Consumer Products Deals Quarterly: Portfolio …...Midland Co. Buyer country US Target WILD Flavors...

Issue 20

Q3 2014

Portfolio optimization driving deals

Consumer Products Deals Quarterly

2 Portfolio optimization driving deals — Issue 20

Top 10 deals in Q3 14

General Mills Inc.Buyer countryUSTargetAnnies Inc.USAnnounced date8 Sept 2014

US$820m

Imperial Tobacco Group PLCBuyer country

TargetReynolds Amer Inc-CigaretteUSAnnounced date11 July 2014

US$7,056m

Reynolds American Inc.Buyer countryUS

UKTargetLorillard Inc.USAnnounced date11 July 2014

US$27,400m

Shanghai Bairun FlavorBuyer countryChinaTargetShanghai Bakesi Wine Co. Ltd.ChinaAnnounced date12 Sept 2014

US$939m

Ajinomoto Co. Inc.Buyer countryJapanTargetWindsor Quality Foods Co LtdUSAnnounced date10 Sept 2014

US$800m

The Coca-Cola CompanyBuyer countryUSTargetMonster Beverage-BusinessUSAnnounced date14 Aug 2014

US$2,150m

Archer Daniels Midland Co.Buyer countryUSTargetWILD Flavors GmbHSwitzerlandAnnounced date7 July 2014

US$3,129m

Groupe Lactalis S.ABuyer countryFranceTargetBRF S.A.BrazilAnnounced date3 Sept 2014

US$805m

Dongling Grain & Oil Co. Ltd.Buyer countryChinaTargetChina Natl Agricultural Intl.ChinaAnnounced date26 Aug 2014

US$617m

TreeHouse Foods Inc.Buyer countryUSTargetFlagstone FoodsUSAnnounced date30 June 2014

US$860m

Highlights of Q3 2014 consumer products deals

Eight megadeals have been announced so far this year, twice the total for the whole of 2013.

Global players showing appetite for megadeals

2014 YTD2013

290Average LTMnumber of deals

6

17

49

222

Deal volumes make steady progress

Surge in deal values continues

Portfolio optimization —

dominant theme for the quarterPrivate equity activity

picks up

40 Private equity deals

254 Corporate deals

3.47 0.31 32.4612.88

Total deal value by subsector in US$b.

Editor’s viewpoint

3Portfolio optimization driving deals — Issue 20

Top three mistakes that companies make with their portfolios:

Failure to develop actionable portfolio optimization scenarios and linkage to value creation metrics

Failure to identify appropriate benchmarks and develop a process to overcome internal biases

Failure to deploy a periodic, consistent and objective review process

1 2 3

This year has been notable for a sharp increase in total deal value which continued through the third quarter. The dominant theme underpinning this activity is strategic portfolio optimization, as the global consumer companies continue to pursue consistent enterprise sales growth in the developed markets. Deal making in the sector has come roaring back in 2014. The year to date ended September 30 deal value has increased by over 70% from US$86b in 2013, to $US148b in 2014.

Strategic portfolio optimization is far from straightforward. Businesses continue to become more global and organizationally complex, and

time deploying a robust portfolio review process. Many companies, consequently, do not look to

rationalize their portfolio because they perceive that the return from doing so does not outweigh the time and distraction involved. Generally, companies fail to remove cultural and organizational bias from the portfolio review process.

Developing meaningful and actionable scenarios, including sequencing and phasing of activities, as review output and linkage to shareholder value creation metrics is a best practice. However, to create shareholder value, the strategic portfolio review process should result in what brands, categories or businesses should be

my opinion, a periodic, consistent and objective portfolio review and rationalization is a sign of a well-managed company.

