European food business Wessanen has opted to go private after accepting a takeover offer from a consortium of investors. Simon Harvey speaks with analysts to gauge the reaction among the investment community and what might change under new leadership.

Analysts have been left feeling flummoxed by what Wessanen hopes to achieve by going private, with some questioning how a takeover will change the operating dynamics in an organic food market – a key sector for the Netherlands-based group – facing intense competition from rivals and price pressures from retailers.

Wessanen, which for the time being remains listed on the Amsterdam stock exchange, accepted a buyout offer from private-equity firm Pai Partners and its largest shareholder, Charles Jobson, on Wednesday (10 April), based on EUR11.50 a share, valuing the business at EUR885m (US$1bn).

While still not a done deal, and still open to a rival bidder, albeit with a price-inflated stipulation that is most likely to deter any other would-be buyer, opinion is divided as to whether the offer delivers value for shareholders. That, of course, depends on which side of the investment fence you reside, given the offer represents about a 50% premium to this year’s low, and a 36% discount to the share’s high reached in 2018.

Troubles started to surface for Amsterdam-based Wessanen in the middle of last year, when the owner of brands including Whole Earth peanut butter and Kallo rice snacks posted two consecutive quarters of revenue declines, interrupting what had essentially been a consistent growth story, and leading to a debate among analysts as to whether the problems were structural or more widespread.

And while a recovery looked on the cards in the final quarter of last year, when Wessanen delivered a 5.2% gain in revenues, hopes were dashed this week as it reported a 4.1% slump in the same metric during the first quarter to coincide with the takeover news. All in all, 2018 was not a good year for the company, which counts France and the UK as its biggest markets, with revenues inching up by only 0.6%.

Wessanen’s share price spiked almost 6% on Wednesday following the takeover news, although analysts say the move higher was not related, with one putting it down to investors covering so-called short positions, or one-way bets the stock price was about to fall further.

Netherlands-based equity analyst Reginald Watson at ING, says: “The company made it quite clear that there were no other bidders. And if you read the documentation for the agreement … they can only look at unsolicited bids and they can only look at unsolicited bids if the new bid price is 7% above EUR11.50.

“So whoever wants to come in now needs to be looking at EUR12.31. I don’t understand how anyone can come in and make it work. I’m aware of the fact that the rest of the sell side thinks that the company is undervalued at EUR11.50 and that another bid is possible … but really these are the same people that also thought Q1 revenues would be plus 1.2%, when they delivered minus 4%.”

Does the offer represent an undervaluation for Wessanen? “No, that’s what everyone else thinks,” Watson responds. “I think they’ve done a very good job because I think it’s worth far less than that. It’s a pretty decent upside at 50% off the low.”

Share price considerations aside, what does the future hold for Wessanen in terms of strategy under private ownership? Some equity analysts, such as Netherlands-based Robert Jan Vos at ABN AMRO, fail to see what ground-breaking benefits PAI and Jobson can bring to the business, and what they can do differently than if it remains public.

Wessanen’s operations are concentrated in western Europe having exited the US market some years ago. Since around 2014, the company has sought to look at healthier and sustainable food products, with a refined focus on its own brands while seeking to reduce the private-label and wholesale operations.

Through acquisitions, the company has acquired a number of businesses, although asset purchases have tailed off as of late. Some analysts argue Wessanen has too many brands, while others say it should look to buy more to differentiate itself from the rising competition in the European organic food market and in healthier categories more generally or focus attention on its biggest brands at the expense of smaller, less growth-driven brands.

Wessanen’s portfolio consists of gluten-free cakes with Mrs Crimble in the UK, and Bjorg baby food in France. It recently acquired the plant-based dairy alternative business Abbot Kinney’s of the Netherlands and also owns a similar brand in Isola Bio. In Spain, its asssets include organic food manufacturer Biogran.

The investor consortium stated this week it will “add scale in core categories and markets through acquisitions” and “will support the company in pursuing acquisitions and will ensure that the Wessanen group will have the ability to finance further acquisitions”.

The statement continued: “The consortium intends to put in place a debt structure in line with transactions of this size and nature, whereby the net debt position of the Wessanen group post settlement of the offer corresponds to a maximum of 6X the estimated last 12 months leverageable EBITDA on a covenant-light structure”. It also said debt commitments had been entered into worth EUR445m.

ABN Amro’s Jan Vos says Wessanen will be loaded up with debt, which “is not something a publicly-listed company should strive for”.

