Mar 2007 Financial News

The real strategic value of GraceKennedy's acquisition of WT Foods

Mar 23, 2007

GraceKennedy's acquisition of WT Foods is, in order of magnitude, larger than any of the conglomerate's past investments, and so is very important to its future.

"It is a significant investment relative to the size of Grace-Kennedy - it represents about 15 per cent of our stock market value," said CEO Douglas Orane.

For some time now, Grace has had a strategy of establishing 'beachheads' in the main diaspora markets. The U.K is second only to the U.S. as a diaspora market, so the acquisition appears to be a logical follow on from Grace-Kennedy's expansion through acquisition in Canada in 2004.

Orane believes that, partly as a result of the Thatcher years, today's U.K. is "experiencing a ferment of entrepreneurial activity, with new businesses constantly being started", a very different business environment from when he went to university there.

THE BACKGROUND

London and its environs represent, he says, one of the most concentrated areas of prosperity in the world, partly as a result of its role as magnet for the world's wealthiest people, making it an ideal market for new products.

The U.K. has also seen huge migration from Africa, Asia and Eastern Europe, creating incredible diversity in the capital city, London.

When this is coupled with the huge expansion in travel of the native English population, the result is a society much more open to different styles and tastes than in the past.

Another factor in Grace's investment decision is that the U.K is extremely open to foreign investment.

In Orane's view, the U.K has got the model right in terms of attracting foreign investment by making it very easy to invest from both a legal and regulatory perspective. For example, an investor can form a company in 24 hours and it has become the norm to achieve simultaneous signing and completion of an agreement, as was achieved in Grace's acquisition of WT Foods.

As a result, many other companies from former Common-wealth countries are investing in the U.K, with recent investments by the major Indian-owned conglomerates Mittal and Tata among the most noteworthy.

GraceKennedy is also making a major bet on the potential of the U.K food market, which according to Orane is experiencing a "ferment of creativity, with new businesses constantly being started through the creation of new products".

THE OPPORTUNITY

GraceKennedy's market research has revealed that the Afro-Caribbean market segment is growing at eight-nine per cent per annum, much faster than the U.K.'s overall GDP growth. Its brands alone have been growing even faster at double-digit levels - near 20 per cent - from products such as Tropical Rhythms, Grace coconut water and condensed milk, albeit from a "relatively small base" in terms of overall sales.

WT Foods has three main operating subsidiaries: Enco which owns and distributes Caribbean food brands (such as the Dunn's River line), Chadha which distributes oriental foods, and Funny Bones - a Tex Mex food service outfit. WT Foods overall has 4.0 per cent of the U.K's 1.3 billion pound ethnic food market.

Orane argued that the planned move of Grace's own brands from their existing distributor to WT Foods was "a form of consolidation of the Afro-Caribbean food segment", giving Grace the critical mass to grow its business in one of the U.K's fastest-growing food segments.

While the U.K. food market is much larger than Jamaica's, Orane pointed out that "There are not so many brands in our market segment." Moreover, "The portfolio of brands are all complimentary, with very little overlap."

ROUTE TO MARKET

Orane noted that for some time GraceKennedy has realised that the biggest impediment to the expan-sion of its food and beverage brands overseas was the difficulty of getting through the distribution system to the final consumer.

As a consequence, Grace made the decision that whenever there was an opportunity to go downstream, it would take it, once the prospect for acquisition meets its requirements of strong professional management, being profitable, having strong brands within its market segment, and high growth potential.

The U.K's food business is highly concentrated, dominated by the major supermarket multiples. The acquisition of WT Foods provides Grace with a vastly greater entr?e into the multiples (and other retailers) due to its well established brands.

WT Foods is already in all the multiples and pretty much all geographic markets in the U.K, prying open new doors for GraceKennedy to get its products to market by means other than a third party distributor.

In the case of WT Foods, profitability was defined as ?3 million of earnings before interest, taxation, depreciation and amortisation (EBITDA).

After expected interest on the debt used to finance the acquisition of $1.8 million, this leaves $1.2 million to cover the other expenses.

"Even after amortisation, our best guess is that the acquisition will not depress GraceKennedy's profits going forward," said Orane.

After the first year, he expects the acquisition to be well integrated, with a solid, expanding business driving increased profitability.

FOCUSSED ON EUROPE

According to Orane, "As part of its international expansion, GraceKennedy has been focusing on Europe from thebeginning of the decade".

The conglomerate was aware that WT Foods represented a potential acquisition opportunity from when they started to scan the U.K. horizon for acquisition opportunities in 2003. They knew the company well as it used to be a Grace distributor.

They were therefore ready when WT Food's owner, private equity player Bridgepoint, made the decision to sell and approached them in 2006.

The acquisition greatly improves Grace's 'route to market' in the U.K, as well as expanding Grace's product lines and sales force. It also hugely expanded Grace's U.K logistics capability, bringing Grace a fleet of 46 trucks and a 119,000 square foot modern distribution centre.

It even gives WT Foods its own food processing factories in Wales.

Grace is also taking the integration issues created by the acquisition very seriously.

In an impressive sign of their commitment, they are relocating four of their most senior executives, including the head of the food division Erwin Burton, to the U.K.

"The integration issue is the most important issue," said Orane.

"We need to answer the question of "How do we keep the team that comes with WT Foods motivated."

Keith Collister
Business Writer
The Jamaica Gleaner
Friday, March 23, 2007.
http://www.jamaica-gleaner.com/gleaner/20070323/business/business8.html
keithcollister@gleanerjm.com