Gregory J. StemlerGlobal Consumer Products Transaction Advisory Services LeaderEY


Data analysis — Total value exceeds US$50b for second consecutive quarter

Data analysisTotal value exceeds US$50b for second consecutive quarter

Total deal value in the global consumer products sector between Q1 14 and Q3 14

US$148bThis year’s rapid surge in total deal value continued into the third quarter. Total disclosed deal value was US$53b in Q3 14, not far short of Q2 14’s US$57b, which was the highest quarterly total

outstripped the comparable period in 2013 by 75% and is already

Two megadeals, with a value greater than US$5b, were announced during the quarter: Reynolds American’s purchase of Lorillard and the related divestment of some of Reynolds’ and Lorillard’s brands to Imperial Tobacco. So far this year, eight megadeals have been announced, twice the total for the whole of 2013.

In contrast to this year’s surge in value, the trend in total deal volume has been relatively stable. Total deal volume decreased by 2% from 299 deals in Q2 14 to 294 deals in Q3. A sharp drop in transactions in the household and personal care sector from 31 in Q2 14 to just 17 in Q3 14 was a notable feature of this quarter’s deal activity.

In addition to the global players’ ongoing interest in megadeals, we see evidence of a two-tier market, with appetite also improving for middle market deals. Our recently published 11th Global

highlighted a shift in expectations among consumer products companies toward smaller transaction sizes in the coming 12 months.1 This shift toward the middle market suggests that deal volumes should recover as companies pursue bolt-on acquisitions.

EY, October 2014.

“ We believe that the recent higher levels of total value are likely to be maintained as the large consumer products

Dave MurrayConsumer Products Transaction Advisory Services Leader UK and Ireland EY

Data highlights Q3 14Deal values Q4 11-Q3 14

Ave

rage

dea

l val

ue (U

S$b)

Tota

l dea

l val

ue (U

S$b)

Food Beverages HPC Tobacco Average deal size

0.0

0.2

0.4

0.6

0.8

1.0

0

20

40

60

Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14

Deal volumes Q4 11-Q3 14

232

231

222

206

221

243

193

186

185

190

207

222

69 66

60 65 69

68

66 52 56 54 54 49

52 40

25 43 25

32

33 46 37 36 31 17

4 4

2 3 3

4

2 1 3 7 7 6

-50

100150200250300350400450500

Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14

Num

ber

Tobacco HPC Beverages Food Average LTM number of deals

Corporate vs. private equity deals Q4 11-Q3 14

278

79

285

56

261

48

264

53

258

60

292

55

241

53

222

63

229

52

236

51

264

35

254

40

Corporate PE

0%

20%

40%

60%

80%

100%

Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14


Data analysis — Total value exceeds US$50b for second consecutive quarter

Top 10 deals in Q3 14

Buyer name Buyer country Target name Target country

Disclosed value (US$m)

Announced date

Deal type Sector Cross-border or in-border

Reynolds American Inc. United States Lorillard Inc. United States $27,400 11 Jul 14 Corporate Tobacco In-borderImperial Tobacco Group PLC

United Kingdom Reynolds American Inc. United States $7,056 11 Jul 14 Corporate Tobacco Cross-border

Archer Daniels Midland Co.

United States WILD Flavors GmbH Switzerland $3,129 7 Jul 14 Corporate Food Cross-border

The Coca-Cola Company

United States Monster Beverage-Business United States $2,150 14 Aug 14 Corporate Beverages In-border

Shanghai Bairun Flavor China Shanghai Bakesi Wine Co Ltd China $939 12 Sep 14 Corporate Beverages In-borderTreeHouse Foods Inc. United States Flagstone Foods United States $860 30 Jun 14 Corporate Food In-borderGeneral Mills Inc. United States Annies Inc. United States $820 8 Sep 14 Corporate Food In-borderGroupe Lactalis S.A. France BRF S.A. Brazil $805 3 Sep 14 Corporate Food Cross-borderAjinomoto Co. Inc. Japan Windsor Quality Foods

Co. Ltd.United States $800 10 Sep 14 Corporate Food Cross-border

Dongling Grain & Oil Co. Ltd.

