The consolidation of the European biscuit industry more or less ended not with a bang, but with a whimper. It also ended with a transaction that forms part of a trend that is widely predicted to continue for the foreseeable future, as the details of the UK's post-industrial landscape begin to sharpen.
The sale of United Biscuits to an international consortium comprising financial buyers and trade buyers is being viewed by investment bankers specialising in food as marking the end of the shakeout in European biscuits. It leaves Danone of France and Nabisco of the US as the last two big rivals left standing.
The sale encapsulates the dilemma faced by many UK companies trying to cope with a fallen valuation and serried ranks of disgruntled shareholders. It represents a classic of its kind - a public-to-private transaction just waiting to happen. As investors demand ever higher returns, managers who do not or cannot deliver must expect to face some uncomfortable questions.
There should have been an outcry when the maker of many of Britain's favourite biscuits put itself up for sale last summer, thereby precipitating the final great shakeout in the European biscuits industry. But there wasn't. There was some huffing and puffing from Eric Martlew, the member of parliament for Carlisle, at the possible loss of jobs in his constituency, it is true. But the late tactical withdrawal of Hicks Muse from the bid to avoid an EU Phase 2 referral removed the immediate threat to the local UB factory. Hicks Muse also owns Horizon Biscuits, through the UK food business Hillsdown Holdings, and as such posed competition questions that faded like mist in the late morning sun with its disappearance from the scene.
The entire transaction unfolded in an atmosphere of surreality, with periods of frantic activity punctuated by longeurs in which life proceeded in slow motion or ground to a complete halt. At one stage or another, observed one investment banker familiar with the details, everyone was teamed up with everyone else. Meaning, inter alia, that everyone was more familiar with everyone else's figures and strategies than would normally be the case.
In August, UB stated its intention to explore options for its frozen and chilled foods business as part of its declared strategy to focus management and financial resources on the development of its domestic and international biscuit and snacks business. That resulted in the sale of the business to Heinz for £190m. In October, the company announced it was reviewing a range of strategic options, both on a stand-alone basis and with third parties, in order to maximise shareholder value. Advised by Morgan Stanley Dean Witter, the board decided to sell the business.
In mid-December, a 245 pence per share offer was tabled by Burlington, a company to be operated by Hicks, Muse, Tate & Furst and Nabisco Holdings. This was then raised to 254 pence following the acquisition of shares in the market at the higher price. Burlington's increased offer did not win a board recommendation as, in the meantime, the Finalrealm consortium had offered 265 pence.
Finalrealm at that stage comprised a group of private equity providers, Paribas Affaires Industrielles, Cinven and DB Capital Partners. Although Danone did not participate formally in the buying consortium, it did guarantee an interim bridge facility extended by Deutsche Bank to help finance the purchase. Conditional only upon the transaction being declared unconditional, Danone agreed to buy UB's interests in the Far East, Scandinavia, Finland and Central and Eastern Europe while Finalrealm retained all its other interests.
By the time the process reached the final stages, Hicks, Muse and Nabisco had agreed to join Finalrealm. Agreements were then amended to reflect a revised agreement to sell certain assets in China, Hong Kong and Taiwan to Nabisco. Somewhat bizarrely, as briefly related above, Hicks, Muse, the original would-be buyer, dropped out at the eleventh hour, after pocketing an estimated £50m profit on the shares it bought early on. The offer was declared unconditional in mid-April.
Internal and external communications at UB have painted the sale and dismemberment process as the logical outcome of the company's drive to deliver shareholder value. In this respect, one has to consider that while the peak price over the past ten years was 425 pence a share, the final offer of 265 pence represented a premium of 41 per cent over the price in the market on the last trading day before discussions were announced. Given the continuing fall in the food sector relative to the market since then, one analyst has calculated that UB's price today would be around 150 pence.
According to one banker familiar with the deal, the only realistic alternative to selling UB would have been some two years of painful reorganisation during which the share price would have continued to fall. "Much better to hand it over to a financial buyer and let them get on with it," he says. This is a fate, he predicts, that awaits many mid-market companies in similar straits.
If predictions of higher levels of such transactions prove accurate, UB will be followed off the stock exchange lists by a fast-growing number of traditional companies trading at significant discounts to recent prices. "Opportunities abound for financial buyers with an eye on break-up or cost-cutting transactions," says one investment banker. "There are companies out there waiting to be raped," suggests another.
The muted industry reaction to the transaction reflects not only the length and breadth of the City's disenchantment with UB itself, and mid-cap companies in general. It also reflects the view in some quarters that a spell out of the spotlight will do the company the world of good, allowing difficult restructuring decisions to be taken more harshly and amputations to proceed more quickly, before a relisting of the spruced-up company in due course.
"Much of the business has already been substantially turned around," observes one food analyst. "UB is performing well, in the UK at least. The problems arise mainly from overseas operations. The UB name will continue. McVities will continue."
This is not a universal view. The sale process has underlined the break-up value of the underlying brands, and there is even the possibility that UB will become nothing more than the European arm of Nabisco. If Nabisco survives. In the interim period, it too has been put up for sale.
A version of this article appeared in Financial News, the London-based weekly newspaper covering the securities and investment banking markets, in May 2000.