredients arm

It was the day when thousands of couples across Asia tied the knot on the 'lucky' date of 12/12/12 and Barry Callebaut CEO Juergen Steinemann was able to announce the chocolate giant's own marriage.

"Today is 12/12/12, which is a very special date, with good karma - so I learnt - here in Singapore. We are very excited to share with you today the agreement we signed this morning with Petra Foods here in Singapore to acquire their cocoa ingredients business," Steinemann quipped as he began to outline to analysts and investors why the Swiss group had moved to make its latest acquisition.

Barry Callebaut's takeover of Petra Foods' cocoa ingredients arm will, when finalised, make the world's largest B2B chocolate group its largest cocoa processor. The deal will boost Barry Callebaut's presence in regions like Asia and Latin America, where demand for chocolate is growing faster than in the mature markets of the West. And, Steinemann said, the transaction will enhance the company's ability to supply cocoa powder, demand for which will increase faster than for cocoa liquor or butter.

"We believe the acquisition of Petra Foods' [cocoa ingredients division] is an excellent strategic fit at the core of our business," Steinemann insisted.

And, on the face of it, he is right. The deal will boost Barry Callebaut's sales volumes in Asia and Latin America by almost two-thirds. After the deal, those regions would account for 31% of Barry Callebaut's volumes.

Citing data from Euromonitor and from industry "experts", the company said demand for cocoa powder will grow at a CAGR of 2-5% between 2011 and 2016 thanks to a wide number of applications, including flavoured milk drinks, compound chocolate and ice cream. Demand for liquor and butter will grow but more slowly.

These two factors then come together with demand for cocoa powder being driven by emerging markets. The annual growth rate in Asia Pacific, for example, is double that in Europe and triple that in North America.

"Our presence in emerging markets is growing fast but it currently only represents one quarter of total volumes. In order to accelerate our growth in emerging markets, we will also need to grow our supply platforms and be closer to our customers," Steinemann said.

The Petra Foods deal gives it plants in countries including Thailand, Indonesia and Malaysia, as well as Brazil and Mexico, alongside other sides in Europe and the US. It also gives Barry Callebaut another area from which to source cocoa - Asia - reducing the risk of issues in west Africa. And, of course, having your own supply of cocoa has benefits that buying in cannot provide.

So why did Barry Callebaut's shares fall yesterday? In short, for financial, rather than strategic reasons. The US$950m price tag was deemed expensive among some analysts and there would likely have been frowns that the deal has meant Barry Callebaut has changed a mid-term earnings target.

The acquisition represented an EV/EBITDA multiple of 14.3x, which could be judged as pricey. "It looks like an expensive deal at 15x EBITDA trailing year and it could actually be closer to 20x EBITDA this year for what is a mainly a commodity type business," Kepler Capital Markets analyst Jon Cox told just-food. "Investors with a shorter time horizon might be disappointed."

Elsewhere, some pointed to Petra Foods' recent financial performance. EBITDA from Petra Foods' cocoa division fell 29% in the first nine months of the year on the back of a 20% slide in sales. Petra Foods blamed "weak" global chocolate consumption.

"Considering Petra's cocoa ingredients division's results, the company was under pressure. Sales volume and profitability were significantly down," Vontobel analyst Jean-Philippe Bertschy said. "Barry Callebaut is securing a number one position in the fast growing emerging markets, however at a high price." The Petra Foods business also, it emerged, had lower margins than Barry Callebaut's own cocoa business.

Barry Callebaut seemed prepared for some of the concerns and underlined both the rival interest in the Petra Foods' asset and the synergies it expected to generate from the deal.

"The price was the result of a competitive selling and bidding process," Barry Callebaut CFO Victor Balli insisted. He claimed Barry Callebaut would be able to "improve the profitability" of Petra Foods' cocoa division through synergies. He pointed to more effective production flows and use of capacity. He said there would be benefits to inventories and transport costs. These savings would, Balli insisted, mean the company would reinstate that mid-term target on EBIT per tonne within four years.

"The acqusition will initially lower our profitability but based on our plan and synergy potential we believe we can come back to our solid pre-acquisitions metrics within a three- to four-year period," Balli said.

Vontobel said the deal multiple was based on Petra Foods' financial results in 2011 and argued the 2012 numbers were "likely to be significantly lower". He added: "[The] key challenge will be to restore Petra's profitability. Barry Callebaut is embarking on a long process to cover its cost of capital. We are taking both our recommendation [on Barry Callebaut's shares] and price target under review."

Cox was less pessimistic. "From a long-term strategic perspective [the acquisition] probably makes sense given the capacity and Asian focus of Petra," he said.

Barry Callebaut's explanation of the strategic benefits of the acquisition, however, failed to win over the market, at least in the immediate aftermath of the announcement. The company has faith it can demonstrate the financial benefits of the deal but these will take time to emerge. Steinemann will hope the good karma around yesterday's date will surround Barry Callebaut's latest acquisition, too.