China China Natl. Agricultural Intl. China $617 26 Aug 14 Corporate Food In-border

20.97

40.24

30.24

15.37

9.44

40.68

56.94

51.11

40.24 40.68

30.24 56.94

15.37

51.11

0

20

40

60

80

100

120

140

160

180

9M'13 9M'14 12M'13 12M'14

US$

b

Q4 Q1 Q2 Q3

Note: 2013 (12 month data) runs from 15 Sep’12 – 14 Sep’13.2014 (12 month data) runs from 15 Sep’13 – 14 Sep’14.

Total rise in disclosed deal values in 2014 compared to 2013, based on 9-month and 12-month periods9M’13 9M’14 12M’13 12M’14

Q4 $20.97 $9.44

Q1 $40.24 $40.68 $40.24 $40.68

Q2 $30.24 $56.94 $30.24 $56.94

Q3 $15.37 $51.11 $15.37 $51.11

$85.85 $148.73 $106.82 $158.17

Total disclosed deal values (US$b) in 2013 and 2014


Portfolio optimization was the dominant investment theme in Q3 14, underpinning this quarter’s largest deals, the majority of which were US-based transactions. The third quarter’s biggest deals also point towards the end of two long-held beliefs in the consumer products sector: that offering consumers more choice increases their spending and that being fully vertically integrated confers competitive advantage.

Procter & Gamble to cull underperforming brandsStrategic portfolio optimization is an ongoing investment theme underpinning M&A activity in the global consumer products sector. The trend gained additional impetus in the third quarter when Procter & Gamble, the world’s largest household and personal care company, announced that it would divest or discontinue, 90 to 100 of its brands that are non-core to its business. The company

seeks to revitalize growth and reduce costs.

lot of evidence in a number of our business categories that the shopper and the consumer really don’t want more assortment and more choice. Consumers want to keep their life simple and

1

P&G has already been divesting non-core businesses. In the third quarter, P&G completed its exit from the food sector with the sale of its European business, which includes the Iams and Eukanuba brands, to Spectrum Brand Holdings for an undisclosed sum. Mars acquired the bulk of P&G’s global pet food business earlier this year.

wholesale overhaul of P&G’s portfolio over the next one to two years. The brands that are to be put up for sale have yet to be disclosed. As part of the new strategy, in October, Chinese private equity group CDH Investments agreed to buy a 79% stake in Chinese alkaline battery manufacturer Fujian Nanping Nanfu Battery Co. from P&G.2

, www.ft.com, 1 August 2014.

, www.asiasset.com, 10 October 2014.

Investment themes

Companies are focused on portfolio optimizationThe results of the latest EY survey support this focus on portfolio optimization. Consumer products groups were asked on which capital management issue – raising, investing, optimizing or preserving – their company was currently placing the greatest attention and resources. Optimizing was the clear frontrunner with 51% of consumer products and

3

Shareholder activists are also playing a role in moving optimization up the corporate agenda. While cost reductions, share buybacks and dividend payments are the most popular issues elevated up the boardroom agenda by activists, 26% of consumer products and retail companies report strategic divestment is being driven by shareholder activism.4

EY, October 2014.EY, October 2014.

“ P&G’s intention to drastically slim down its brand portfolio is further evidence of the need for consumer products companies to focus on actively managing their portfolios. If you don’t manage your portfolio, someone

Greg StemlerGlobal Consumer Products Transaction Advisory Services Leader EY

Strategic portfolio optimization takes center stage

Investment themes — Strategic portfolio optimization takes center stage



US tobacco industry shake-upThe third quarter’s largest deal – the US$27.4b acquisition of Lorillard by Reynolds American – is both a scale play in the US market and a portfolio optimization story, combining the second-and third-largest US tobacco companies to take on market leader Altria Group.

British American Tobacco, which holds 42% of Reynolds American, has also agreed to invest US$4.2b to maintain its stake. Reynolds American estimates that the deal will generate cost

2015, after a regulatory review, which some analysts believe will present obstacles to the deal being completed.5 Others, however, believe the deal will go through because Lorillard and Reynolds’ portfolios have limited direct competitive overlap as they both serve different demographics and different geographies and that strengthening Imperial Tobacco into a legitimate number three competitor should also alleviate concerns.6

, 15 July 2014.

