Mar 2007 Financial News

UK acquisition adds 20% value (GraceKennedy)

Mar 16, 2007

When a fortnight ago GraceKennedy paid the British private equity firm, Bridgepoint Capital ₤23 million (J$3 billion) to acquire the United Kingdom-based food company, WT Foods, it not only gained a firmer toe-hold in a market in which it has been keen to expand, but in one go increased its size, in terms of sale, by a fifth.

"That is important," Grace-Kennedy's CEO and chairman, Douglas Orane, said this week, explaining the significance of the acquisition.

"We (GraceKennedy) have sales of US$500 million and WT Foods has sales of ₤60 million pounds or US$120 million," Orane said. "All of a sudden, we are 20 per cent bigger."

Scale is one thing, but profitability and opportunity can be entirely another. On both counts, Orane and Derrick Reckord, the man who runs Grace's international food division, believe that have made a good decision.

"It is absolutely a great move," said Reckord "... You are talking about a company with a range that is largely complementary to ours and there are clear opportunities to expand the Grace brand."

Challenges

The optimism of the Grace bosses notwithstanding, the more immediate concern of the group's shareholders is how the acquisition is likely to impact the bottom line of the conglomerate, which, while remaining profitable, has had challenges in recent times.

In 2005, for instance, while GraceKennedy's revenue grew nearly eight per cent to just over J$33 billion, its pre-tax profit was down three per cent - significantly below the rate of inflation - to J$3 billion, reversing a four-year trend of robust expansion. Then, much of the problem lay with the stodgy performance of the its retail and trading division.

Last year,while Grace was able to expand its turnover by nine-and-a-quarter per cent, to approximately $36.1 billion, its net profit was down by nearly $230 million or 11 per cent, to $1.84 billion.

Much of the shrinkage was on the back of a $281 million provision for dodgy receivables on its Jamaican remittance business as well as reported fraud.

Towards the end of 2006, GraceKennedy announced a major restructuring, flattening out the organisation and creating two operating divisions - GK Foods and GK Investments, headed respectively by Erwin Burton and Don Wehby, who was also named deputy CEO of the group. Significantly, too, John Mahfood, who used to run the retail and trading operation as well as Brian Goldson, who ran the information services division under which the remittance business fell, were no longer with the group.

While financial services continues to return to the bulk of group profit (over 50 per cent), and GK Investments, under which this segment of the business falls, appeared to aggressively hunting opportunities, GraceKennedy seemed to be placing renewed emphasis on a position it staked-out for itself in the mid 1990s: to become a global consumer group with strong brands in the market.

The WT Foods buy-out is apparently part of this process. "What has happened is a return to our core business," said Reckord.

Or, as Orane explained, while GK Investments, with its profile as a portfolio operation, would take minority takes in companies, "I could safely say that we wouldn't take a minority position in a food business".

Critical venture

Which means that WT Foods is a critical venture from which Grace's management expect much - and quickly. Indeed, Orane insists that it won't be a drag on its new parent. A strong cash flow will ensure that.

For example, Orane explained that WT Foods - which includes three subsidiaries, Enco, which owns and distributes Caribbean brands; Chadha, which distributes oriental foods; and FunnyBones, a food service outfit - has earnings before interest, taxes, depreciation and amortisation (EBITDA) of ₤3 million. By Grace's estimate it will cost about ₤1.2 million to service debts associated with the acquisition, leaving another ₤1.8 million in free cash flow for other expenses.

"The company runs a strong positive cash flow," said Orane.

Even with integration costs during the first year, he says, the WT Foods will be cash-flow positive and, at the very worse, cash flow neutral. Moreover, GraceKennedy, which has dispatched three top managers from is Canada, U.S. and Jamaican centres to lead the integration WT Foods into its operation, believes it can squeeze more efficiencies from U.K. business.

"Fundamentally, the acquisition is based on a sound assessment of the business and of a market segment we know very well," said Orane, recalling that WT Foods once distributed Grace products in the U.K.

Among the advantages that Orane believes he has with this acquisition is the growing U.K. fascination with ethnic foods, much of which, including Jamaican and West Indian cuisine, is reaching mainstream.

Very importantly too will be early opportunity for GraceKennedy to retrieve the distribution of its Grace brand products in the U.K., with a dedicated sales forces paying attention to its broad range of products.

The company argues too that increased volume and greater supplier knowledge of will add to its procurement clout.

"Even without investing a lot of cash we can grow the business," said Reckord. "We can eliminate some of the procurement costs."

Added Orane: "We are very positive and upbeat. We we are showing is that we can take advantage of globalisation, that we can be proactive and not just reactive to the pressures of globalisation."


Source:
Elpert Fitzwarren, Business Writer
The Jamaica Gleaner
Friday 16th March, 2007

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