The Irish competition regulator’s decision to block Kerry Group’s acquisition of Breeo Foods will have come as a blow to a company that is looking to expand its business at home and abroad. By increasing the scale and breadth of its interests and consolidating manufacturing, Kerry is looking to sidestep some of the harsher effects of the global economic downturn. While the Breeo decision may have put a spanner in the works for Kerry, the company has indicated its intention to seek out further acquisition opportunities. Katy Humphries reports.
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Kerry Foods has made no bones about its desire to expand its business through acquisitive activity, which have historically formed a core part of the group’s growth strategy.
It is therefore no surprise that the company says it is “disappointed” by the news that the Irish Competition Authority has moved to block its acquisition of Breeo Foods, which is owned by investment group Reox Holdings.
The deal, which has been under negotiation since November last year, was valued at around EUR165m (US$257m).
It would have seen Kerry take control of some of Ireland’s leading dairy and meat brands, such as Dairygold, Galtee, Shaws, Roscrea, Mitchelstown, Calvita and Sno. It would also have brought Breeo’s chilled foods distribution service under Kerry’s umbrella.
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By GlobalDataCosts are soaring in the food industry. Poor harvests, rising costs and increased demand have driven up the price of many key ingredients and high energy prices have pushed up transport and production expenses.
Meanwhile, retailers looking to woo cash-strapped consumers are upping the pressure on food manufacturers to maintain or even reduce prices.
Responding to these pressures, the Irish food sector may be entering a period of rationalisation and consolidation. Scale and branding, it has been argued, are the only viable defences.
One of Kerry’s central motivations behind its move for Breeo was the desire to broaden its portfolio of high-profile brands in related sectors. If it had gone through, the deal would have give Kerry more weight in its dealings with suppliers and retailers.
The combined Kerry-Breeo entity would have had greater buying power and, as a result, more muscle in negotiations with suppliers. Likewise, the enlarged group would have been more able to push through price increases when negotiating with retailers, something for which Kerry already has a strong track-record.
The acquisition would have also offered synergies that would have allowed Kerry to boost profit margins.
As Goodbody Stockbrokers analyst Liam Igoe tells just-food, by incorporating Breeo into its existing consumer foods unit, Kerry would have looked to leverage economies of scale, consolidating manufacturing in order to markedly boost profitability.
“The overlap of the businesses in the Irish market offered the opportunity to consolidate manufacturing and increase profitability,” Igoe says.
While the overlap between the two companies formed an important part of the strategic rationale behind the buy, it also proved to be the deal’s undoing.
In blocking the tie-up, the Irish Competition Authority said that the planned acquisition would “substantially lessen” competition in the markets for the production of rashers, non-poultry cooked meats and processed cheese.
The watchdog’s findings are thought to have come as a surprise to Kerry and Reox Holdings. The decision was made in accordance with section 22(3)(b) of the Competition Act 2002, the CA said. It is only the third time that the Authority has blocked a proposed merger since the provisions of the Competition Act regarding merger control came into effect in January 2003.
Within one calendar month, either party can appeal the ruling and the dispute would then pass to the High Court. Any subsequent appeal to the Supreme Court could only be made on point of law.
It is believed that a High Court appeal – the first testing a decision made under the Competition Act – is being considered and legal advice is being sought. However, Kerry is unable to confirm this.
In the meantime, Breeo is adopting a “business as usual” approach. “Breeo Foods will restructure itself to meet the challenges of the current market place and invest where necessary to grow the business,” Breeo says in a company memo seen by just-food.
If the deal does fall through, Reox says that it has no plans to immediately put Breeo up for sale again, in spite of a number of potential private equity buyers.
Dublin-based Ion Equity and Jaguar Capital have expressed an interested in acquiring Breeo, while Ion Equity says it is “monitoring the situation”.
Even if Reox did put Breeo up for sale again, it could prove more difficult to reach an agreement a second time around. Reox says that it will only agree to a sale if there is “compelling value benefit to shareholders”. With the credit crunch deepening, some private equity companies are finding it difficult to secure finance, making it seem less likely that Reox will be offered a premium price for the business.
Meanwhile, Kerry tells just-food that it will remain on the acquisition hunt. The Irish consumer foods and ingredients giant says that it has a number of potential acquisitions in the pipeline, which it expects will come to fruition in the next 12 months.
“Kerry Group has had a very active programme on the acquisition front over the past decade or so…. We do have an active strategy of seeking out acquisitions and there are some very interesting opportunities out there,” a spokesperson for Kerry says.
Although Kerry declines to identify businesses that it has set its sights on, the company will likely be seeking manufacturers already operating in related areas where it will be able to generate significant synergies.
According to Igoe, these potential acquisition targets are likely to include overseas ingredients firms.
“Acquisitions have always been a part of the company’s strategy and this will remain the case indefinitely,” Igoe predicts. “Breeo was the most obvious acquisition target. Now that seems to have fallen through, I would expect their main focus to be ingredients companies internationally.”
Regardless of whether Kerry decides to appeal the Breeo decision, we can clearly expect to hear news of further acquisitions coming out of County Kerry in the coming year.