, 29 September 2014.

In a related transaction, Imperial Tobacco Group agreed to purchase Reynolds American’s Winston, Kool and Salem brands; Lorillard’s Maverick brand; its blu e-cigarette business; and its production facilities in North Carolina, all for US$7.1b. The

US presence and the market-leading brand in the e-cigarette market, where Lorillard had a market share of almost 50%. The sale of blu was unexpected, and Lorillard and Reynolds are now backing the latter’s e-cigarette brand, Vuse, which became the top-selling brand when it was launched in two test markets, Colorado and Utah.7

Ahead of the transaction, Imperial Tobacco released some cash by selling 27.3% of its Franco-Spanish logistics business, Logista, through an IPO on the Spanish stock market, which valued the whole company at US$2.4b (€1.73b).8

Coca-Cola’s Monster energy playCoca-Cola’s purchase of a 16.7% stake in Monster Beverage for US$2.2b is a clear example of the portfolio optimization theme. Under the terms of the deal Coca-Cola will transfer ownership of its energy business, which includes brands such as NOS, Full Throttle, Burn, Mother, Play and Power Play, and Relentless, to Monster. In turn, Monster will transfer its non-energy business, including Hansen’s Natural Sodas, Peace Tea, Hubert’s Lemonade and Hansen’s Juice Products, to Coca-Cola.

The carbonated soft drink market has been slowing –

of the bright spots.9 For Monster, RBC Capital Markets Analyst Nik Modi believes that “the international opportunity is now larger,

best global distribution footprint across CPG [consumer packaged goods] and will likely want to push Monster aggressively into new

10 Coca-Cola will become Monster’s preferred distribution partner globally, and Monster will become Coca-Cola’s exclusive energy play.

, www.fool.com, 20 July 2014.

, www.reuters.com, 10 July 2014.

, www.dowjones.com/djnewswires, 15 August 2014.

10 , 15 August 2014.

“ Reynolds American is the merger lead acquiring Lorillard to gain the Newport brand and thus becoming a stronger player across three key segments – premium, menthol and value. Imperial’s related deal is transformational for its US business: it gains national scale and becomes

Ed HudsonGlobal Tobacco Sector Co-Leader EY


Ongoing focus on healthy eatingWithin the food sector, one variation of the optimization theme is

In September, General Mills agreed to pay US$820m to acquire organic foods company Annie’s, which is best known for its boxed macaroni and cheese and bunny-shaped crackers. Since its purchase of Small Planet Foods in 2000, General Mills has been gradually building up its portfolio of natural and organic brands, adding the LARABAR range of fruit and nut-based snack bars in 2008 and the Food Should Taste Good range of savory snacks in 2012.

General Mills has struggled to increase sales this year – growth

digit growth, albeit at a price. “We think it is paying a full price for the business (29x FY15 EBITDA), but not necessarily overpaying given Annie’s strong 20% per year track record for sales growth and the opportunity to improve the cost structure

brand is uniquely positioned to capitalize on the growing demand for processed foods with organic and natural ingredients. General Mills needs to build more scale in its Small Planet Foods

11

In July, Archer Daniels Midland (ADM) expanded its presence in the natural ingredients market with the acquisition of beverage

double ADM’s specialty ingredients sales and, importantly, adds a

food supplements business.12

11 , 8 September 2014.

12 , www.ft.com, 7 July 2014.

TreeHouse Foods agreed to buy trail mix and dried fruit company Flagstone Foods from Gryphon Investors for US$860m in cash, making it a private label leader in healthy snacks. TreeHouse Chief Executive Sam Reed said Flagstone “is ideally situated at the intersection of health and wellness, snacking and the perimeter of the store, and represents an attractive new platform for TreeHouse to enter the on-trend, rapidly growing $7.1 billon

13

Giving brands breathing roomIn the healthy eating space, there is a trend for large companies not to fully integrate natural/organic acquisitions. In part, this

a new segment, without the red tape and cost structures of a large company. General Mills’ Small Planet Foods division, for example, is run relatively autonomously. However, big companies buying organic companies with a very loyal customer base must also overcome consumer distrust. The Annie’s transaction has attracted criticism from consumers and anti-GMO activists concerned that Annie’s core values will be lost under General Mills’ ownership.14 Both Annie’s and General Mills, however, have stated their intention not to change Annie’s values.

