Kerry to remain cautious on acquisitions
While interested in serious deals, the group’s chief executive, Hugh Friel, said he would not “compromise shareholder value” by paying through the teeth for a business that could not justify the amount paid for it.
In effect, private equity firms are increasing what they have been prepared to pay for firms, ruling out a number of deals for Kerry.
During that frenzied period “we have not lost out to our competitors or to our peer group on any occasion“, Mr Friel said.
What has happened is that the funds have taken a “a much more aggressive” stance in the market, resulting in the cost of deals being pushed well above what Kerry will fork out.
There are European and US equity funds prepared to pay prices the sector is not willing to live with, which is why Kerry has not lost out to rivals in recent deals, he noted.
Their commitment to the sector is an endorsement of the value they see in it, “but it doesn’t make it any easier for us to do the deals we want to do“.
Those funds can also leverage their equity and in some instances can use €100m of equity against €800m of debt to buy something they regard as desirable, a major issue now for all key players in the ingredients and other sectors.
Friel is prepared to concede the industry may be guilty of highlighting its own attractiveness through the amount of high profile deals done in recent years.
Price therefore will be a factor in the evolution of Kerry’s business where EPS has fallen from double to single digit levels.
Kerry is well capable of a €700m to €1bn deal if the opportunity and rewards merit such a calculated risk. It didn’t get to where it has by being a shrinking violet.
In 1999 Denis Brosnan, the then chief executive, said his fast-growing company would not shy from a €1 billion acquisition, but the market has changed and the environment is very different.
There has been significant consolidation, with Kerry Group a key player. Cynics suggest Brosnan got out at the right time.
Before he quit, he said he expected to see consolidation in the sector, implying the possibility of a merger with Kerry staying the dominant player.
We haven’t heard much talk of that in recent years but no doubt Kerry still has strong ambitions.
Bolt-on acquisitions will stay a feature of the group but it will be more difficult for the company to get back on the surge of the 90s.
Times were different then. Costs were falling and the price of oil averaged $20 per barrel over the decade.
That has changed and the big multiples are pushing hard for lower prices while the cost of oil is hitting everyone as everyone competes to give the consumer the best deal. However, Kerry is highly active in the markets it serves. This year in food ingredients it will contribute to between 7,000 and 8,000 products, 10% effectively new offerings to the consumer.
In the consumer foods division covering Britain and Ireland the group’s product range runs into “hundreds in quite a narrow market“.
Many of those will be reconfigured while some product will be totally new.
The group’s best chance of demanding higher prices is in the creation of new products and its commitment to research and development in its entire output continues to pay dividends.
China and Asia Pacific offer scope for growth, cities like Beijing and Shanghai delivering GDP growth of 20% per annum, well above the 7% average for the economy as a whole, Mr Friel says.
While the potential is enormous, he fears the high cost of oil and the huge bills for steel and other products the Chinese are demanding as their right will likely trigger strong inflation that could take some of the steam out of the economy.
Kerry remains upbeat, but the picture Mr Friel paints is quite sombre.
