Five years after losing out on buying Tilda to Hain Celestial, Spain-based Ebro Foods has acquired the UK rice business. Dean Best explores the reasons behind the deal.
Ebro Foods has finally got its man. More than five years after the Spanish group was beaten to the acquisition of Tilda by US rival Hain Celestial, last week it announced the acquisition of the UK-based rice manufacturer and marketer.
Both Ebro and Hain have pronounced how the change in ownership of Tilda will benefit their business – and equity analysts covering both companies can see advantages to the transaction.
Ebro has struck a deal to pay US$342m in cash for Tilda, a largely basmati rice business, centred on its eponymous brand, based in Essex in south-east England.
In the year to 30 June, the last full financial year for New York-listed Hain, Tilda generated around $200m in sales and adjusted EBITDA of $25m, meaning the price paid for the business equates to an adjusted EBITDA multiple of 13.5 times.
Back in January 2014, Hain announced a cash-and-stock deal that saw it pay Tilda’s family owners a total of $357m, comprising $176m in cash, $148m in stock and a deferred consideration of $33m payable a year later. At the time Hain set out that transaction, it said Tilda had generated sales of $190m in calendar year in 2013.
Ebro says it has got a business it wanted back in 2014 when Hain beat it to the punch. “In 2014, we were looking to acquire this business but we were unable to because Hain Celestial paid more than us. Now, after investment in India, Tilda is doubly attractive for us because we have our own factory where we could provide in a very easy way all the basmati rice from India,” an Ebro official told us last week.
Some 92% of Tilda’s sales come from basmati rice products and, geographically, more than half (60%) of sales are made in the company’s domestic market of the UK. Announcing the deal last week, Ebro said the acquisition would give it “a strong foothold in the British market”, where it had only had “a token presence” selling into the country’s ethnic-foods channel, as well as being a business-to-business supplier to food manufacturers.
The UK is, of course, yet to agree on how it will leave the EU, with a departure without a deal more likely than it was just a few months ago. Ebro is sanguine about buying a UK-headquartered business at a time when no-one knows what form Brexit could take – and with a no-deal exit a real possibility.
“We are not worried about this because 60% of the business is in the UK. The local business is not going to be affected,” the Ebro official says. “What Tilda sells there is basmati rice and the basmati rice only crops in India and Pakistan, so I don’t think there is going to be a problem.
“In the rest of the business, if there starts to appear some levies to ship out the rice from the UK to other places, it is not going to be a problem because we are able to sell rice from all over the world for different countries. We don’t need to make any export from the UK to other places.” Tilda’s main markets outside the UK include western Europe (principally France), Canada, Australia and the US.
Ebro’s statement on the deal included an indication the company plans to use some of the products or flavours in the Tilda portfolio elsewhere in its own stable. “Ebro believes that Tilda’s international nature will pave the way for extensive development with other group products,” it said.
Pablo Cuadrado Tordera, an equity analyst covering Ebro at finance house Kepler Cheuvreux, says it is a common strategy for the company to use new assets to help shape product development on existing brands. “Ebro acquires companies and then integrate the know-how of that business into the different brands Ebro has worldwide. They will integrate the know-how of Tilda and introduce the know-how in different brands worldwide,” he says.
The strategy works both ways, Tordera adds. “For example, now Ebro is doing microwave products with rice, sauces and vegetables and other products, so they have that know-how they are going to introduce to Tilda, which is going to allow the company to launch new products and build the Tilda brand.”
While Ebro sees growth opportunities, the international rice supplier was also keen to insist it can enjoy the benefits of integrating Tilda into its network. Hain CEO Mark Schiller last week described the price Ebro paid for Tilda as “a significant premium to most other food transactions done in the UK or in the rice and pasta industry over the past several years”.
At Kepler Cheuvreux, Tordera cites another reason why Ebro may have been prepared to have paid the price it did for Tilda. “I guess the company has been somehow willing to pay such a multiple because I believe they could be in talks to sell the US pasta business. The environment, the competitive environment in the US is pretty tough in the pasta segment,” he says. Tordera adds he sees the longer-term strategy at Ebro – which in July sold its organic-foods business – focusing on rice and pasta in Europe but just rice in the US.
