Ferrero is back with a Sweet Acquisition

On January 16th  2018, Ferrero, announced that it will acquire the confectionery business of Nestle in the US for $2.8 billion. The deal makes Ferrero the third-biggest firm in the confectionery market in the US, according to Euromonitor. The unit acquired generated $900 million in sales during 2017 for the Swiss-based company. Ferrero will own well-known brands, among which, Butterfinger, Baby Ruth and Crunch. Hershey and Rhone Capital (private equity group) also participated to the auction process.

Ever since Giovanni Ferrero took over at the helm of the family business, he pushed the group towards more M&A activity. Ferrero has always had a tradition of growing internally without this type of transactions, but in the recent years, this seems to be the strategy for the company in the future. For instance, in 2017 Ferrero took over Ferrara Candy for approximately $1.3 billion and Fannie May Confections Brands for $115 million.

The transaction was expected to close during Q1 and indeed, it successfully closed on the 31stof March 2018.

 

Industry Overview

Focusing on the worldwide market share of the chocolate industry, the six biggest firms own approximately 60% of the market, which proves that the industry is fairly concentrated. The industry leaders are Mars, Mondelez, Ferrero, Hershey and Lindt & Sprungli. Moreover, the US alone accounts for approximately 19% of the chocolate market which is worth slightly more than $102 billion according to Euromonitor. Moreover, Mars and Hershey alone have a 58% share of the US market.

With this acquisition, Ferrero has become the third-largest player in the confectionery industry (which includes chocolate, sugar candies and biscuits), just behind Mars and Hershey. It has thus this gained a more competitive position to challenge the US industry leaders. Mars, a privately-held company headquartered in Virginia, generated $35 billion in sales during 2017, while Hershey posted revenues of slightly more than $ 7.5 billion. However, it is worth highlighting that Mars has a widely diversified portfolio of products aside the confectionery business.

The chocolate and confectionery industries are facing several challenges. Firstly, the rise in prices of cocoa which is a fundamental commodity in the chocolate business. In fact, the value has been increasing since the beginning of the year (+30%), and in companies such as Hershey’s, it represents “about 15 to 20 per cent of Hershey’s cost of goods sold” as reported by UBS in an article of the Financial Times. Furthermore, healthier trends in consumer preferences are on the rise, and they represent a clear threat to companies in the confectionary industry, which are likely to harm future financial results.

Source: NASDAQ

Companies Overview

Ferrero

Ferrero spa, one of the biggest chocolate and confectionery companies in the world, was founded in 1946 by Pietro Ferrero. It is a multinational firm with its headquarter in Alba, Italy. The group has faced tremendous growth and now it includes 91 worldwide consolidated companies, it counts about 30,000 employees and €10.5 billion in revenue. The brands that contribute the most in terms of revenues are Nutella, Ferrero Rocher, Kinder Surprise, Kinder Joy, Kinder Bueno and Tic Tac. Ferrero strategy is focused on development, especially from a technological point of view; it aims to improve the quality of its manufacturing establishments in order to consolidate its leading position. This positioning has been achieved thanks to specific values on which the firm focuses its production and way of working, among these: high quality, product freshness and attention to client needs. The implementation of these objectives is highlighted from a numerical point on view, EBIT and revenues have been growing consistently, especially in the last three years, reaching €1.1 billion EBIT and €10.5 billion revenues thanks to an increase in volumes (0.3% in chocolate confectionery and 1% in sugar confectionery in the last year) and high-quality investments.

 

 

Nestlé

Nestlé spa is a multinational company headquartered in Vevey, Switzerland. It was founded in 1905 by the merger of the Anglo-Swiss Milk Company, established in 1866 by brothers George and Charles Page, and Farine Lactée Henri Nestlé, founded in 1866 by Henri Nestlé. Contrarily to Ferrero, Nestlé is not focused only on chocolate and confectionery, but it produces a variety of goods among which baby food, dairy products, breakfast cereals, bottled water and pet food. The company holds more than 2000 brands in its portfolio, becoming the biggest food producer in the world.

