Private equity most likely to bite at United Biscuits

Posted by Josette Dunn on 26th July 2010

It will come as no surprise to those following the food industry news to learn that two of the top five most-read stories on just-food this week are about the potential sale of UK snack and biscuit maker United Biscuits.The prospect of a deal, despite the fact that it is still to be confirmed by the company itself, has captured the imagination as only a large M&A move can.

Along with the rumours over the possible change of ownership at French yoghurt maker Yoplait and reported bids for John West owner MWBrands, the interest the potential sell-off of United Biscuits has already garnered reflects the appetite on the market for defensive stocks in these uncertain times.

A sale of United Biscuits would also be a further sign that private-equity groups are once again coming to the fore of the food industry. Private equity has largely been conspicuous by its absence in the M&A markets for the last 18 months.

Another suggestion that private-equity has once more turned their collective gaze to the food industry will spark excitement in the media, particularly during summer months that are typically barren of news. Private equity, does however, bring challenges all of its own, because, as the name suggests, its dealings are not done in the glare of public scrutiny.

Despite the blanket coverage UB’s future has manufactured in the press, the company itself and its two PE owners – Blackstone Group LP and PAI Partners – have remained stubbornly tight-lipped, refusing to even confirm or deny the reports at present.

It makes second guessing how this story will pan out all the harder. Despite that, there are certain scenarios that make sense in terms of what the private-equity owners of UB could sell and who will buy.

“Our view is that it’s going to be broken up,” one financial source looking closely at the situation told just-food. “You’ll attract good value for the snacks division but not an enormous amount for the biscuits. There are not many buyers for the biscuits, but there are for the snacks.”

The snacks division, despite already being in private-equity hands for a number of years, remains a prime target for yet another private-equity owner.

“That business has still got a lot of legs,” the source told just-food. “There is still fat that can be stripped and management operational efficiencies that can still be delivered.”

That logic stacks up. Branded foods have largely remained resilient during the economic downturn and private-equity companies have continued to steer clear of own label in favour of exactly this kind of investment: the recent scrum of interest for Findus Italy by private equity is a pointed example.

A trade buyer, of course, remains a possibility, driven on by the level of rivalry between private-equity groups that could throw a spanner into any PE-to-PE deal. However, the two most likely candidates, Kraft Foods and PepsiCo, are either still digesting recent acquisitions or would run into serious competition issues.

The trade route, however, does look more likely for the biscuits division – although genuinely strong suitors may be thin on the ground. Burton’s Foods, in better times, would fit the bill, but its recent financial challenges may preclude it from serious participation.

A final option is an IPO, described in the press this week as “less likely, but possible.”

Had this week’s public listing by Ocado been an unqualified success, it may have sparked a wave of floatations in the food sector.

Notwithstanding the criticism of the Ocado listing (and the fact that management cut the offer price at the 11th hour) the fact that the online retailer managed to get to market at all, given the recent uncertainty in the stock market, may still spark a raft of similar moves.

But, an outright sale is still likely to produce a better return for UB’s owners, particularly if it can solve its biscuit conundrum.

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