In the spotlight: Hain Celestial eyes US, global growth with Tilda acquisition
Hain plans to develop Tilda brand in US
Hain Celestial believes its acquisition of UK-based Basmati rice firm Tilda will work to the benefit of both businesses. The US group has identified a number of areas where it intends to drive Tilda's growth. Hain also intends to capitalise on Tilda's international presence by feeding its existing product portfolio into markets such as India and the Middle East. Katy Askew reports.
Hain Celestial announced the acquisition of UK-based Basmati rice business Tilda Ltd yesterday (13 January). The US food group will pay a total of US$357m to Tilda's family-owners, comprising $176m in cash, $148m in stock and a deferred consideration of $33m payable in a year's time.
Hain said Tilda generated sales of $190m in 2013 and the company expects the deal to boost its second-half earnings, a period that runs until the end of June, by six-to-ten cents a share - including adjustments for the newly-issued share capital.
Tilda is a UK business with an international footprint. The firm has operations in over 40 countries, including the UK, India, the Middle East, northern Africa and North America. By volume, the UK represents 60% of sales, followed by the Middle East, continental Europe and India.
The business will, Hain said, become its largest global brand. And that international scope offered is one of the key reasons that attracted Hain to Tilda, founder and CEO Irwin Simon said yesterday on a conference call to discuss the deal.
"It provides us with a tremendous platform to expand into other countries, whether its [baby food businesses] Earth's Best or Ella's [Kitchen]," he told analysts. "This gives Hain the opportunity to sell its products into the Middle East - which it does very little today - India, the UK, Europe and North Africa."
In particular, Simon flagged up the potential of expanding its infant food brands into countries such as India, which benefit from demographic drivers such as a comparatively high birth rate and large population.
Tilda also offers Hain a foothold in the ethnic retail and foodservice sectors. Simon described this as a "big opportunity" that again affords the possibility of extending the distribution of Hain's other brands - which range from natural and organic soups to sauces and baking mixes to baby food.
While Hain intends to capitalise on Tilda's distribution networks and customer relationships internationally, the group also plans to foster growth of the Tilda business by expanding the iconic Basmati rice brand in the US, where it generates just 2.5% of sales.
The company is confident it will be able to quickly build Tilda's distribution in a market where it is available in "very few" retailers, including ethnic grocers in the US and Loblaw in Canada.
Insisting the company will be able to scale up distribution quickly, Simon pointed to the speed at which Hain brought Ella's Kitchen to the US following its acquisition of the UK baby food business last year.
"When we acquired Ella's, within 30 days we went to a big mass market and got distribution," he said. While Hain has not yet secured distribution deals with US retailers for Tilda, Simon said Hain intends to be "out there presenting". He added: "We think a lot of retailers will be interested."
Significantly, Hain has identified what it believes are a number of unique selling points associated with the Tilda brand. The brand has a heritage message because, Hain claims, "true Basmati rice" is grown in the foothills of the Himalayas, it is a gluten-free all natural product and - at a time when the debate around genetic modification is gaining momentum in the US - it is a GMO-free product. Simon suggested Hain will be able to position Tilda as a premium rice brand in the US.
"When Hain acquired UK-based Ella's Kitchen, management successfully introduced products to the US relatively quickly via distribution agreements with Wal-Mart and other large chains, and Hain intends to pursue a similar strategy for Tilda. Tilda's Basmati rice is a natural, gluten-free, GMO-free product, and therefore could be also sold through natural retailers such as Whole Foods Market," BB&T Capital Markets Andre Wolf and Jeremy Henrard wrote in a note to investors.
Another area of the business Hain intends to develop is Tilda's line-up of ready-to-eat and value-added products.
At present, 80% of Tilda's sales come from its premium Basmati dry rice, with value-added products making up the remaining 20%. Hain looks set to ramp up its product development efforts, particularly ready-to-eat lines. The group is also assessing the extension of the Tilda's brand into adjacent categories. "The Tilda name can be expanded into so many other categories and so many other channels," Simon claimed.
Moreover, management added the deal presents an opportunity for margin accretion through synergies and increased scale. Hain said it expects to generate initial cost synergies in the range of GBP4-6m (US$6.6-9.8m)
While Hain was upbeat on the potential for growing Tilda - particularly in the US market, where natural and organic sales are growing ahead of the wider grocery sector - Janney Montgomery Scott analyst Jonathan Feeney suggested the deal demonstrates that Hain is being "priced out" of acquisitions in the US.
Hain has gone on something of an acquisition spree in recent years. Five of the group's six most recent purchases were UK-based and eight of the last 11 were European targets.
"In total, since mid-2010, the company has deployed approximately US$1bn of capital in European M&A, we estimate," Feeney wrote. "With accelerating natural/organic demand in the US, we think the clear preponderance of international deals, typically in the high-single-digits of EBITDA, suggests how few natural/organic deals are available anywhere near Hain's sensible historical standards (6x-8x post-synergy EBITDA) in its own backyard, effectively inhibiting perhaps the most important key to the company's growth over the past decade."
If Hain is able to leverage the Tilda business to drive growth in the US, the firm may have found a way to circumvent the difficulty of finding US acquisition targets in its price range.
Moreover, as the business will extend Hain's global reach, the acquisition presents the natural and organic food maker with the possibility to deliver long-term gains in faster-growth economies such as India and the Middle East without having to face the costly and time-consuming challenge of building distribution from the ground up.
Sectors: Baby food, Canned food, Chilled foods, Commodities & ingredients, Condiments, dressings & sauces, Dairy, Dried foods, Emerging markets, Mergers & acquisitions, Natural & organic, NPD & innovation, World foods
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