With a new CEO at Cloetta, the European confectioner has already faced questions about its possible acquisition targets. However, Stefan Kirk, just-food M&A columnist and advisor at Glenboden, believes the company could itself be on the radar.

The recent change of CEO position at European confectioner Cloetta has prompted this column to assess what could be the company's future M&A trajectory. Although there is potential for one or two more add-on acquisitions in Europe, there is a bigger case for a consolidation-led takeover before the end of this cycle.

A focus on financial targets

Cloetta's financial announcements place a strong emphasis on the achievement of defined targets: to increase organic sales at least in line with market growth; to reach an underlying EBIT margin of at least 14%; to reduce the net debt ratio to around 2.5 times EBITDA; and towards an end-game of a dividend payout of 40-60% of net profit.

It seems the key objective that underlies these targets is for Cloetta to attain the status of a stable, free cashflow-generative business, which will win the approval and long-term loyalty of its shareholders, most of which are institutional investors.

However there is an alternative scenario: that the achievement of some or all of the above targets will turn Cloetta into an attractive acquisition case, for both buyers and sellers, in the context of ongoing consolidation in the European confectionery market.

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Financial institutions in the majority

After the merger with Leaf International in 2012, the resulting shareholder structure saw Leaf's private-equity owners, CVC and Nordic Capital, jointly hold 57.6% of the share capital of the enlarged entity. They subsequently sold down those shares, mostly to Swedish institutional investors, finally exiting Cloetta in 2013.

At present, 41.3% of Cloetta's voting rights are indirectly held by a foundation established by the Svenfelts family that has owned the company for 100 years. Another 9.3% of the voting rights are held by AMF, a large Swedish non-private pension fund group (including trade unions). The rest is free-float.

Potentially, the Svenfelts family and AMF would act in concert to prevent any takeover of Cloetta. On the other hand, if a major liquidity opportunity was to present itself, then AMF would be obliged to vote in favour of it, in the interests of its members. Cloetta operates in highly competitive markets in which stable cashflows cannot be guaranteed; it is not a utilty or telecom company.

An increasingly attractive takeover candidate

Given its profile (right), it's reasonable to assume Cloetta will continue on its path to reaching its financial targets, including further bolt-on acquisitions that generate growth and synergies but do not compromise the debt reduction agenda.

There may come a point, however, when the value of Cloetta to a potential acquirer will rise to such a level that a takeover bid for the group, especially in the form of an all-cash offer, would be hard for the company's institutional shareholders to refuse.

On top of that, a takeover attempt is made more likely if Cloetta continues to grow its top line above the rate of growth of the overall confectionery market, as it did in 2014 when it booked a sales increase of 10.1%, and again in Q1 2015 (8.6%). That bites into the market share of rivals, including giant rivals like Perfetti Van Melle.

A potential acquirer stands out

Indeed, Perfetti's sales revenue declined in 2014, for the first time in a decade, by 2%, to EUR2.44bn. That is disappointing but it still means Perfetti is four times bigger than Cloetta in top-line terms – a very healthy ratio from a cash-only takeover bid perspective.

Also, Perfetti is a clear nominee for future consolidation moves in the European confectionery market. The third-largest sweets group in the world, it already earned the mantle of chief consolidator in sugar confectionery, when Perfetti of Italy acquired Van Melle of Holland in 2001, followed by the purchase of Chupa Chups of Spain in 2006. Cloetta is in the same territory as the above, being also focused on sugar confectionery (chocolate products accounting for under 20% of group sales).

Then there is the rationale story with respect to geographies. Perfetti and Cloetta compete fiercely in the markets of Italy and the Netherlands, both of which are in decline or flat at best; that's a classic consolidation scenario. In addition, Perfetti is bound to covet Cloetta's leading market position in the Nordic region, which accounts for 60% of the group's total sales. Perfetti is so far relatively weak in the Nordics.

Transaction issues?

Obviously anti-monopoly concentration in Italy and the Netherlands, where a combined Perfetti and Cloetta would control about 40% of the sugar confectionery market in both countries. Plus the small matter of valuation; Cloetta's trading enterprise value is quite toppish by mid-cap M&A standards (see valuation).