Mizkan upbeat on Ragus prospects

Mizkan upbeat on Ragu's prospects

Japanese condiments maker Mizkan Group has set out a clear growth agenda to grow overseas sales and globalise its operations in order to offset soft domestic consumption patterns. The company announced today (22 May) it has struck a deal to acquire the Ragu and Bertolli in North America from Unilever. While the move strengthens Mizkan's presence in North America, operating in the US pasta sauce category is not without its challenges. Katy Askew reports.

Mizkan Group has struck a deal that will see it acquire two of the US's largest pasta sauce brands - Ragu and Bertiolli - from Anglo-Dutch FMCG giant Unilever.

The company has agreed to pay US$2.15bn for the business, which generates annual sales in excess of $600m and operates two production facilities, in Kentucky and California.

Sanford C. Bernstein analyst Andrew Wood, who covers Unilever, estimates the brands generate annual EBITDA of approximately $136m.

"With estimated sales of $620m and estimated EBITDA of $136m (22%) the disposals multiples (3.5x sales, 16x EBITDA) are very good. Even assuming an EBITDA of $155m (25%), which seems somewhat aggressive, would still give a good EBITDA multiple of 14x," he writes in an investor note.

The sale had purportedly drawn interest from an array of US food makers, including the likes of Pinnacle Foods, Hormel Foods and Hillshire Brands. In order to win through in what was apparently a competitive sale process, Mizkan has agreed to pay top dollar for the brands. Pundits had expected Ragu and Bertolli to fetch between $1.5bn and $2bn.

Mizkan clearly places a high value on the pasta sauce brands. And much of this value comes from the impact the acquisition will have on the group's global profile.

Earlier this year, Mizkan launched a new "mid-term management strategy". The Japanese food maker said it would increase its focus on driving growth overseas. Like many Japanese food giants, Mizkan generates the lion's share of its sales in Japan but declining demand from an ageing population in the country has forced the group to look further afield to carve out growth.

During 2013, Mizkan reported total sales growth of 16.8% driven almost exclusively by the 65% sales increase the company booked at its international operations. Mizkan said it saw increased revenues across its overseas businesses in Asia, Europe and North America. Expansion in Europe in particular was driven by M&A and the group acquired UK brands Branston, Haywards and Sarson's from Premier Foods during the period.

Mizkan does not intend to ease up. Over the next five years, through to 2018, Mizkan said it will focus on expanding its global footprint in key markets where it plans to "grow dramatically".

To this end, the firm divided its business into three distinct business units - Mizkan Japan and Asia, Mizkan Americas and Mizkan Europe. Each of these subsidiaries report into Mizkan Holdings. Through this structure, Mizkan said it will be able to take a "bird's eye view" as it seeks out opportunities for global growth.

In North America, the firm said it will focus on developing the "vinegar category", which the company defines as including various vinegar-based BBQ sauces, mustards and marinades. In addition, Mizkan has made inroads into ethnic cuisine by offering Japanese and Hispanic branded sauces. The company operates a number of well-established brands in the US including Holland House, World Harbors, Border Foods and Nakano.

The acquisition of Mexican sauce business Border Foods in May 2011 marked the firm's first foray into a non-vinegar market. Today's acquisition of Ragu and Bertolli is an extension of this strategy to diversify Mizkan's product offering, Mizkan chairman and CEO Kazuhide Nakano says. "We are confident that this transaction allows us to further achieve our objectives of diversification and expansion of our international footprint."

However, unlike Mizkan's move into Mexican food, Ragu and Bertolli are leading brands in a slow- to no-growth category.

According to Eurominitor, a research firm, the US sauces market grew by 1% in current value terms through 2012 to reach a value of US$18.6bn, while retail volume sales looked set to fall by 2%. Of this, pasta sauce sales accounted for sales of around $2.3bn.

Mizkan offers a more optimistic view of category trends in US pasta sauces. "The segment has stable volume and value over time, as well as diversified product portfolio across multiple subcategories."

Mizkan is also upbeat on Ragu's consumer appeal as the largest pasta brand in North America. "Ragu is the number one brand across all key consumer metrics, with strong brand appeal and recognition, a diversified product range and broad distribution channels," the company stresses.

However, Ragu's volumes are being squeezed by competition from products with a more premium position, on the one hand, and cheaper own-label alternatives on the other.

"The sauces category is seeing a move towards premiumisation as consumers are demanding a better taste and higher quality from their home-cooked meals," Euromonitor researchers suggest.

With volumes of Ragu coming under pressure, maintaining profitability levels could become more challenging. Mizkan says it believes it will be able to leverage synergies in the US market - but the group stopped short of detailing the extent of the savings.

Moving forward, Nakano says Mizkan will take a long-term view of the business and its growth trajectory. "Mizkan is strongly committed to the long-term growth of Ragu and Bertolli, and we will work to help ensure that both brands continue to grow and prosper. We believe this acquisition will create more opportunities for our company and our workforce, including Ragu and Bertolli's talented employees, and create significant value for our global stakeholders," the chief executive says.

The parallels between this transaction and Mizkan's acquisition of the Branston pickle brand in the UK last year seem clear. The company has taken on a strong and highly recognised brand - but one that operates in a slow growth category. As with Branston, it seems likely Mizkan will work to develop a strong innovation pipeline in order to breath fresh life into an old classic.