Deal or no deal: CSM prepares for bakery bids
A high-level of interest expected for CSM bakery sale
Dutch food and ingredients group CSM announced plans to sell off its bakery business earlier this week. The speed of the decision to offload the division may have taken industry watchers by surprise but CSM has been giving off signals that it sees its future as a bio-based ingredients company for some time. Katy Askew takes a speculative look at the interest that the sale could generate.
CSM, the world's largest bakery ingredients group, has indicated that it will sell off its bakery assets in North America and Europe.
The Dutch company said that it has reached this decision because it is unable to invest in both its bakery and bio-ingredients businesses. The company said it anticipates an increasing level of consolidation in the European and US bakery sectors and it is not in a position to lead this process if it is to focus on the development of its more profitable bio-plastics unit.
"We expect there to be more consolidation in the bakery supplies industry which will require substantial financial resources. At the same time, our bio-based activities also requires significant investment to maximise their full potential," CEO Gerard Hoetmer said during a conference call with analysts following the announcement.
While the bakery businesses hold "superior market positions" their results have been impacted by "economic turmoil" that has "constrained growth investments", management said. The stable cashflow required to fund investment has also been hit by the volatility of the commodities markets and rising input costs, the company added.
Hoetmer insisted the North American and European bakery operations would be of "greater value to another owner" - one that is prepared to invest in the process of consolidation.
CSM has been grappling with issues at its European bakery unit, which has seen sales volumes and profits dwindle for some time.
In February, CSM revealed around 30% of its bakery supplies Europe business did "not match our criteria" and would be sold off. In April the group said it had already earmarked "at least" EUR100m of sales to be divested. A matter of weeks later, CSM increased those plans to include its entire bakery supplies operation.
"The divestment is a major announcement for CSM, one that was eventually expected, but clearly not this quickly," SNS Securities analyst Richard Withagen said in a note to investors.
The operations that CSM is retaining – Purac and Caravan Ingredients – generate annual sales of EUR700m and profitability of 13%. This compares to the higher revenue-lower margin model of the to-be-disposed operations. Bakery supplies North America and Europe generate annual sales in the region of EUR2.4bn and EBITDA of EUR128m, giving relatively low profitability at 3.6%.
In spite of these poor margins, Hoetmer insisted CSM expectes to find a buyer or buyers by the first quarter of 2013.
"We are confident that there will be buyers for these attractive assets. We will explore all options to maximise value through a divestment process with a preference to sell in one piece. And we expect to have completed all or substantially all of this process in the first quarter of 2013," he said.
While Hoetmer said it was "too early" to talk about a price tag, analysts expect the sale to generate in the region of EUR1bn. SNS Securities estimates the sale proceeds at EUR1.2bn to EUR1.7bn, while ABN AMRO suggests a sale price of around EUR1.021bn. Petercam values the business at EUR900m, give or take 5%.
Robert Jan Vos of ABN AMRO says he "cannot think of an industry buyer interested in all operations". Instead, he suggests private equity could be attracted to the sale by the businesses high cash flows. Alternately, the operations could be sold off piecemeal.
A number of names have been cited as potential buyers, if not for the business in its entirety then for parts of it that would reinforce their own strategic positions.
The likes of Grupo Bimbo, Aryzta and Puratos have all been linked to the deal. US firm Dawn Foods, which recently purchased Unifine Food & Bake Ingredients in Europe, has been suggested as a potential suitor, while speculation has also centred on the possibility that fellow US player General Mills could look to strengthen its position in some of its markets or categories through the acquisition.
Indeed, Petercam's Fernand de Boer suggests CSM's decision to increase the scale of its divestment programme could have been prompted by a higher than anticipated level of interest.
"I think that the reason that they have put everything up for sale might be partly explained by the likelihood that they have had more interest than originally expected. In February, they put up EUR100m-worth of assets up for sale. There could be more interest for a large part of the bakery supply business," he tells just-food.
While CSM's bakery supply business is struggling, potential buyers will likely be attracted to the sale by the opportunity to build their own market positions. This could increase their dominance in an ever more consolidated sector and provide them with a better hand in price negotiations with retailers.
It also seems probable that if a trade buyer – or buyers – takes on CSM's bakery operations they will expect to improve profitability by integrating manufacturing and generating buying, logistics and production synergies.
With these benefits to be had, we can expect a considerable amount of interest surrounding the sale of CSM's bakery businesses.
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