Valeo Foods Group‘s acquisition of Irish rival Jacob Fruitfield Food Group has highlighted the company’s ambition to lead consolidation in Ireland’s food sector. But is the move likely to signal ambitions further afield? Michelle Russell reports.

Irish food maker Valeo Foods Group has insisted that it wants to lead consolidation in Ireland’s food sector with its latest purchase – but some analysts believe that the company may now look across the Irish Sea for further growth opportunities.

The Irish food maker announced a deal on Monday (8 August) to buy local rival Jacob Fruitfield Food Group. Valeo, which formed last year when it was spun off from local agribusiness company Origin Enterprises, says it wants to be at the forefront of M&A activity in Ireland’s food industry as a further step towards growing the company’s footprint in the country.

There is no doubt that the Irish economy is in the doldrums, struggling to recover from the effects of the financial crisis. Businesses are being negatively impacted by issues around credit, cash flow, rising costs, weak consumer spending power and the black economy – and there are no signs of an immediate pick-up.

Consolidation, therefore, appears to be a logical move, according to an analyst who asked not to be identified.

“Clearly [the acquisition] has been done for consolidation play within the Irish market and, you’d probably say, in the context of the market overall, it is something you would expect. Demand isn’t very robust in Ireland but I think it will give [Valeo] bigger markets strengths and so on,” the analyst told just-food.

The transaction, which remains subject to competition approval, would form a business with annual sales of EUR300m (US$425.2m). The merger, the analyst added, will benefit Jacob Fruitfield, as well as Valeo.

“From the point of view of the Fruitfield business, they plainly see some opportunity in this. You’ve got a business of a decent size. Nobody is saying what the profits are but it might be, in operating profits terms, a GBP30m (US$48.5m) business. You could put a multiple on that and say that’s pretty decent.”

But while consolidation in the Irish food market appears to be Valeo’s priority, Bloxham Stockbrokers analyst Joe Gill believes that the UK might hold the key for future growth for the firm.

“I think they would be keen to do more deals, possibly in the UK,” Gill told just-food. “They do see an opportunity to expand the ambient grocery business, which they feel is right for consolidation and you can scale it up and get synergies on the purchasing and distribution side as you’re doing that.”

However, Gill believes that, while expansion might be on the cards, debt management will most likely become a priority.

“I would have thought they will be keen on expansion but this is a fairly big transaction for Valeo so they will probably want to bed this down for a while and drive the cash flows and try and unwind debt before making any major moves from here,” Gill said. “But I certainly think that that would be the strategy over time.”

He added: “There are also private-equity investors in this business who I presume would want to get a return one way or another over the next three to five years and that means they will either have a trade sale or refinancing of the business. So, that’s the other piece that will be interesting to watch in the future.”

Indeed, once the transaction is complete, Valeo’s shareholders include Origin Enterprises with a 32% stake, majority shareholder CapVest with a 40% stake and Jacob Frutifield with a 25% share in the business. The remaining shares will be held by senior management.

The unnamed analyst speculated that future growth may involve an IPO at some point.

“Maybe [Valeo] are beginning to create a structure out of a disparate number of assets that could very well become attractive to the stock market on a forward basis or to another partner,” he said. “So I think all of the parties involved plainly see the enlarged entity as a means to generating value and a profit that otherwise might be more difficult to obtain.”

However, he shares Gill’s sentiment that the firm might indeed look to the UK for growth, given the common characteristics of the two markets.

“It is logical to assume. Given that we swim a reasonably common cultural tide to that of the UK, Irish companies that have cut it in Ireland and where growth in Ireland is either difficult to achieve and where they have a growth ambition, have typically looked at the UK in the first instance because the rules by which the UK live have a great deal in common with how we live over here,” the analyst said. “We are running out of growth in Ireland but have developed a capability to typically attempt to develop that or pioneer that in the UK in the first instance.”

Jacob Fruitfield managing director Seamus Kearney will head the new company, someone Gill describes as a “formidable senior executive”, given his previous managerial roles with AER LINGUS and subsequent food industry roles.

There is no doubt that the deal has created a force to be reckoned with in the Irish food industry, bringing together some of Ireland’s biggest food brands, including Fig Rolls, Kimberley, Mikado, Batchelors, Roma and Erin. But while it is unknown what Valeo’s next move will be, one thing is for sure – yesterday’s deal has marked a significant step in what is likely to be a continuing process of consolidation in the Irish food sector.