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Chocolate (bid-ask) spread

21 October 2013 By Quentin Webb

Ferrero could be worth $25 billion in a sale. For now, the family behind the giant Italian confectioner is emphatically against selling. But the maker of Nutella, Kinder eggs and Ferrero Rocher would be attractive to bigger global rivals.

Reports of interest from Nestle pushed Ferrero to say it was “not for sale in the most categorical and absolute manner.” Fair enough. The business is doing fine, and there are no gaggles of cousins clamouring to cash in their chips. Yet a generational change looms. Patriarch Michele Ferrero is 88 and his heir, Giovanni, might in time prove more open to deal-making, or a stock-market flotation.

It is certainly a strong business, with great brands and fat margins. There is also scarcity value. Alongside Lindt of Switzerland, Ferrero is one of only a few big independent confectionery houses left that the industry’s giants could potentially buy.

Still, this would be a pretty big mouthful. Ferrero’s last accounts, to end-August 2012, show annual EBITDA of roughly 1.2 billion euros. Suppose that is nearer to 1.3 billion this year. On a 14 times multiple, that implies an enterprise value of about 18 billion euros. 

That might look high. But Nestle itself trades at 12 times. Factor in a takeover premium and it quickly becomes a plausible price for Ferrero. Some previous sector deals have been struck at ever higher valuations. Nonetheless, the price tag also effectively limits the field of possible acquirers to Nestle, Cadbury owner Mondelez, private giant Mars, or perhaps a merger with Hershey.

Synergies would help buyers. Costs could be cut by obtaining keener prices for cocoa, sugar and packaging; and by combining staff and sites. The Cadbury takeover suggests costs worth 7 percent of Ferrero sales could go. Taxed and capitalised, this gives a net present value of 4 billion euros. Revenue could also grow through pushing deeper into emerging markets. At present Ferrero makes just 13 percent of sales in Latin America, Asia, Africa and the Middle East. Nestle, in contrast, generates 43 percent of sales outside the developed world.

There may of course be no deal. Nestle, the richest likely suitor, has plenty of other potential targets, such as Lindt, General Mills, or Green Mountain Coffee. And Ferrero’s culture suggests it could easily continue in private hands indefinitely. If that changes, though, there would certainly be appetite.


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