The Ebro official insists the company is not in any discussions to sell its US pasta arm. “We are not now in the middle of any process with any business,” she says. “All businesses that don’t provide us the profitability we are looking for are able to be sold. That is what our chairman said in our last presentation but we don’t have anything specifically at this point. We always give opportunity to businesses but we want to achieve a specific level of profitability.”
Over at Hain, in the face of growing competition, the US-based manufacturer has, in recent years, increasingly talked of a need to “simplify” a portfolio built through acquisitions over the last couple of decades in order to accelerate sales from brands that stay within the business and improve the company’s profitability.
Those moves were started under founder (and now former CEO) Irwin Simon in 2016. However, in June 2017, activist investor Engaged Capital bought shares in Hain, claiming its stock was “undervalued” and, by September, the two had struck a “mutual cooperation agreement, including the appointment of six new directors.
Schiller has continued with plans to trim the Hain portfolio, with a focus on profitable growth. And, as well as pruning SKUs, the company has offloaded assets, selling its meats division in February and finding a buyer for a tofu business in May.
Last week, Schiller said the sale of Tilda was “consistent with our transformational plan to simplify our portfolio, strengthen our core capabilities and expand margins and cash flow”. But he admitted Hain was not necessarily looking to offload the UK rice supplier.
“When we were at our investor day [in February], what we told you is any brands that we felt were not going to be accretive to the business we would sell. Tilda did not fit in that bucket,” Schiller told analysts last week. “But what we did get on Tilda was an unsolicited offer at a very premium valuation, which forced us to take a look at it and say ‘It’s now the time to sell this business.'”
Schiller set out the reasons why Hain agreed to sell Tilda – the price Ebro was willing to pay (“We’ll net close to $350m for this transaction, which is pretty close to what we paid for it – but when we paid for it, it was at $1.65 currency, and it’s now at $1.21”), changes to UK regulations on the import of rice that pushed up input costs and weighed on margins and then the wider landscape in the UK. “Obviously, given the currency fluctuation and Brexit, the feeling was that this is a good time to mitigate some of our risks in the UK. And so the combination of those factors is what led us to decide to make that sale,” he said.
Could more disposals come? In a note to clients, Wells Fargo analyst John Baumgartner said the sale of Tilda was “a bit of surprise” but acknowledged Hain had got an unsolicited bid from Ebro. “From here, [Hain] management appears focused on unloading uneconomic/growth-dilutive assets but will also ‘entertain’ offers for better performing units,” he said.
Speaking to analysts last week on a call to discuss Hain’s fourth-quarter and full-year results (a call that was 24 hours after the Tilda deal was announced), Bill Chappell, MD at investment bank SunTrust Robinson Humphrey, asked Schiller if the food group would look to sell “other growth businesses”.
Schiller replied: “Our preference is to focus on brands that are uneconomic and that don’t have potential to be accretive to our algorithm. But as a public company, people come to us all the time with offers to buy businesses, and we evaluate each one of them on their merits.
“And so while Tilda wasn’t specifically for sale, it was the right deal at the right time on that business. And should we receive other offers on other businesses, we would certainly entertain them. But proactively, we are really focused on the low-margin businesses and exiting those or fixing them in a short period of time.”
Not all analysts covering Hain would publicly mull over which brands the company could sell next but Rebecca Scheuneman, an equity research analyst covering the business for US financial services firm Morningstar, suggested some that could be offloaded.
“We do expect periodic divestitures. They will most likely be from low-margin or low-growth brands, such as Arrowhead Mills, Rudi’s, Spectrum, Imagine or BluePrint,” she tells just-food. “We expect Hain to make periodic divestitures, as they focus on simplifying their operations, which has become overly burdened the past several years from onerous complexity with too many brands, categories, and channels.”