British food giants hunger for capital

The venture capitalist-backed bids for United Biscuits could set the future tone for Britain’s cash-strapped food sector. As consolidation unlocks brand value, even established giants will become vulnerable, Ian McCawley reports

The battle for United Biscuits (UB) may herald a new era of bidding wars as venture capitalists target some of the UK’s most traditional – and respected – food companies, such as Tetley, Ranks Hovis McDougall, and maybe even Cadbury.

UB is caught up in a straight fight between US consortium Burlington – a private investment company including Hicks Muse Tate & Furst and biscuit giant Nabisco – and European investment consortium Finalrealm, which includes French equity company Paribas, Deutsche Bank, UK buyout outfit Cinven and Danone. The two-way fight between US and European buyout specialists has provoked speculation about which will be the next big food name to come up for grabs. Industry sources say the rise of private equity companies could leave even the biggest brands open to hostile takeover bids.

Even if Hicks Muse’s bid for UB fails, the company has other fish to fry. It is keen to splash out in the struggling UK and European food sector. The “buy and build” brand strategy it and other venture capitalists favour is being scrutinised by industry insiders, who think it will become the norm for the sector. One source says: “The European food sector is underperforming terribly. It generates cash, but nowhere near as much as other sectors. If Hicks Muse is looking for companies with the ability to make money, food is a good place to start.

“The general strategy is to acquire businesses, nurture them so they perform well, pay down the debt and sell the business on within five years.

“I suspect it will try to do a balancing act to support brands and make them more healthy, but not spend too much cash.”

Hicks Muse’s food and consumer goods acquisitions are operated by the C Dean Metropoulos consultancy. Together they have spent $13bn (&£8bn) on deals in the US and South America, and jointly own canned food, popcorn and home cooking specialist International Home Foods.

Hicks Muse has spent about $1.5bn in Europe, gaining its first major foothold in the UK food sector with the takeover of furniture and food company Hillsdown Holdings in June last year.

At the time, Hicks Muse managing director John Muse said he was looking forward to making further deals in the UK and Europe.

Dean Metropoulos, a partner at Hicks Muse and chairman of C Dean Metropoulos, says the buy and build strategy will continue: “There is a great opportunity to provide some consolidation and rationalisation in the food industry, where businesses have not made great investments.

“Our strategy is focused on awaiting appropriate opportunities rather than having a specific amount of money to invest.

He is keen to expand: “By providing private equity, we act as a catalyst to unlock the hidden value of a brand or company. We’re in the business of investing, fixing and improving.

“We are oriented towards a management style which cuts down manufacturing and administrative costs. We’re not interested in stripping companies and selling off their best assets. We make companies leaner, more effective and put the focus on core areas, so they become more profitable.”

Metropoulos adds: “We generally have a five-year horizon, but we still invest as if we will own a company 20 years down the road. Then we will consider making the company public again, or selling to a more long-term investor.”

Hicks Muse is in the process of merging Hillsdown jam producer Chivers Hartley and HL Foods, which has a licence from Danone to produce HP tinned food.

Premier Brands, maker of Typhoo tea, and Horizon Biscuits, producer of Cadbury Fingers, have already merged.

Hicks Muse will have to decide whether to hold on to core food brands and sell-off other interests such as furniture division Christie Tyler and poultry business Buxted Chicken.

The company plans to target other businesses on this side of the Atlantic and has already been linked with a bid for manufacturing group Tomkins’ food division, Ranks Hovis McDougall.

The UB sell-off could mark a turning point for UK food companies. One analyst explains: “There has been a great deal of venture capitalist money about for the past two or three years. They are feeling bullish because economies are generally performing well. They are discovering the value of brands in the food business that have either been wrongly positioned or lost inside a company portfolio. They see a fantastic opportunity to turn them around.”

The present scenario may become commonplace. The analyst continues: “The food sector is in trouble because manufacturing margins are so high and second or third brands are finding it hard to survive against bigger ones. For example, PepsiCo owns Walkers, which has a stranglehold on the snacks market, and UB’s KP Snacks found it difficult to compete because of the need to balance its brand portfolio and keep shareholders happy.

Their vision of the future is simple: “I think there will be a small number of global category controllers, such as Nestlé in coffee.

“There will be players which work with retailers, and ’boutique’ brand owners, such as Baxters, which are small but already worth enough to defend themselves against takeovers.

“There is no point in getting jingoistic about these deals – it is a global market. For example, Rowntree Macintosh would probably not have been able to spread its brands if it hadn’t been taken over by Nestlé.”

Ironically, the analyst likens the UB takeover to Kohlberg Kravis Roberts’ (KKR) infamous $25bn buyout of former food and tobacco company RJR Nabisco in 1988 – dubbed the “Barbarians at the gate” episode. “No one had heard of KKR until it started buying prominent businesses. The acquisition of RJR tobacco was such a shock.

“I don’t think any company is safe – not even one like Cadbury. If someone has got the money and a plan, the City backs it and shareholders no longer have confidence in the management, anything is possible.”


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