“This transaction makes industrial and strategic sense.” So said Leaf International CEO Bengt Baron when on Friday he announced the Swedish confectioner’s plans to merge with local rival Cloetta. The initial reaction from analysts is much the same. As Sam Webb reports, industry watchers believe the combined company will benefit from the increased number of markets in which it operates and a greater ability to deal with volatile commodity costs.
Food analysts have reacted positively to Friday’s (16 December) announcement that Scandinavian confectionery companies Cloetta and Leaf International are set to merge.
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The new company, which will operate under the name Cloetta, will bring together Cloetta’s strength in the region’s chocolate sector with Leaf’s sugar confectionery and gum brands.
The proposed new entity, which is still subject to competition clearance and approval from Cloetta’s shareholders, will have net sales of SEK5.7bn (US$821.6m) and recurring EBITA of SEK666m, a joint statement from the two companies said.
Analysts have said the move makes sense as the pair have both been mooted as takeover or merger targets since they de-merged from larger companies – Cloetta from Fazer and Leaf from Dutch Baker CSM.
Ildiko Szalai, senior company analyst at Euromonitor, says the new Cloetta will allow the two partners to access more markets. Cloetta has enormous clout in Sweden, while Leaf has a strong presence in Italy, as well as throughout Scandinavia.
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By GlobalData“Cloetta is more concentrated in the Swedish market – 82% of retail value sales comes from Sweden – and is more involved in chocolate confectionery. The rest of its sales come from neighbouring Scandinavian countries, as well as a small presence in the Baltics,” Szalai says.
“Leaf is more internationally spread and its largest market is actually Italy, where it owns three out of every five sugar confectionery labels. In terms of synergy, it will work both ways as it will allow Cloetta to enter international markets while Leaf gains strong sales in Sweden.”
She adds: “A merger makes it an all-round confectioner and allows the company to benefit from diverse growth.”
On top of a wider market, Szalai feels the merged company will benefit from greater margins, better operations and cost savings in production and infrastructure as they make integrations in areas like marketing, manufacturing and distribution. It will also give it the muscle to compete with larger confectioners like Nestle and Kraft Foods.
“Local companies give strong competition to multinational brands in terms of infrastructure and pricing, as well as being better branded and marketed. In Sweden the new company will be a leading player but [the merger] will also give them an established structure throughout Europe. In geographical terms, it creates more dynamic market access for both.”
Jonathan Thomas, an analyst for Leatherhead Food Research, agrees that the move is the right one in terms of synergies, especially in the face of high raw material costs in areas like sugar, dairy and cocoa. On top of that, he thinks Cloetta’s new scale and international reach will enjoy greater influence with retailers.
“In western Europe, while there are big pan-European food retailers like Carrefour, there are also strong local operators and Cloetta will be able to increase the footprint of their various brands with them,” he explains.
He also feels that further acquisitions are on the horizon, especially because of the changing dietary habits of the European consumer. Indeed, on Friday Bengt Baron, who is set to become CEO for the new Cloetta, told Sweden’s SIX News that acquisitions would allow further economies of scale and if any opportunities arise in the core Nordic countries, the Benelux region, western Europe or Italy, the company will take them.
Thomas says: “I think further acquisitions can’t be ruled out. The other main factor [aside from economies of scale] driving this is the fact that many confectionery markets are fairly mature and are not showing much year-on-year growth for reasons such as health.
“Consumers are turning away from chocolate and confectionery on health grounds, especially older people, and much of the growth is coming from market niches like sugar-free sweets and chewing gum, Fairtrade and, before the recession, single-origin dark chocolate products.
“When companies don’t have a presence within growth sectors, one of the easiest ways is to acquire a smaller company which does.”
Thomas also feels Cloetta will now look east to emerging markets like Ukraine, Bulgaria and Russia for growth opportunities, considering the lack of scale in the Nordic region and market maturity in western Europe.
However, Szalai does not feel the merger will necessarily lead to more acquisitions in the near future as financing remains hard to come by.
“Companies are identifying market gaps and purchasing local companies but integration is quite costly,” she said.
Whatever the future holds for Cloetta and Leaf combined, other European confectionery companies will be watching the new, larger entity on the continent.
