Raisio, the Finland-based group behind brands including Benecol, Honey Monster cereals and Fox’s confectionery, has, in recent years, tried to grow via M&A. However, Stefan Kirk of M&A advisors Glenboden questions the company’s strategy and believes it should be sold to a private-equity firm to unlock value.

Raisio’s EBIT was down by nearly 75% in the first half of 2014, including one-off items that are inherent within a business model based on M&A activity. We believe the Finland-based food group’s strategy since 2009 of transformation into a modern business, through M&A and innovation, has not been successful. One scenario is for shareholders to sell to a private-equity firm.

Weak underlying businesses …

Raisio’s sales are split roughly 60:40 between its brands division (covering Benecol, cereals, snacks and confectionery), and Raisioagro (animal feeds, vegetable oil, grain trade). About 50% of the group’s sales are outside its native Finland.

Arguably the brands division is sustained by the stalwart Benecol and Elovena brands in Raisio’s domestic market. Internationally – principally the UK – brands is something of a misnomer; 50% of snacks and cereals sales, and 75% of confectionery sales, are private label or third-party brands.

As for Raisioagro, it booked a significant EBIT loss in the first half of 2014, and has only been at break-even in recent years. That begs questions over whether Raisio has the scale to be competitive in supplying to the farming sector, and whether the downsizing strategy might make things worse.

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… major M&A disappointments …

Raisio’s weak business profile is largely the result of its M&A activity. The strategy since 2009 has been to exit from mature businesses, where gains can be made on their sale, and re-invest the money in healthy snacking of other grain-based consumer foods categories.

Hence the divestment of the group’s margarine business to Bunge in 2009, and its malt business to Viking in 2011; hence the acquisitions between 2010 and 2012 of Glisten and Big Bear in the UK, Czech confectioner Candy Plus and Polish pasta manufacturer Sulma.

The trouble is, rather than exciting better-for-you snacking brands, Raisio has bought a string of under-invested brands in traditional confectionery and cereals categories, with a large private-label component on top.

It is like selling property because the offers were good, with the aim of then buying new properties with high potential; only to find that you cannot find what you had imagined on the market, but have to put the money somewhere.

… private-equity takeover prescription

Arguably Raisio does not have a future as a stand-alone entity, and should be sold to a private-equity player that can unlock value through a break-up and re-sale of the brands, contract manufacture and agri-business assets.

One barrier to that is valuation. Historically Raisio’s shares have traded at an enterprise value north of x10 EBITDA. In our view, however, the M&A multiple should be lower, given the prevalence of unbranded and commodity sales by the group (see valuation).

Another barrier is shareholder structure; over 80% of Raisio’s voting rights are exercised by restricted shares, owned largely by entities linked to the group’s history as a farming co-operative.

Question is, for how long can Raisio’s management continue to drip-feed those shareholders with dividend payments?