Nordic food group Orkla is expanding its presence in central Europe through the acquisition of Czech Republic-based Hamé. The deal offers cost and revenue synergies and expands Orkla’s presence in categories that are complementary to its portfolio. It also feeds into Orkla’s strategy of focusing on regional categories and markets where it can build scale but which have, on the whole, gone under the radar of multinational competitors. Katy Askew reports.
Orkla announced the acquisition of Hamé last week for EUR175m (US$191.7m) or 8.3x EBITDA. Hamé operates ten production sites in central Europe and achieved sales of CZK4.9bn (US$198.8m) and net profit of CZK234m in 2014.
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The company generates 70% of sales in the Czech Republic and Slovakia where it holds “leading positions” in pates, ready meals, ketchup, preserved vegetables, jams and baby food. Its brands include Hamé, Májka, Znojmia, and Otma. Hamé also boasts strong positions in pates in Hungary, Romania and Russia, Orkla said.
The Hamé deal will double Orkla’s turnover in central Europe, the company revealed. Orkla’s existing businesses in central Europe include Vitana, which operates in the Czech Republic and Slovakia, Felix in Austria and a unit in Romania. Orkla has not detailed its synergy expectations but margins at the group’s regional business should benefit from increased scale.
This scale will also provide the combined Orkla and Hamé brands with additional clout when it comes to negotiating with customers. Combining its operations will make Orkla a more “attractive supplier” to the grocery trade in these markets and position the company for “further growth” in the region, Atle Vidar Nagel-Johansen, EVP and CEO of the company’s Orkla Foods unit, suggested
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Explaining the rationale for the deal further, Orkla CEO Peter Ruzicka said: “The categories offered by Hamé are well-known to Orkla and will complement and strengthen our existing categories. With this transaction Orkla becomes one of the leading FMCG players in attractive markets in central Europe.”
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By GlobalDataHowever, the move to expand in the central and eastern European region came as a surprise to some, especially given Orkla’s recent disposal of its operations in Russia.
Overall, the Czech packaged food market grew by 17% in value between 2010 and 2015, according to Euromonitor International. But, with the exception of baby food, the categories in which Hamé operates are not dynamic growth sectors.
Hamé is, for example, the largest preserved foods maker in the Czech Republic with a market share of around 25%. According to market research from Euromonitor, sector volumes are likely to remain “static” over the next five years. A shift towards more premium products driven by health concerns likely to result in “marginal” value growth but also increased competition from fresh categories that are perceived as better for you. In ready meals, Hamé is the second-largest player behind Dr Oetker with a 19% share. Euromonitor forecasts “modest” growth through to 2020 in the sector. In condiments, Hamé is the third-largest player behind Unilever and Orkla’s Vitana and the category is likely to decline by around 2% over the forecast period, Euromonitor predicts.
These declining markets are something Orkla must “pay attention to” as it looks to drive organic growth in central and eastern Europe, Euromonitor analyst Stefan Anbro tells just-food.
“It comes as a slight surprise that Orkla strengthens its position in central Europe. The company’s strategic focus so far has been on developing its position on the Nordic and Baltic markets. Last year we even saw how Orkla’s Russian business was divested. With the acquisition of Hamé, Orkla is back in Russia and in general we must interpret the acquisition as Orkla’s wish to stay and grow in central and eastern Europe,” Anbro says.
Likewise, Fondsfinans analyst Daniel Johansson is hesitant about the strategic logic of the acquisition. “The deal is strategically somewhat awkward since we and many others thought Orkla would exit the region while they are now acquirers,” he tells just-food. “We like the price tag and character of Hamé but find the strategic move less great. We still prefer higher [dividend per share] and more and faster moves towards higher profitability in the Nordic/Baltic region while also selling non-core [businesses] such as Sapa.”
Nevertheless, Johansson says Hamé is “very suitable” in terms of add-on products and “some” cost synergy from higher scale in central and eastern European markets. He continues: “We think Orkla aims at gaining market share with the deal but also to strengthen its direct bargaining power towards retailers, as such the deal appears sound… I think that there is vast cross selling opportunities but those are hard to quantify exactly in the short term.”
Johansson suggests the company could look to grow the former Rieber franchise in the Czech Republic as well as “extracting value” in Norway through cross selling.
UBS analyst David Halldén is less convinced that Orkla is attracted to Hamé for the prospect of selling its existing products into the Czech group’s distribution channels – or introducing Hamé brands to the Baltics and Nordics where Orkla is stronger. “Cross selling is actually not very common, because many of the products sold by Orkla are acquired taste brands, with local preferences. But this is also the beauty – you don’t have to fight with the dragons all the time and the barriers to entry are very high. Pickled herring in Norway is not the same as pickled herring 300 kilometres to the east in Sweden, for instance.”
In other words, the very specific localised tastes that Orkla caters to provide it with some insulation from competition from multinational players – as does its decision to operate in smaller markets that are less attractive to the large international corporations. Although the move to bolster its business in central Europe suggests Orkla is departing somewhat from its previously announced strategy to focus on the core markets of Norway, Sweden, Denmark and Finland, the principle of being a local champion with a solid understanding of regional consumers remains the same.
Orkla wants to be a big fish in a relatively small pond and the company believes this can be achieved by using local know-how and its closeness to consumers in the region.
