Nestlé’s latest deal should help it milk the softening ice-cream business for private-equity style returns, perhaps ahead of a potential initial public offering in a few years’ time.
The world’s largest food company said late Wednesday that it is selling U.S. brands including Häagen-Dazs and Drumstick to Froneri, a joint venture it created in 2016 with private equity company PAI Partners to manage its European ice cream assets.
The U.S. business, which made sales of $1.8 billion in 2018, is going for $4 billion. The price equates to roughly 15 times earnings before interest, taxes, depreciation and amortization, according to people close to the deal. That is low for Nestlé, which got 20 times for the U.S. candy brands it sold to Italian confectioner Ferrero early last year.
Still, it is a smart move. Frozen food assets can be hard to sell as they need an expensive chilled logistics network. Froneri owns around 1 billion freezers globally, including the ones that consumers see in convenience stores. While that keeps barriers to entry high, it can also limit the number of bidders when frozen food assets are on the block.
Add the fact that the U.S. ice-cream market is growing sales at a relatively sluggish 3% annually, and the Nestlé brands were never going to command a huge price. But by keeping its 50% stake in a now larger partnership, Nestlé can let Froneri do the legwork of getting more value out of the business while it focuses on its strategic product categories, which include coffee and pet food.
Froneri has already increased the Ebitda margins of existing brands in the Nestlé partnership to around 20%. If it can do the same for the U.S. brands, which current clock in 5 percentage points lower, the Swiss company will share in any upside. Froneri’s latest purchase is funded with lashings of debt, bringing borrowings close to six times Ebitda.
The question is whether and how Nestlé will cash out of ice-cream altogether. Froneri has done a number of deals over the last six years, advised by Rothschild. It is now the second-largest ice-cream player globally after Unilever, which owns Ben & Jerry’s and Magnum.
After buying Häagen-Dazs, Froneri will have close to $5 billion in annual sales. That could make it too big a mouthful for another private-equity or consumer company. An IPO in the U.S. or Europe in a couple of years is probably more realistic.
All going well, Nestlé’s latest sale has lined it up for a creamier valuation later.
Write to Carol Ryan at carol.ryan@wsj.com
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December 12, 2019 at 04:34PM
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