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August 14, 2019

Premium Brands lines up more M&A with Europe distinct possibility

Premium Brands Holdings has given its firmest indication yet the Canada-based food business plans to do M&A outside North America.

By Dean Best

Acquisition-hot Premium Brands Holdings has given its firmest indication yet that the the Canada-based food business plans to do a deal outside North America, with chief executive George Paleologou suggesting Europe is a target.

Premium Brands issued its first-half results yesterday (13 August) showing gains in revenues and profits before tax, but also a downturn in net earnings. And on a follow-up call with analysts the CEO talked about how Premium Brands was driven to raise prices for its pork products on the back of the African Swine fever outbreak in China, with the pass-through effect of those increases not yet fully reflected in its top line.

Premium Brands has been quiet so far this year on the acquisition front after completing 12 deals in 2018 valued at CAD753m (US$566.2m today), with many of those centred on the US. Four of the transactions represented “major platform transactions”, while the rest were bolt-on acquisitions, the CEO said in March.  

But more M&A looks imminent after Paleologou confirmed yesterday he is in a “record number of discussions and expects to be announcing several transactions in the near future”.

Asked what those transactions might entail, the CEO responded: “There are tuck-in and bolt-on deals there, and there is some other larger transactions in the pipeline. It’s tough to give you guidance on when things will be done when, but I would basically confirm that this is probably the busiest we’ve ever been.” 

Paleologou revealed two weeks ago Premium Brands installed a “permanent” managing director in Munich, Germany. “We are looking at a number of possible M&A opportunities in Europe,” he added. “It’s not inconceivable that we would do a transaction in Europe, let’s say, over the next six months.” 

Expanding on the criteria for such deals, the CEO said they would initially be protein-related and ones where Premium Brands could take the targeted company’s proposition into North America and gain “traction” with it.

“So it will be situations where we like their products. We believe that their products meet the attributes that we would like, and we think that by leveraging our existing sales, marketing and distribution infrastructure, we would be able to get traction. 

“We are currently distributing and selling a lot of these type of products in North America, and it is conceivable that we would make investments that would enable them to grow capacity or speed up their innovation, etc, etc. So that’s generally the primary focus.” 

Richmond-based Premium Brands reported a 28% increase in six-month revenues for the period to 29 June to CAD1.7bn. Adjusted EBITDA climbed 27% to CAD149m. However, net earnings dropped 6% to CAD41.2m.

CFO William Kalutycz said the company faced “extreme volatility in certain commodity protein markets” during the half year as a consequence of the African Swine fever (ASF) outbreak in China.

ASF has decimated hog herds in China and led to an upsurge in global pork prices and supply shortages. The disease has also spread beyond China’s borders into other countries in Asia, parts of Europe and South Africa.

Kalutycz estimated the impact on EBITDA from ASF to be around CAD6m, while a bout of poor spring weather shaved off another CAD4m.

“Our sales were negatively impacted by this [ASF] as many of our protein businesses reduced their product featuring and promotional activities in response to the cost uncertainties associated with these volatilities,” the CFO added.

As a result of the higher pork inputs, Premium Brands raised some selling prices across its businesses but they had “only a limited benefit in the quarter” because they were put in place toward the end of June and early July, Kalutycz said.

The price increases ranged from 5% to 10% and did not impact volumes, the CFO noted. And second-quarter organic growth of 4.6% was within the company’s “long-term targeted range” of 4% to 6%, with Premium Brands “bullish” on the outlook for the second half, Kalutycz added. 

CEO Paleologou said Premium Brands’ customers are willing to absorb the price increases.

“You have to remember that we are at a very, very high end of the spectrum, a broad spectrum and consumers buy our products, not because they are the cheapest but because they like them, because they enjoy them,” he said. 

“The fact of the matter is that our consumer is very quality-driven, a brand-driven consumer. They go to the store and they want to buy our products. And that’s part of the reason why we’re confident with the velocity of our products given our pricing.”

Paleologou said Premium Brands will be less affected by seasonal changes in the weather as its “aggressive expansion” in the US over the past two to three years has taken out some of the seasonality. “It’s been part of our long-term strategy, and US-based type of acquisitions will do that.” 

But Paleologou also conceded there is uncertainty across markets and the food industry on how ASF will pan out, although his finance chief said forthcoming acquisitions should help mitigate any other unforeseen challenges ahead.

Paleologou said: “In terms of the ASF crisis, we continue to monitor the situation closely and to work with our supply chain partners and customers in managing this challenge.  

“No one knows how this issue is going to play out as there are many complex variables to consider including consumer demand destruction, changes in retail and foodservice featuring, ongoing trade disputes between China and North America, the substitution of other proteins for pork and the progress made in the containment of the disease. 

“I do, however, know that our unique business model of partnering with and empowering talented successful entrepreneurs and then supporting them in managing their businesses for the long term will enable us to continue to be leaders in the speciality foods industry no matter how this situation unfolds.” 

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