Kerry Group’s rumoured consumer division sale 'makes strategic sense', believe equity analysts

By Oliver Morrison

- Last updated on GMT

Image: Kerry Group
Image: Kerry Group

Related tags Kerry Kerry foods

Irish ingredient giant Kerry Group has made no comments on speculation it is considering a strategic review of its Consumer Foods division.

According to a Bloomberg report quoting ‘people familiar with the matter’, the company is reviewing its ownership of Kerry Foods, which produces chilled meat and dairy products including Charleville cheese, Cheestrings, Dairygold spread, and Richmond sausages. The move, potentially worth ‘billions of euro’, could free up money for acquisitions in its largest and fast-growing Taste and Nutrition division. If it decides to proceed, it could pursue a sale or spin-off of part or all of the business next year.

According to the sources, Kerry’s non-dairy consumer food assets, including key brands Richmond, Denny, Fridge Raiders, Rollover hotdogs and Naked Glory meat substitutes, are seen as easier to divest and could attract interest from private equity companies. 

No final decision has been taken by Kerry Group, which could still retain the business. It has also said it does not comment on “rumours or speculation”. However, its share price jumped on the rumours. According to equity analysts, the move would make strategic sense by helping raise funds for Kerry to expand its core food ingredients business through acquisitions.

The group’s CEO, Edmond Scanlon, who took over as chief executive two years ago, has already made clear he is targeting expansion of the Taste & Nutrition unit and has identified a ‘strong’ pipeline of potential targets. This ambition is illustrated by Kerry’s failed attempt last year to purchase DuPont’s nutrition business. Kerry is also in talks to sell a 60% share in its dairy business.

Kerry's Consumer Foods unit at a glance
Kerry's Consumer Food unit at a glance

'Investors have long questioned Kerry’s strategic rationale for owning the business'

Laura Parisot, an analyst at Alpha Value, suggested any move to sell its Consumer Foods division has been a long time coming.

“According to Bloomberg, Kerry is said to weigh (finally!) options for Consumer Foods business (part or all the activities),”​ she wrote in a note to investors.
“This is an operation that would be considered very positive as the division is way behind the core business and, historically, a drag on margin. We value the business €1.5bn and believe that the timing is right for such a transaction, after overall business volumes were back (excluding Tesco contract loss) as a result of the pandemic. We clearly see upside if Kerry makes it happen.”

Kerry lost a contract estimated to be worth €80m with the UK's largest supermarket chain Tesco prior to closing its production plant in Staffordshire in England in 2018.

Jason Molins, an analyst at Goodbody stockbrokers, also values the division at around €1bn. He said: “Overall, while deliberations are at an early stage, we are not surprised by the speculation regarding the divestment of the Consumer Foods business. The disposal would make strategic sense, freeing up significant funds to invest behind the core Taste & Nutrition division whilst also improving the growth and margin profile of the Group.”

Barclays analyst Alex Sloane noted that Kerry’s consumer foods divisions is ‘relatively small within the group’ and is ‘dilutive to Kerry’s group margins and growth profile’. “Investors have long questioned Kerry’s strategic rationale for owning the business which has limited synergies with and structurally slower growth prospects than its core Taste & Nutrition unit,”​ he said.

Barclays’ estimates a potential disposal might provide “around €1.1-€1.4bn” of potential proceeds if Kerry were to sell the entire unit, he added.

“Clearly a disposal could provide incremental firepower for Kerry’s potential M&A pipeline in Consumer Ingredients,”​ said Sloane.

He noted that Kerry’s ‘strong track record of shareholder value creation through more than two decades of bolt on M&A’. “We like that Kerry has flexibility to potentially add selected ingredient technologies that it can use its global footprint to scale. The two acquisitions announced with Q3 20 results are good examples of this, with Kerry able to spend c€200m on Bio-K, a Canadian probiotics business, and Jining Nature, a savoury taste solutions business further expanding Kerry’s footprint in China. Kerry purchased Ganeden, a probiotics technology firm, in 2018, and has successfully been able to scale to new markets and application.”

The UBS team of equity analysts agreed the move would make strategic sense. “It is in line with the strategy management discussed at the UBS European Conference in November where the CEO emphasised the continued prioritisation of capital deployment to its faster growing, higher margin Taste & Nutrition division.”​ This division made up 82% of sales and 89% of EBITA (Earnings before interest, taxes, and amortization) in 2019, they noted.

“The CEO highlighted that Kerry has been successfully aligning its portfolio with the highest growth areas in the market (plant-based protein, natural, health & wellness, sustainability) in recent years. While 2020 has seen notable disruption to this division from the pandemic (given the division's 30% sales exposure to the foodservice channel), it is Kerry's belief that these trends are here to stay and Kerry's alignment with these trends should help its T&N volume growth rate to accelerate to the mid to upper end of its +4-6% medium-term guidance range.”

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