Givaudan said that it aims to develop a “clear market leadership” position through the deal, which will see it initially take a 40.6% stake in Naturex. Givaudan said that it plans to launch a mandatory cash-tender offer for the remaining shares in the French listed group.
Givaudan's 2020 Strategy and M&A
Givaudan placed the transaction in the context of its 2020 strategy, which focuses on expanding its natural product offering.
The company aims to be the “partner of choice” for food manufacturers, delivering 4-5% organic sales growth, operating margins of 20% and free cash flow standing at 12-17% of revenue.
Givaudan is concentrating on “growing with its partners” by focusing on delivering integrated solutions that meet the needs of growth markets, preferred categories and health and wellbeing trends.
For the full-year of 2017, Givaudan booked sales of CHF5.1bn, up 4.1% on a like-for-like basis and 8.3% when factoring in currency exchange. Growth was propelled by Givaudan’s flavours division, where like-for-like revenue increased 5.3%. On a group-wide basis, free cash flow stood at 11.8% of sales, the company revealed in January.
“The acquisition of a significant shareholding in Naturex fits fully with our 2020 strategy to expand our offering to deliver natural products to our customers,” Givaudan CEO Gilles Andrier commented.
Naturex, which is a leader in plant extraction for natural food solutions, hit sales of €405m in 2017. Created in 1992, and listed in 1996, the group operates 16 production facilities internationally. The group is positioned favourably within the growing natural ingredients space. Naturex produces extracts, botanicals and other antioxidants for use as colourings, flavourings, preservatives and other bioactives by food manufacturers and associated industries.
“Givaudan is the global leader in the space of natural flavours and Naturex further compliments our capabilities with its strong portfolio of plant extracts and natural ingredients across the food and beverage, nutrition and health and personal care sectors,” Andrier added.
Responding to demand growth, Givaudan has built its presence in the natural flavours sector through a series of recent acquisitions. These have included Spicetec in 2016, Activ International and Vika in 2017, and Centroflora Nutra in 2018. Since 2014, across its flavours and fragrances divisions, Givaudan has invested a total of CHF691m in M&A, with acquired businesses contributing CHF315m to the top line in 2017.
Louie D’Amico, president designate of the flavours division, said that the Naturex deal is “extremely complementary” to previous M&A.
“Consumers around the world are increasingly demanding more natural and organic products from food and beverage companies,” D’Amico noted, suggesting the Naturex deal will help Givaudan deliver solutions in this area.
Backing the deal, Naturex's board echoed the strategic rational that the combination will create a "clear" leader in the natural space.
Olivier Rigaud, CEO of Naturex commented: “This combination is supported by a strong strategic rationale with an ambition to become the leader in natural ingredients. We are proud to become part of Givaudan and leverage the complementary capabilities for our customers.”
Paying the piper
Givaudan revealed it will pay €135 per share for Naturex, equating to a transaction value of €522m. This valuation equates to a 40% premium on Naturex’s trading price prior to the announcement yesterday (26 March). The price represents an EBITDA (earnings before interest, tax, depreciation and amortisation) to enterprise value of approximately 22 times.
Vertical Group analyst Brett Hundley described the acquisition price as “expensive” for a company that returns EBITDA at 15% of total sales.
“This is an expensive deal, even by value-add ingredients standards,” Hundley observed.
The analyst suggests that in the short-term, the acquisition could actually weigh on Givaudan’s earnings potential and more than double net leverage levels to 22 times sales, versus 1x today.
“Our workup of pro-forma financials is as follows,” Hundley explained. “We add projected Naturex sales of €506m to our fiscal 2018 model for Givaudan, and include projected Naturex EBIT and EBITDA of €50.6m and€83.8m respectively. Against an enterprise value of… CHF1.679bn we attach we attach a 5% financing rate for incremental net interest expense of €84m… Thus our profit forecast model for [fiscal] 2018 ends up showing a pre-tax income of CHF838m, compared to our existing 2018 forecast of CHF871m.”
Essentially, Hundley concludes, this leaves a “negative value hole” of CHF33m. However, he adds that Givaudan could drive cost savings of CHF33m “over time” with further upside if the group is able to strengthen Naturex’s EBITDA margins as part of its 2020 strategy.
Givaudan did not provide details on the impact the acquisition is expected to have on its financial position.
Hundley suggested that the deal says more about the investment thesis of Naturex competitors, such as Futarom or Sensient, and showcases “just how expensive it is to consolidate this space right now”.