Canada’s Premium Brands Holdings has entered into an agreement to buy local family-owned deli meats marker Freybe Gourmet Foods. With potential synergies and cross-selling opportunities, the deal looks set to have a positive impact on Premium Brands’ earnings. Katy Askew reports.

Premium Brands Holdings, the Canadian speciality food group, has struck a deal to acquire Freybe Gourmet Foods for a transaction value of C$55m (US$54m). The group plans to complete a sale-leaseback transaction for Freybe’s Langley production facility, which should result in net proceeds of C$23m – meaning that the price paid for the business will equate to C$32m.

Freybe is a leading Canadian deli meats manufacturer, generating annual sales of around C$78m. According to Canaccord Genuity analysts, who raised their target price on Premium Brands in the wake of the announcement, the deal is expected to be immediately accretive to earnings.

“Assuming Freybe’s EBITDA margins are in-line with Premium Brands’ retail division, we estimate that Freybe could add EBITDA of C$7m annually, which represents a transaction multiple of 4.6x, following the sale-leaseback transaction,” the analysts write in a note to investors.

However, the longer-term potential for Freybe could be greater still.

The acquisition should be viewed in the context of Premium Brands’ wider growth strategy. Management has previously indicated it plans to further expand revenue through a focus on innovation and geographical expansion. As Freybe is fed into Premium Brands’ distribution network the brand’s geographic reach will be expanded from its western Canadian stronghold to national customers.

“We see significant opportunities to help Freybe grow its business and brand by leveraging both our deli meat platform’s sales and marketing infrastructure as well as our proprietary distribution networks in the foodservice and retail channels,” president and CEO George Paleologou says.

It is clear Freybe fits snugly into Premium Brands’ existing portfolio, which includes Piller’s and Grimm’s Fine Foods deli products, as well as premium processed meat brands such as Hempler’s and Harvest Meats. The company says it hopes to leverage the “iconic” Freybe brand as it drives growth in the category and – with Premium Brands’ insistence it will grow through innovation – product development could well be a key way the firm looks to achieve this.

While the upside in terms of fit and sales expansion is compelling, perhaps one of the most significant benefits the acquisition will bring comes in terms of manufacturing synergies.

Through the acquisition, Premier Brands will take control of Freybe’s state-of-the-art 118,000 square foot production facility located in Langley, British Colombia.

This site has “significant” unutilised capacity. Frequently, empty capacity is not great news as it represents a drag on profitability. However, Premium Brands has big plans for this extra capacity.

“It is an ideal solution for replacing the capacity of our deli meats production facility in Richmond, British Columbia, which is scheduled to be shut down later this year,” Paleologou reveals. “By transferring a significant portion of the Richmond plant’s production to Freybe’s nearby Langley facility instead of our production facilities in eastern Canada we will gain significant cost and freight synergies.”

The group also plans to utilise this additional capacity to step up production in order to expand in the US, Paleologou adds.

“We intend to use Freybe’s unutilised production capacity to support our growth in the US through our Ferndale, Washington-based business Hempler Foods Group. Hempler has in recent years been growing at an average compounded rate of almost 17% over the last three years.”

Through the acquisition, Premier Brands is therefore deploying capital it would otherwise have had to invest in ramping up its own manufacturing footprint in order to support the growth of its brands.

With the promise of sales expansion on the one hand and potential cost savings to be had on the other, the logic behind this acquisition seems undeniable.