A number of large companies have taken the decision not to fully integrate acquisitions, believing that a brand can prosper if the company buying it leaves it alone and fearing that full integration risks brand dilution. Coca-Cola/Innocent and this year’s purchase of Dorset Cereals by Associated British Foods (ABF) are both examples of this more hands-off approach. Nestlé has not integrated its acquisitions in China, while SABMiller allows businesses to operate with a degree of autonomy to appeal to local market conditions.

13 , www.forbes.com, 30 June 2014.

1417 September 2014.

“ Food ingredients manufacturing is a hot area for M&A and is likely to remain so. Large food companies are looking to gain strategic advantage by buying technology and innovation further down the

Mike SillsGlobal Food Sector Co-Leader EY

“ In my opinion, periodic portfolio review including actionable scenario analysis linkage to shareholder

Greg StemlerGlobal Consumer Products Transaction Advisory Services Leader EY


While recognizing the challenges of running smaller, non-core brands within a large corporate structure, others have opted

Brynwood Partners acquired the SnackWell’s cookies and snacks

Nature Foods.

A new business model for the food sector?Annie’s has a non-traditional operating model, having built its business without investing in manufacturing facilities. While outsourcing manufacturing carries a risk with regard to food safety and maintaining customer trust, Annie’s shows that it is possible to build a very loyal customer base operating this business model. Co-manufacturing is therefore generating increased interest. Earlier this year, Hearthside Food Solutions, the largest independent bakery and contract food manufacturer in North America, which was established in 2009, was bought by Goldman Sachs and Vestar Capital Partners.

“ Companies managing brands and categories and shedding manufacturing capacity may be a future direction for food companies. Manufacturing no longer

Andrew CosgroveGlobal Consumer Products Lead Analyst EY


We expect that the themes underpinning the third quarter’s deal activity will be recurring ones, providing the rationale for further large-scale deals:

• Corporations are showing a renewed appetite for megadeals, particularly US dealmakers. During the quarter, for example, SABMiller made an approach to Heineken, which was rebuffed, in turn prompting speculation that SABMiller could become the subject of a bid from larger rival AB Inbev.15

• Another option for AB InBev is one of the major soft drinks players.

• Recent press reports also suggest that toothpaste giant Colgate-Palmolive could be a potential target.16

• The third quarter’s tobacco megadeal could also generate a response from Altria or Philip Morris.

• P&G’s intended sale of a large number of brands will obviously generate deal activity in the coming months.

• 3G Capital, which bought Heinz, has in the past made an

used it as a platform for further deals.

• We believe acquisitions in the healthy eating and snacking sectors will also continue.

15 , www.theguardian.com, 15 September 2014.

16 , www.bloomberg.com, 24 September 2014.

Activity to watch out for ...

11th Global Capital

EY’s Talking series

Luxury and cosmetics

Challenging growth in the luxury and cosmetics sector

Find out more at www.ey.com/ccb

Find out more at www.ey.com/consumerproducts

Find out more at www.ey.com/consumerproducts

More information at www.ey.com/consumerproductsFollow us on Twitter @EYConsumerGoods


Our Barometer predicts healthy growth for M&A globally, which should take the market back to levels last seen before the

Longer-term urbanization, a reducing drag on the wholesale market and an increasing shift toward younger, male customers are set to be the driving factors behind future growth

in the luxury and cosmetics market. We highlight three areas of focus that executives need to consider.

Our Talking series are regular

food, brewing, personal care and tobacco subsectors. Published every month, they provide a succinct update on the new strategic developments across a broad range of topics.


