What would a bid for Hain Celestial mean for Nestlé?
According to a report by Bloomberg, which cited an unidentified source, Nestlé has signalled its interest in Hain alongside other unnamed US food companies and buyout firms. The Vevey-based food maker is said to be in preliminary discussions over a possible offer, with nothing firm yet on the table.
Nestlé declined to comment on “rumours or speculation”, while representatives for Hain Celestial were unavailable at time of press.
Nestlé’s portfolio strategy
Like other food majors, Nestlé has witnessed a slowdown in its organic growth rate as consumers increasingly turn to smaller, disruptive brands. The KitKat to Lean Cuisine food maker has responded by abandoning the so-called ‘Nestlé model’, which calls for year-on-year organic sales growth of at least 5%, to more conservative growth guidance.
Nestlé has faced mounting pressure from activist shareholders, with Third Point investor Daniel Loeb insisting that there is room to “unlock value”. Under Nestlé’s new chief executive, Mark Schneider, the company has stepped up its restructuring efforts to improve margins.
Nestlé has been working to adjust its portfolio to reflect emerging consumer preferences. For some years, as it works to build profitability, the group has been shedding underperforming brands, from Jenny Craig, to Power Bar and a swathe of Italian frozen and confectionery brands. Most recently, Nestlé confirmed it is considering options for its US confectionery business, which consists of brands such as Sweetarts, Butterfinger and Baby Ruth.
However, Nestlé’s “comprehensive value creation model” would suggest that the group is also mindful of expansion opportunities. Nestlé said it aims to strike the “right balance” between growing earnings, delivering “competitive” shareholder returns and providing “flexibility for external growth”.
Nestlé’s portfolio strategy has, to date, largely focused on disposing business units and brands that it does not believe will deliver growth. But the company indicated its intention to use M&A to enter desirable segments when it acquired US plant-based ready meal maker Sweet Earth earlier this year.
At the time, Nestlé said expanding its portfolio of plant-based and flexitarian options was a “strategic priority”. The company also offers vegetarian protein-based products in some European markets under the Garden Gourmet brand.
Accessing ‘natural’ through Hain?
Is Nestlé planning to expand its presence in the ‘natural’ space further through this larger-scale deal?
Hain Celestial operates in a variety of categories in the US and UK. Its stable of brands include Garden of Eatin’, Earth’s Best and Arrowhead Mills in the US and Covent Garden Soup, Tilda and Ella’s Kitchen in the UK, offer a variety of natural, organic and vegetarian options. The Hain Pure Protein segment includes a range of antibiotic-free, hormone-free and organic poultry products.
The group’s presence in the natural space means it is well-placed to tap into continued growth in the segment. However, while Hain’s sales growth is ahead of the broader packaged foods market the group is trending behind the more buoyant natural sector.
When the company reported its first-quarter sales earlier this month, growth in the US – where Hain generates 46% of sales - stood at 4% “well ahead of the flattish overall consumption in the quarter”, Barclays analyst Andrew Lazar noted. However, he suggested that excluding SKU rationalisation and inventory adjustments last year, comparable sales were less robust.
“Even if we just focus on Hain's top selling 500 SKUs, which are the clear focus and account for 93% of sales, US consumption rose just 1% year-on-year in the past 12 weeks – better than the average packaged good space to be sure, but still below the growth coming from the overall natural and organic space,” Lazar stressed.
He is nevertheless upbeat on the longer term prospects for Hain’s brands: “We realize that in many ways, Hain views FY17 as its "reset" year, during which much was accomplished around SKU rationalization and inventory adjustments. But, with all of the opportunity in this better for you space, we believe those brands that can solidify their place with key growth retailers and consumers should have a healthy runway for growth, over time.”
Uninspiring growth and relatively weak margins – with EBIT margin standing at just 7% - mean that Hain is itself under pressure to improve its performance from activist investors. Engaged Capital recently nominated six new board members.
MainFirst analyst Alain Oberhuber sees some upside to a possible acquisition for the Swiss food group. “The positive is that Hain Celestial is in an interesting organic and vegetarian category. Furthermore, Nestlé could be interested in the US distribution network of Hain Celestial.”
However, Oberhuber concludes that the deal is not an attractive proposition – not least due to the weighty price tag likely to be attached.
“In our view, if realised, this would be an expensive acquisition based on current pre-acquisition valuation multiples of an EV/EBITDA-18E of 13.1x and an EV/EBIT-18E of 16.8x, vs. the median of its peers of 12.8x and 15.5x respectively,” he said
Oberhuber believes that this valuation is particularly significant given Hain’s low operating margins and what he believes are limited opportunities to improve profitability. “The potential deal also looks less inspiring on relative profitability… Also, the spread between gross and EBIT margins looks less attractive, as the 11.7% difference leaves just limited room for an EBIT margin improvement.”
It remains to be seen whether Nestlé decides the possibility of gaining further access to natural, organic and meat-free categories with established brands is a prize worth paying for.
