U.S. food company H.J. Heinz has agreed to buy Danone’s UK-based HP Foods business for about $855 million in a deal that puts HP and Lea & Perrins sauces under the same roof as its own Heinz ketchup.
The cash purchase would help Pittsburgh-based Heinz to focus more around core areas like condiments and infant nutrition, while France’s Danone would focus almost exclusively on water, yogurt and cookies.
About 38 percent of Heinz’s business would come from condiments and sauces following the deal, a spokesman said. But the company also has a large business in products like soups and baked beans in Britain.
Analysts said Heinz was buying a collection of largely UK domestic brands such as HP and Daddies sauces, with only Lea & Perrins Worcestershire sauce a truly global brand.
“It’s a highly profitable business and will fit well with Heinz, but it’s not a top-notch price because it’s not a top notch business,” said analyst David Lang at Investec Securities.
While analysts agreed that the deal fits Heinz strategy, they were skeptical about how much growth potential there was in the brands.
“It seems to be fairly sensible, but not terribly exciting,” William Leach, analyst at Neuberger Berman, said. ”These are mature brands.”
Heinz said it expected the acquisition to add to earnings in the first full fiscal year and to close in the next few weeks pending all regulatory approvals.
The deal follows on the acquisition of a majority stake in Russian condiments and sauces maker Petrosoyuz as Heinz shifts its focus from an overhaul of its U.S. business to Europe.
European seasoning
Heinz has been hurt in Europe by the growth of deep discount retailers and a portfolio that some analysts say focuses too much on commodity-type products which are hard to differentiate from competitors.
Joe Jimenez, Heinz Europe’s chief executive, said the acquired brands fit well with the company’s expertise.
“These are businesses that we know we can grow by applying the same product and packaging innovation that we applied to Heinz ketchup in Europe,” Jimenez said in an interview with Reuters.
Danone Chief Financial Officer Emmanuel Faber said the HP business had annual sales of $291.3 million, which meant the purchase price valued the business at 2.5 to 3.0 times sales. The price amounted to 11 times its earnings before interest, depreciation and amortization (EBITDA).
Faber said the cash from the deal and from the sale of a stake in Spanish brewer Mahou would enable the French food company to be more active in share buybacks and that it was on track to hit its targets for 2005.
“We are very confident to deliver what we have targeted for 2005,” said Faber, adding that the group would be more active on share buybacks in the second half than in the first half.
Danone, which makes Actimel dairy drinks, Volvic and Evian bottled waters and LU cookies, targets underlying sales growth of 5 percent to 7 percent, an annual rise in operating margins of 20 to 40 basis points and growth in earnings per share of 10 percent.
Danone plans to increase its buybacks to between 600 million and 800 million euros worth of shares in the second half, compared with 500 million so far this year.
The third-biggest food group in Europe after Nestle and Unilever said it expected to book a capital gain of more than 450 million euros in its 2005 accounts from the sale.
The deal gives Heinz three plants, two in England and one in the U.S. including 450 staff as well as a perpetual license to market Amoy Asian sauces and products in Europe.
Heinz fought off a strong field of potential buyers including UK groups Associated British Foods and Premier Foods and also New York-based sauces and spices group McCormick & Co. Inc..
Danone was advised by Lazard and Heinz by UBS.
