Kerry "puts frozen unit up for sale"

Kerry "puts frozen unit up for sale"

Kerry Group is reportedly mulling the sale of its frozen food business. The company has seen strong sales and profit momentum at its ingredients unit but endured a lacklustre performance from the consumer foods side of the business. In this context, it makes sense for the Irish company to pare down peripheral and under-performing areas of Kerry Foods. Katy Askew reports.

Reports surfaced this weekend Kerry Group has engaged financial advisers over the potential sale of its frozen food business. According to The Daily Telegraph, the Ireland-based company is working with IBI Corporate Finance on options for its frozen ready meals unit.

Kerry declined to comment on the rumours. If true, however, a disposal would be a sound strategic decision coming out of its HQ in Tralee.

It acquired the bulk of its its frozen private-label ready meal operations in 2001, as part of its EUR238.7m (US$296.5m) takeover of Irish peer Golden Vale. The business manufactures frozen ready meals for UK retailers. While Kerry also produces branded frozen foods such as Sharwood's, Paxo and Bisto under licence from Premier Foods plc, it is unclear whether these would be included in any sale.

Kerry's consumer unit has seen sales and profitability squeezed by weak consumer sentiment in recent years. The proportion of Kerry's turnover generated by consumer foods has been in decline as the group has grown its ingredients business, on the one hand, while battling with challenging trading conditions in its two main markets, the UK and Ireland, on the other. In 2013, consumer foods accounted for just 28% of Kerry's revenue of EUR5.8bn.

While Kerry does not strip out the numbers for its various consumer food interests, in its most recent sales update for the first nine months of the year, Kerry revealed consumer foods dragged on the group-wide performance. Total sales volumes in the first nine months of the year climbed 2.4%, with higher ingredient revenues offsetting a 1.2% decline in consumer food.

The company admitted its year-to-date performance in frozen ready meals has been marked by the ongoing "challenging" conditions it faces. The ready meals market in the UK and Ireland is still recovering from the 2013 horsemeat scandal, which undermined consumer confidence in the category. Frozen ready meals are also facing growing competition from chilled options, which consumers perceive as higher quality.

As researchers at Euromonitor International note: "The horsemeat scandal significantly impacted upon ready meals in 2013, damaging consumer confidence in ready meals, particularly frozen ready meals."

The research firm expects sales to pick up in the coming years, albeit at a subdued level. Expansion is likely to be strongest in the chilled aisle, the researchers continue. "Prepared salads and chilled ready meals, which represent a significant portion of the total ready meals category, will perform well, as consumers look to save money and time where possible."

In response to slow sales across its consumer division, Kerry has worked to improve efficiency and lower costs, while also repositioning its products to generate higher margins. This year, the company has seen divisional trading profit margin improved by 20 basis points in the first nine months. However, again the group's consumer brands under-performed the ingredients business, where margins were up 80 basis points.

If Kerry were to sell off its frozen ready meal business, it would be offloading a unit that generates relatively low returns. The knock-on affect could provide a boon to consumer food margins.

As Goodbody Stockbrokers analyst Liam Igoe tells just-food: "It's a low margin business and it does make sense that Kerry would sell it to concentrate on its branded chilled business, such as Wall's - so the latter would not be for sale."

Indeed, speaking to just-food, a source close to the situation says Kerry's frozen assets represent a "very small" part of the overall consumer business. The company apparently remains committed to growing consumer food sales. Kerry has honed in on some specific areas where it believes there is still space to expand.

At an investor conference earlier this year, CEO Stan McCarthy outlined the areas where Kerry can "eke out growth" from its consumer foods division. The company, he said, has identified snacking products in Kerry's two key sectors of meat and dairy as areas for growth. "[There is a] need for product versatility and snacking on-the-go offerings, which is something we view as very significant for our business in the future," McCarthy said.

According to Investec analyst Ian Hunter, a potential sale would also boost Kerry's financial clout should it look to M&A opportunities to fuel growth. "We estimate that... the frozen foods arm is generating circa EUR5m to EUR6m in profit. If it is up for sale it could generate over EUR60m (12x operating profit), adding to the balance sheet strength the company has to support organic and/or acquisitive growth."

Hunter adds Kerry already has a "potential war chest of over EUR1bn if the balance sheet was flexed".

As to the buyer? Rumours from Ireland have touted Greencore as a potential suitor. Hunter is unconvinced. "The rumour in Dublin is that Greencore could be a possible candidate but I think only because it is also Irish and has a frozen foods division."

Elsewhere, Boparan Holdings-owned 2 Sisters Food Group is viewed as a potential buyer by some given its category and market overlap and acquisitive track record. The business would be a good fit for the group, which ramped up its presence in the ready meal space with the 2011 acquisition of Northern Foods. However, the company is still struggling to digest that deal and other recent buys. 2 Sisters revealed annual losses jumped by almost 330% last week, blaming restructuring costs and financial charges associated to refinancing the group's debt capital.

Icelandic food group Bakkavor could also be interested in the sale. The company has sold off a swathe of European assets to concentrate its energies on its largest market, the UK, where it generates close to 90% of sales. The private-label food processor gained market share in the first nine months of this year and the company has indicated it is increasing investment to support expansion. However, with a strong showing in higher-growth fresh categories, it does seem questionable as to whether Bakkavor would want to increase its exposure to the troubled frozen ready meals sector.

The field, then, is wide open. Given the scale of the deal, it would not come as a surprise to see a smaller private company come to the fore.