Barry Callebaut can afford a taste for bold M&A. The Swiss chocolate company is splurging $950-million (U.S.) on a Singaporean cocoa business that is having a terrible year. For the buyer, credit downgrades to "junk" are likely to follow. If you want to be brave in deal making, it helps to have patient family backers and a safe perch outside the euro zone.
This is the biggest-ever takeover by the business-to-business chocolate maker, which vies with U.S. behemoths ADM and Cargill, and supplies customers such as Nestlé, Hershey's and Unilever. Vendor Petra Foods is keen to de-gear and focus on branded snacks such as Indonesian Silver Queen brand chocolate bars.
The sale follows an auction which pushed the unit's valuation up to 14.3 times 2011 EBITDA. That looks appropriately expensive for an emerging-markets food business. But these stale numbers probably understate the deal's real richness. That is because this year has been much weaker: EBITDA fell 29 per cent in the first three quarters, as lacklustre global appetite for chocolate ate into margins.
To justify the price, Barry Callebaut can point to meaningful cost savings of up 30 to 35 million Swiss francs ($31- to $37-million) a year. That's hefty compared to 2011 operating profit of 44 million francs, and would cut the 2011 multiple to a much skinnier 9.4 times EBITDA. The company reckons returns on capital and equity will return to pre-deal levels within a respectable three or four years.
There is business sense too: emerging market growth, diversification away from Africa, and new heft in cocoa powder – once cocoa butter's poor relation, but now booming. Butter-based chocolate melts too easily in hot countries, and can taste too rich for choc-novices. Powder is perfect for flavouring biscuits and drinks, and making cheaper, hardier "compound" chocolate.
Barry Callebaut's willingness to junk its credit rating is unusual for a large-cap corporate. But majority control rests with the Jacobs family, who can take a long-term view. And when bond markets are exuberant, the downside looks limited. The yield on the company's 2021 bonds had halved in the last year to about 2.9 per cent; even post-deal they stand at a still skinny 3.6 per cent. Now and then, you can get away with re-leveraging in M&A.