Analysts said Orkla paid a high price for Rieber & Søn but backed the rationale behind the deal

Analysts said Orkla paid a high price for Rieber & Søn but backed the rationale behind the deal

Orkla, the Norwegian conglomerate with interests in aluminium and finance as well as pizza and chocolate, wants to focus on consumer goods. This week, Orkla agreed to buy local food group Rieber & Son and, although analysts expressed misgivings at the price it paid, they believe it is a sensible move from the company. Dean Best reports.

Almost a year since Orkla, the Norwegian conglomerate, made clear its plan to focus on FMCG, it has made its first serious acquisition in food.

On Monday (20 August), Orkla agreed a deal to buy Rieber & Søn, a family-owned Norwegian food group with operations across Europe and in Russia.

Orkla, which has been selling off non-consumer assets in recent years but still has interests in sectors including aluminium, financial investments and hydro power, said the takeover of Rieber & Søn was "a significant step" to becoming a "pure-play branded consumer goods company".

The group's bid to focus on FMCG, announced last September, has been welcomed by analysts. Disposals of other assets would return cash to shareholders and, more strategically, consumer goods would provide Orkla with more stable revenue streams. The company said it would look to make acquisitions to bolster its FMCG operations.

It has, however, taken some time before Orkla backed up its words with action. In fact, two months after the company announced its new strategy, it sold a consumer asset, offloading its bakery business to Norwegian retailer Norgesgruppen.

Then there was the shock news in the spring when, in a matter of days, Orkla announced its CEO and the head of its consumer goods business had left the company. Analysts speculated Orkla's owners had grown frustrated with the progress the company was making with its new strategy.

In June, Orkla added its first consumer business, announcing the acquisition of Jordan, a Norwegian company that makes dental and paint products for NOK1.18bn, or just under US$200m.

However, on Monday morning, current president and CEO Åge Korsvold announced the more significant acquisition of Rieber & Søn.

The deal was the latest episode between the two companies. Orkla had owned a stake in Rieber & Søn but sold it two years ago to a fund controlled by the Rieber family. 

Nevertheless, Fritz Rieber, a representative of the family, said on Monday that the company had announced in February that it was looking for a "financial partner". Orkla reignited its interest in the company this summer when Korsvold approached representatives of Rieber & Søn's family shareholders.

Korsvold told reporters the "very competitive" grocery market meant companies needed more resources to prosper. He said companies needed economies of scale and greater resources to be able to invest in innovation and compete with international manufacturers.

All very logical but Rieber & Søn has suffered in recent months. The food manufacturer's profits fell in 2011 amid falling sales volumes and commodity pressure. Last month it reported a further decline in half-year earnings.

Korsvold, however, brushed off any concerns about the new addition to Orkla's operations. "Things go up and down. Rieber & Søn is a strong company. Even though the figures haven't been as good as we could have wished in recent years, Rieber & Søn still has very good, strong positions. That hasn't changed," Korsvold said.

Analysts seemed to welcome the deal. Arctic Securities analyst Kenneth Sivertsen told just-food Rieber & Søn was a "solid company that can expand further with Orkla". Danske Markets Equities analyst Martin Stenshall said Rieber & Søn was "close to a perfect match" for Orkla.

However, there were some misgivings at the price Orkla has agreed to pay for Rieber & Søn. The deal for the Rieber family's 90.1% stake (Orkla will then make a mandatory purchase of the remaining shares) values Rieber & Søn at NOK6.1bn (US$1.03bn).

Stenshall, noting Rieber & Søn's recent financial performance, argued Orkla paid "quite an expensive price" for the company.

"If you just look at the price they paid, consider that against Rieber & Søn's full-year 2011 EBITDA of EUR467m. That gives a multiple of 13.1 times. That in my view is expensive if you just assume a normalised business with slight growth and stable margins. But considering the fact that Rieber has experienced a 16% drop in revenue from 2009 to my 2012 estimate and coupled with deteriorating margins, I find the multiple to be high," he told just-food.

Reports in Norway claim Nestle was also interested in Rieber & Søn, which could explain the price Orkla paid for the company. 

Sievertsen agreed. He called the purchase price "a stretch" and said Orkla will need to capture the synergies it believes it can accrue from the deal. Korsvold indicated Orkla expected to generate some cost savings from the deal, although he did not elaborate from where any synergies would be extracted. He did say, however, that Orkla expects Rieber & Søn to return to the level of profitability it achieved in 2010 in two years.

Sievertsen and Stenshall believe there are cost savings Orkla could make. Sievertsen pointed to areas like sales and marketing and said: "Orkla has been operating as a close competitor for years and knows the company and should be able to take some synergies out of it."

Stenshall added there could be savings in innovation and procurement but also pointed to the "revenue synergies" Orkla could gain from the deal. Orkla, he said, could use Rieber's distribution networks in markets in which it is not present to push its own products. However, one crucial benefit of buying Rieber & Søn was the addition of products Orkla does not have in its portfolio.

"The products are quite complementary. Rieber has a lot of dry meal products like soup, while Orkla has a lot of frozen products, as well as chocolate. On a category basis, you can see the acquisition is very sensible. It makes perfect sense in my view," Stenshall said.

However, Stenshall noted that, as well the recent woes at Rieber & Søn, Orkla's consumer goods business has had its challenges. "Orkla has definitely had some challenges outside the Nordic countries but also inside the Nordic," he said. "Facing intensified competition and price pressure. We have seen slow growth and low margins. It's not only private label; you have got a lot of smaller competitors that have intensified competition."

That said, the acquisition will give Orkla a greater chunk of Norway's grocery market, where it is already the largest player. Moreover, it should give it access to more markets in Europe. And, for all the caution over Rieber & Søn's financial performance and Orkla's recent trading, there seemed to be the view among analysts that, despite the price Orkla has agreed to pay, it looks - for now - to be worth it.

"It's a close to a perfect match for Orkla right now," Stenshall said. "It has come at a very steep price. Then again, with branded consumer goods companies, you have to pay up."