Methodology is based on EY’s analysis

of Thomson Reuters data from Q4 11-Q3 14. Data was pulled from the Thomson Reuters database using standard industrial

products includes only those companies in the food, beverages, tobacco and HPC subsectors.

date that the Thomson Reuters database was accessed.

Data source and industry scope

• Deals include transactions between companies in the four consumer products subsectors, consumer products companies acquiring businesses in other subsectors and non-consumer products companies acquiring consumer products companies.

• Private equity deal activity includes full and partial-stake transactions and was analyzed based on acquisitions by

management groups, certain commercial banks, investment banks, venture capital and other similar entities.

• based on the consumer products sector of the seller.

• Equity investments were included (corporate and private equity).

• Joint ventures were not included.

• The value and status of all deals highlighted in this report are as of 14 September 2014. Q3 2014 represents deals announced between 15 June 2014 and 14 September 2014.

• All dollar amounts are in US$ unless otherwise indicated.

• There is no minimum US$ deal threshold.

• Only disclosed deal values (as per Thomson Reuters) are used in all value analyses.

• value of deals with disclosed values for the period under discussion.

• The disclosed value as stated in the top 10 deals table is the total value of consideration paid by the acquirer, excluding fees and expenses. The dollar value includes the amount paid for all common stock, common stock equivalents, preferred stock, debt, options, assets, warrants and stake purchases made within six months of the announcement date of the transaction. Liabilities assumed are included in the value if they are publicly disclosed. Preferred stock is included only if it is being acquired as part of a 100% acquisition. If a portion of the consideration paid by the acquirer is common stock, the stock is valued using the closing price on the last full trading day prior to the announcement of the terms of the stock swap. If the exchange ratio of shares offered changes, the stock is valued based on its closing price on the last full trading day prior to the date of the exchange ratio change. For public target 100% acquisitions, the number of shares at date of announcement is used.

Qualifying deals

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How EY’s Global Consumer Products Center can help your business Consumer products companies are operating in a brand new order, a challenging environment of spiraling complexity and unprecedented change. Demand is shifting to rapid-growth markets, costs are rising, consumer behavior and expectations are evolving, and stakeholders are becoming more demanding. To succeed, companies now need to be leaner and more agile, with a relentless focus on execution. Our Global Consumer Products Center enables our worldwide network of more than 16,000 sector-focused assurance, tax, transaction and advisory professionals to share powerful insights and deep sector knowledge with businesses like yours. This intelligence, combined with our technical experience, can assist you in making more informed strategic choices and help you execute better and faster.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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EY | Assurance | Tax | Transactions | AdvisoryContactsRegion Contact Email/telephone

Global Gregory J. Stemler Global Consumer Products Transaction Advisory Services Leader

[email protected] +1 312 879 3351

Americas Steven G. Potter Consumer Products Transaction Advisory Services Leader


Asia-Pacific John Hope Consumer Products Transaction Advisory Services Leader

[email protected] +852 2846 9997

Europe, Middle East, India and Africa

David Murray Consumer Products Transaction Advisory Services Leader


Japan Tatsuya Hiramoto Consumer Products Transaction Advisory Services Leader


Country Contact Email/telephone

Cristiane Amaral Consumer Products Leader


Russia Dmitry Khalilov Retail and Consumer Products Leader


India Pinaki Mishra Retail and Consumer Products Leader


China Robert Partridge Transaction Advisory Services Leader

[email protected] +852 2846 9973

Sector Contact Email/telephone

Global Kristina Rogers Global Consumer Products Sector Leader


Andrew Cosgrove Global Consumer Products Lead Analyst


Steve Wills Global Leader


Food Patricia Novosel Global Co-Leader


Mike Sills Global Co-Leader


HPC Anastasia Economos Global Co-Leader


Mark Twine Global Co-Leader


Tobacco Ed Hudson Global Co-Leader


Reinier Labadie Global Co-Leader


Consumer Products Deals Quarterly: Portfolio …...Midland Co. Buyer country US Target WILD Flavors...

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