He adds: “Consortium leverage is up to 6X – they could easily go to 3X, instead of the 0.5X they are now at, and that would free up quite a material amount to either step up capex or do more M&A. They are extremely light leveraged, they only have EUR30m of net debt on their balance sheet. The consortium will lever up Wessanen with an additional EUR445m of debt. That serves only one purpose and that is creating financial leverage. You have a very strong balance sheet, so if additional investments or capex are needed, or you want to do more in M&A, there’s plenty of room to leverage your balance sheet further and do it yourselves.”

Asked to comment on going private, Jan Vos says. “I’m still a bit puzzled on what it is they can do under the ownership of this consortium that they couldn’t have done as a public company.”

He says Wessanen should look to expand elsewhere in Europe under new ownership, ruling out moving into overseas markets or chopping down the portfolio.

“They are a collection of local brands. There’s no real necessity for them to do a huge brand portfolio restructuring,” he comments. “I doubt if they should look beyond Europe at this stage because it would be a move back. If you take the US as an example, then it would be a move back to where they were six or seven years ago and I think investors really appreciated them bringing back focus to markets close to where they were born. They should look to add some other markets in Europe. Those markets are more comparable to what they already know.”

Meanwhile, Fernand de Boer, an equity analyst at Petercam in the Netherlands, explains Wessanen needs to overcome structural issues, such as emerging competition, along with retailers asking for better prices, forcing the company to do more in the way of promotional and advertising spending (A&P).

However, with more spending on A&P comes less margin expansion, he says, adding: “The company never disclosed what level of A&P they have; we assume they had 10% of sales, and maybe they have to step that up to 15%, but then the margins will go down by four or five basis points. But we don’t know that exactly.”

Ultimately, de Boer believes it is the wrong decision to go private but he says Wessanen needs to do better with executing acquisitions and developing inherited brands. “I think they could do everything they had been doing on the stock exchange,” he says. “They are going to be heavily leveraged on private equity, so financially they will have less room to manoeuvre.

“The problem in the past [when they have made acquisitions], they added new brands and there they have to do a better job. You could say [they] have a number of goods brands like Clipper tea and Bjorg in France, so they need to use their strength more and maybe add a few products to that. They need to focus on those brands that are really growing.

“But it also needs a lot of time and maybe investments to grow smaller brands, which might not be worth it, and I think that could be one of the key problems that they have; too many different brands, and too many small brands.”

Both de Boer and ING’s Watson say Wessanen should have been more clear on its forward-looking plans, a facet that would have calmed market nerves, rather than opting to go private.

“They should stay on the market and show that last year was only a temporary issue, and [say] this is the way we are going to solve it,” according to de Boer.

Watson is more hard-hitting in his assessment of PAI’s added firepower and whether further acquisitions are the way forward.

“OK, they put in more investment, but they also want a return, and if they put in more investment the return they are getting is lousy,” Watson says.

“It’s not obvious because they have geared up their holding company but they haven’t geared up Wessanen itself,” he responds when asked what the consortium might do differently. “They haven’t geared up this company to make more acquisitions and it’s difficult to cut costs. Where do you go from here? They are at the mercy of the markets. Personally, I think it’s a terrible deal for PAI … it’s a very fine line between genius and insanity. And only time will tell which one of these things PAI actually is.”

Another issue pointed out by Watson is the reliance of Wessanen on outsourcing manufacturing, which puts the company at the whim of retailers, particularly in private label. As a means to boost competitiveness, Wessanen should lower margins and work “hand-in-hand” with the supermarkets, he says, but adds it cannot cut margins in “isolation”.

Watson says: “This is where I think they struggle to compete against the supermarket own brands because if I’m Carrefour, I can go to the same guys who supply Wessanen with the cereals and rice cakes and get exactly the same product quality and I don’t have to pay any marketing expenses for it. And then I’m a much more efficient organisation and I buy more, and therefore I’m going to get a better price.”

And Watson sees more room for improvement too for Wessanen’s brands, along with better thinking behind potential acquisitions than he says the company has demonstrated in the past.

“Their strongest categories are tea, and the strongest categories in which they are a) sizeable and b) actually have some manufacturing expertise are tea and dairy alternatives. That’s pretty much it,” Watson says. “They have a little bit of rice cakes in Spain with the acquisition of Biogran, but it’s not major, and they are still outsourcing a lot of their rice cake production.”

Ultimately, the case for Wessanen now rests with its potential new owners, who, according to the analysts just-food spoke to, have much to do to convince investors of the viability behind such a deal. And no doubt the proof will have to be shown in the second-quarter results, although one suspects a longer time frame will be needed to demonstrate solid progress in its top-line.

Watson adds: “They just need to invest more behind the brands. They need to give more away on price because the markets become more competitive. And they just need to accept that if you want to continue growing the top line, then you have to take lower margins.”