The acquisition involves only the US Nestlé confectionery business division, which includes more than 20 American brands including Butterfinger, BabyRut, 100Grand, Raisinets and Wonka. Regarding the Zone Americas operations (United States, Canada, Latin America and Caribbean), confectionery remained almost unchanged in terms revenues, rising from CHF 3,451 million in 2016 to CHF 3,507 in 2017

Deal Drivers

Both companies, Nestle and Ferrero, have a strategic rationale in undertaking this deal.

Lately, Nestle has been engaged in restructuring its product portfolio and repositioning itself as a health conscious company. As such, we can view this transaction in line with the sale of Australian Violet Crumble chocolate bar business, which also took place in January 2018, to move out of the sugar foods business. To enter health conscious consumer goods, Nestle acquired the Vitamin maker Atrium in December 2017. Nestle acquired Atrium, which has revenues of $700m, for $2.3bn and sold the portfolio of chocolate brands with revenues of $900m to Ferrero for $2.8bn. However, Nestle experienced sluggish growth in its chocolate business as consumer preferences shift toward health conscious goods.

Ferrero seizes this opportunity to acquire prominent brands such as Butterfinger, Wonka and Crunch to extend its North America operations and become the third largest company in the chocolate confectionery market. Achieving Growth is the objective of Ferrero’s larger strategy of scaling its position in confectionery foods, a direction in which it went for a while and among others purchased the Ferrara Candy Company with its Trolli brand, and Fannie May Confections Brands in 2017. Whereas Ferrero is strongly known for Nutella, Kinder, and pralines (Rocher, Raffaello) brands in Europe, it first introduced Tic Tac to the US and let the chocolate related brands follow. Hence, Ferrero would neither leverage nor jeopardise its Italian heritage brand by the portfolio extension.

For Ferrero the slowing market appears not to be a problem too severe and can be offset by the ownership over strong brands and gaining overall market share in the confectionery business. Contrary to Nestle, which is pushed towards increased profitability by its hedge fund shareholder Third Point (managed by Daniel Loeb), Ferrero remains family owned. Thus, besides the strategic rationale an underlying finance and governance related driver appears.

 

Deal Structure

Nestlé S.A., the largest food company in the world, agreed to sell its US confectionery business for $2.8bn in cash to Italian Ferrero S.p.A. The estimated deal value is about 20.7 times earnings before interest tax depreciation and amortisation, which is a “feels like quite a top multiple” as Robert Waldschmidt, as the Liberum analyst commented.

As Ferrero is privately owned, the company does not face any risks of being pressured by activist investors and lobby groups rising concerns about diabetes and obesity. This allows Ferrero to further expand its sweet snack business. Ferrero will acquire over 20 American brands, such as iconic chocolate and sugar brands Butterfinger, Nerds and Wonka. Moreover, the company will also acquire the exclusive right of the Crunch brand for confectionery and certain categories in the U.S. The transaction does not include Nestlé’s iconic Toll House baking products.

In addition, Ferrero will acquire Nestlé’s U.S. manufacturing plants in Illinois and Indiana, including the confectionery-related employees. It will continue to operate through the old Nestle office in California as well as Ferrero’s current American Head Office in New Jersey.

The transaction was subject to customary closing conditions and regulatory approvals and as expected, closed at the end of the first quarter of 2018.

Credit Suisse Securities, Lazard and Davis Polk & Wardwell LLP advised Ferrero.

 


Sources and References: Financial Times, Business Wire, Euromonitor, Nestle Annual Report, Reuters, Ferrero, Il Sole 24 Ore, Bloomberg, Fortune.

 

To contact the authors:

Finn Stockwald                                     finn.stockwald@studbocconi.it
Katharina Sophie                                 katharina.sophie@studbocconi.it
Martina Bonzano                                 martina.bonzano@studbocconi.it
Riccardo Salas                                      riccardo.salas@studbocconi.it