Acquisitions are now more complex and the debt mountain is €1.6bn

When Bain won the auction to buy Valeo Foods for £1.5bn in May 2021, the world was a different place. M&A valuations were high, private equity was cash-rich and debt markets were favourable. Former owner CapVest timed its exit to perfection.

But how is Valeo performing in this new world of soaring inflation and rising interest rates? And how has the M&A slowdown affected its strategy?

The group registered organic sales growth of 3% to €1.2bn (£1.1bn) in the year to 31 March 2022, according to latest consolidated accounts, with UK sales almost €100m higher (or 19.4%) at €588bn, boosted partly by the acquisition of Manomasa, while Irish figures fell €2m to €308m, and European sales jumped €137m to €3.15m.

In terms of profits, EBITDA was flat at £168.5m. And while pre-tax losses were reduced from €103m to just €2.1m, the former figure related mostly to exceptional costs of €113m in 2021 from acquisitions. And the picture painted in the results was one of the Kettle, Rowse and Jacob’s owner struggling to recover input cost inflation.

Ratings agency S&P highlighted the scale of the challenge facing Valeo’s bosses – and, indeed, all fmcg suppliers – when it downgraded the group’s credit worthiness from ‘B’ to ‘B–’ last year on worries of a delay to deleveraging a debt mountain of around €1.6bn.

The time lag in passing on inflation and the ongoing integration of acquisitions weighed on margins, leading S&P to increase estimates for adjusted debt to EBITDA to up to 9x.

However, the agency noted the group’s outlook was ‘stable’ amid steady demand for ambient foods, Valeo’s diverse portfolio and a 60/40 split between branded and own label, mitigating exposure to trading down.

One City source highlights that headline growth should rise significantly in 2022/23 as cost price increases filter through to the top line.

“If you can hold on to volume and are in a resilient space, inflation could be quite helpful,” the source says. “It is painful when the costs first start going up but as that stabilises, it creates an opportunity and growth momentum.”

CapVest built Valeo from an Irish-only business with sales of less than €200m into a platform of enviable scale thanks to 18 small-to-mid-sized acquisitions over the course of a decade.

Valeo brands 2

Valeo brands include Kettle chips, Fox’s mints and Rowse honey

Bain was – alongside a management team led by long-time CEO Seamus Kearney – expected to continue the buy-and-build strategy, but now with the ability to go after bigger deals. It hasn’t quite worked out that way yet.

Since the takeover, Valeo has added UK-based meat snacks group NWFE, pork scratchings maker Fresher Foods and Canadian maple syrup producer Les Industries Bernard & Fils, the latter taking it into North America for the first time.

However, as capital markets dried up following the outbreak of war in Ukraine, M&A activity in general has slowed significantly.

“Investors value Valeo because of its proven ability to keep doing M&A successfully,” one dealmaker says. “That remains a critical part of the investment thesis of Bain and the Valeo team. The market headwinds haven’t stopped their intent to do those deals but there is a paucity of good assets to buy at the moment.”

Another dealmaker points out Bain is a sophisticated investor with the ability to find different debt solutions if needed. Plus, it will still have access to any acquisition finance it locked into the original lending structure when it bought Valeo.

Inflation uncertainty

The issue is there is a disconnect between the universe of buyers and sellers.

“It is very hard for anyone to agree on what the right valuation is for a business right now,” another dealmaker adds. “The magnitude of inflation has created a lot of uncertainty about what is the right measure of profit Valuations have reduced, and owners will take time to adjust from what they thought their business was worth a year ago.”

The City source argues that a pause in deals is no bad thing given the amount of work needed to integrate all those acquisitions.

“Valeo is a very complicated business, so they really need to stay sharp, make sure they are as robust as possible and in a stronger position to create value in the companies acquired next.”

Valeo is aiming to achieve cost savings of €32m by FY2024, linked primarily to the integration of recent acquisitions and the overall streamlining of the group’s operations, according to the S&P note.

One dealmaker speculates the move to bring in industry heavyweight Wayne Hudson on an interim basis to run the snack foods arm – revealed last week – is designed to temporarily free up Ashley Hicks, who previously led the division, to get on with the integration work.

Neither is acquisition the only route to growth for Valeo. “They have lots of brands and a wide geographic spread,” a source says. “Leaning on NPD, brand extensions or advertising and marketing are always options.”

With the hope that inflation has now peaked, Bain can begin to look ahead to a more stable trading environment. And with it, perhaps, the continuance of the Valeo growth story that most expected back in the early summer of 2021.