And, while acknowledging its latest assets have enjoyed only “minimal growth” in recent years, the JBS-backed pork and poultry supplier believes it can expand sales.
After deals in 2017 and 2019 for poultry producer Moy Park and pork business Tulip (now called Pilgrim’s Pride Ltd) respectively, at just after 4pm EDT yesterday (17 June),
Pilgrim’s announced it had snapped up the meats and meals assets of Ireland’s Kerry Group.
The operations include brands such as Richmond sausages and Fridge Raiders meat snacks, as well as chilled and frozen ready meals marketed under third-party brands or retail own label.
As well as selling brands, Kerry’s meats arm is a private-label manufacturer. The division is also the home of meat-free brand Taste & Glory. The meals side of the business also houses the Oakhouse home-delivery unit. Pilgrim’s said the assets it is acquiring generated combined sales of “over GBP725m” (US$1bn) in 2020.
The deal also gives Pilgrim’s another nine production facilities in the UK, as well as 4,500 employees.
Pilgrim’s, publicly-listed but majority-owned by JBS, is paying EUR819m for the assets. The corresponding figure in sterling equals GBP704m, which comprises GBP680m as an enterprise value, plus GBP24m in adjustments for working capital and net debt.
Based on what Pilgrim’s says is the “expected standalone EBITDA” for the assets in 2021, the price implies an EBITDA multiple of 8.5 times.
The deal has put a “healthy valuation” on the Kerry assets, Ryan Tomkins, an analyst following the Ireland-based company for investment bank Jefferies, said today. Another UK analyst, Shore Capital’s Clive Black, an experienced observer of the country’s grocery sector, said Pilgrim’s had “paid a reasonably full price”, telling Just Food: “The extent that they’re going to make an attractive return on that is an interesting question.”
In the US, Morningstar analyst Rebecca Scheuneman looked at the price paid in comparison to other deals announced in the country’s packaged food market.
“The purchase price represents 8.5 times the acquired business’ 2021 standalone EBITDA, well below the 14 times average for packaged food deals executed over the past four years,” she said. “This discount is reasonable in our view, given the target’s lack of sales growth in recent years.”
On a call with US equity analysts yesterday afternoon local time, Pilgrim’s CEO Fabio Sandri and CFO Matt Galvanoni faced questions about the synergies that can be extracted from adding the Kerry businesses to the company’s existing UK operations – and about the growth prospects ahead for the new assets.
Sandri underlined – on more than one occasion – how the acquisition diversifies the Pilgrim’s business by product profile (and therefore margin) and by geography. “This transaction will further enhance our position as a stronger and more diverse leading global player by expanding our portfolio of prepared foods and brands,” he told the analysts. “We will enhance our margin structure, while reducing volatility across our business. And, just as important, with the addition of the Kerry consumer foods business, we will significantly strengthen our brand portfolio, and further improve our value-added innovation capability.”
Geographically, adding the Kerry businesses will mean 35% of Pilgrim’s new sales total will come from the UK and Europe (Mexico at 10% and North America at 55% make up the rest).
The acquisition gives Pilgrim’s a range of products like sausages, ham and chicken bites, all of which the company described in its presentation on the deal as “prepared foods”.
Once the transaction closes, more than a quarter of the Pilgrim’s portfolio will be of these “higher-margin” prepared-food products. The rest comes from Pilgrim’s “primary” meats businesses.
Pilgrim’s said the Kerry assets had “consistently achieved EBITDA margins of circa 10% in the past three years”. In the year to 27 December 2020, Pilgrim’s EBITDA margin was 5.1%. The previous year, the metric stood at just under 9%.
In sum, Pilgrim’s said the transaction will be “immediately accretive” to the company’s cash earnings per share.
On the growth profile of the assets Pilgrim’s is acquiring from Kerry, Sandri said growth had been “very stable” but pointed to recent moves in meat-free and home delivery and argued Pilgrim’s could get growth from Kerry’s range of “iconic brands”.
“If you look at the historical performance of this business, it has been very stable. I think it has some minimal growth. There’s a lot of new fronts that were generated over the last few years. One example was meat-free, and also the direct-to-consumer platform, so we expect both of those segments to generate a lot of growth over the next few years,” he said. “Also, we believe with some investments we can expand the reach of the iconic brands that they have to different products, especially connected with our current operations in Moy Park and PPC UK.”
The Pilgrim’s CEO was pushed on the synergies he believes the company can achieve in the UK. While Sandri indicated there were some to be had, he again underlined how he saw the deal as being a growth opportunity for sales and margins.
“This is a business that is double-digit EBITDA, right, so this acquisition is all about growth and diversification of our portfolio,” Sandri said. “We have some synergies in the back office for sure with a much bigger operation in the UK but it’s all about the integration and how can you support the growth of our key customers.”
Asked if the Kerry meats and meals business already buys ingredients from Moy Park and Pilgrim’s Pride Ltd., Sandri said the US group was indeed a supplier but again emphasised what he saw as the growth opportunities on offer.
“There is an opportunity to take care and integrate the value chain but it’s less on synergies and it’s more on creating special programmes that can enhance the value of the brands like using domestic chicken from UK,” Sandri said. “They rely a lot on meat from other places than UK, and we believe that it can leverage that to create more value to the unique brands.”
It will be from the meat-free operations – centred around the Taste & Glory brand – and from Oakhouse that Pilgrim’s expects to see the stronger growth from its new assets (hardly surprising in a way, given they are smaller businesses) but Sandri was at pains to tell the analysts Kerry’s stable of more mature brands can contribute.
“Most of the growth will come from the new business [Kerry] just started with the branded meat-free products and also the direct-to-consumer segments,” he said. “I think there is also some growth opportunities on the current brands with some developments and some stretch into different categories. I don’t think it is, you know, double-digit growth, because I don’t think the market in the UK and Europe is growing at that pace, but with [the combination of] those two, we can reach some significant growth.”
How much growth Pilgrim’s can generate from a stable of well-established brands will be a subject of debate, not least for a business in the UK centred on private label. It may be that, in the end, it’s the synergies that come into play to in effect ‘pay’ for the acquisition.
“This is a series of brands that have probably gone through the peak of their maturity curve for want of a better term. Unlike Kerry, because they bought the Tulip business – and they’ve obviously got Moy Park in poultry – there may actually be supply synergies and operating synergies, gross margin and operating costs synergies, that can justify that EBITDA multiple,” Shore Capital’s Black said.
“The additional element here is that the majority of what Pilgrim’s are doing in the UK and Ireland is private label, and it’s obviously bringing a portfolio of proprietary brands, so it will be interesting to see whether they can add any value to that proprietary brand portfolio.”
At Morningstar, Scheuneman added: “While the target has not experienced sales growth in aggregate in recent years, its line-up of plant-based meats and its direct-to-consumer home-delivered meals segment have realised compelling growth, and provide a platform for Pilgrim’s to expand to other geographies, if it opts to do so.”