Experts ask whether Bright Food was tempted into overpaying in Weetabix deal
It’s just like the old days. Private equity firm buys ancient family-controlled company with reliable but slowly-growing earnings, injects massive financial leverage, collects a few dividends via further refinancings and then sells out several years later at a spectacular profit.
This is indeed the story of Weetabix since Sir Richard George’s family sold the 80-year-old firm to Lion Capital’s predecessor, Hicks Muse, in 2004. The price paid then was £642m but Thursday’s sale, in which Chinese state-owned firm Bright Food is buying a 60% stake, values the cereal maker at £1.2bn.
Lion and the management are retaining 40% but the private equity firm’s aggressive use of debt (Weetabix has borrowings of about £900m) has allowed it to make a fivefold return on its original equity investment.
Congratulations to Lyndon Lea, the party-loving partner at Lion who masterminded the investment. But you have to ask whether Bright Food, after several false starts for its European expansion plans, has been tempted into overpaying. Neither Lion nor Bright Food will provide up-to-date financial numbers for Weetabix. But the last set of accounts filed at Companies House for Latimer Group, a holding company, show a business running hard to stand still.
“2010 was another challenging year for the Weetabix Group,” the report says, citing “continuing fragile consumer confidence” and “a significantly increased level of promotional activity in the cereal sector”. Overall, operating profits improved only marginally from £66.8m to £67.6m – the UK was up a little; North America was down a little.
Today’s Bright Food deal, then, values Weetabix at about 18 times 2010’s operating profits and more than three times its turnover of £423m in the same year. For comparison, the company made sales of £362m back in 2002 – so progress has been slow but steady, which is what one would expect in a business where consumers’ tastes tend to shift only slowly.
Bright Food’s supporters counter that, actually, the price is more than reasonable. 2010, they say, was indeed a slow year but Weetabix returned to strong growth in 2011. What’s more, they argue, it is a cash machine — a business with gross profit margins as high as 60%. On the basis of ebitda (earnings before interest, tax, depreciation and amortisation), it is said that Weetabix has improved from £60m to more than £120m during Lion’s ownership.
Either way, part of Bright Food’s bet is that the Chinese are about to fall in love with wheat biscuits — it says it wants to “take advantage of the growing appetite in the country for packaged and convenient healthy foods”.
It’s the best judge of that, but it’s worth recalling a comment by Sir Richard George himself about Weetabix’s special status in British stomachs: “Mothers tend to wean their children on Weetabix and people in Britain tend to grow up with an in-built liking for them. That’s not the case in other countries – it’s very hard to sell them in Germany for instance.”