Deal or no deal: Who is in the running for United Biscuits' salty snacks?
The private-equity owners of United Biscuits are considering offloading the salty snacks side of the business may come as little surprise, with the UK group set to be split in two. With the auction process expected to begin in several months time, Katy Askew takes a look at the likely suitors for the Hula Hoops maker.
When US buyout firm Blackstone and French private-equity group PAI Partners revealed last week (23 March) they were planning to separate United Biscuits into two entities - salty snacks and bakery - they suggested the more focused businesses would "provide improved service" and "more targeted innovation and product development".
The split of the food group follows one previous aborted attempt to sell the whole business when, in 2010, Blackstone and PAI appointed JPMorgan and Goldman Sachs to run an auction for United Biscuits.
The auction was never formally launched because Chinese food maker Bright Food entered into exclusive talks with a pre-emptive bid valuing the McVitie's maker at approximately GBP2.5bn (US$3.96bn), including debt. However, Bright walked away from the acquisition and the talks ultimately ended without a deal.
When rumours of the split first emerged, a source familiar with the situation told just-food that by, dividing the business in two, the private-equity groups hoped to "realise more value".
"Both businesses would operate more effectively on a separate basis, which would realise more value for shareholders," the source said.
Shortly afterwards, however, it became clear that the private-equity partners had quite a short-term definition of value creation. A matter of days later, it emerged that Blackstone and PAI had already begun "considering options" for the salty snacks unit, with a sale the likely outcome.
The decision to separate the group's snacks and biscuits units could therefore reflect a belief that it would be easier to attract interest for the individual businesses - which would be put on the block at a more affordable price - as well as the assessment that snacks and biscuits will fair better on a stand-alone basis.
Credit Suisse has been appointed to evaluate Blackstone and PAI's options for salty snacks, the source confirmed.
However, a sale of the larger biscuit business, which owns various brands including McVitie's and which was awarded the prestigious contract to make Prince William and Catherine Middleton's wedding cake, will not be considered until "at least" 2013, the source added.
United Biscuits generated group revenues of GBP1.3bn and EBITDA of GBP230.8m in 2010. Net debt at the end of 2010 stood at GBP1.14bn. The salty snacks side of the business, which owns brands including Hula Hoops and Skips, has been valued at around GBP500m.
With good access to quick cash as the debt markets free-up, it has been suggested that private-equity investment vehicles are likely to be attracted to the expected auction.
Indeed, the level of private-equity interest in food industry investments in general is on the rise. According to Tom Lindsay, co-founder of M&A advisory group Spayne Lindsay, M&A activity in the food sector is likely to be driven by higher levels of private equity investment in the coming months.
Speaking during the Consumer Analyst Group Europe conference in London, where just-food was the exclusive media partner, Lindsay explained the appeal of food companies to private-equity investors.
"Food companies do have relatively stable cash flows, even though they are relatively low growth at the top line level, they can be made to grow at the bottom line level through cost savings, consolidation synergies and improved focus. And there's plenty of capital in the private-equity world," he observed.
Nevertheless, one industry insider claimed it was quite probable that the strong brands and good distribution on offer would make UB's snacks unit a tempting prize for a strategic buyer.
"It is evenly balanced between trade and private equity. I would say it is slightly more likely that the business will go to a trade buyer," the source suggested.
From the trade side, one potential candidate is privately-held German company Intersnack.
With an annual turnover of EUR1.5bn (US$1.99bn), United Biscuits' salty snacks brands would be a good fit with the products that this pan-European group offer in the UK, where it manufactures and distributes private-label snacks as well as the Pom-Bear and Penn State brands. In addition, Intersnack's focus on healthy snacking make a number of United Biscuits' brands - including Twiglets and KP Nuts - of particular appeal.
Another potential trade buyer could emerge in the form of US cereal giant Kellogg.
The US cornflakes maker moved to extend its reach in the snacking aisle last month with the US$2.7bn purchase of Pringles from Procter & Gamble. Kellogg said the acquisition "catapulted" it into the number two position in the worldwide savoury snacks category, behind PepsiCo.
While UB certainly lacks Pringles' presence on the global stage, with its brands being firmly focused on the UK, an acquisition of the United Biscuits snacks unit would strengthen Kellogg's position in the country and fit with the group's aim to become "a truly global cereal and snacks company".
There is an obvious strategic logic behind a bid from PepsiCo, given the group's position in the snacks category and intention to expand in healthy snacking. However, an approach for UB from this snacking colossus seems unlikely because any such deal would almost certainly raise competition concerns.
Likewise, as Kraft Foods prepares to spin-off its US business, it seems that United Biscuits' salty snacks unit would make a decent addition for the firm's international snacks division, soon to be known as Mondelez International. Indeed, Kraft certainly has access to the cash to fund any such move, having recently secured a $4bn revolving credit line to be used for "general corporate purposes". However, with plans to divide the business later this year progressing apace, the timing of the auction seems unfortunate as Kraft management could well have more pressing concerns.
So, as Blackstone and PAI prepare to auction off a strong portfolio of UK-focused brands, we could well see international food manufacturers giving private equity investors a run for their money in the race to acquire United Biscuits' salty snacks business.
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