Blackstone and PAI Partners are hoping to offload United Biscuits for £2bn, but even if they do split it up will they find buyers, asks Hannah Stodell

What is it they say about buses? After virtually no M&A activity since the economic crisis began, first Birds Eye Iglo snapped up Unilever's Italian frozen food business, and now Blackstone and PAI Partners are considering offloading United Biscuits for a cool £2bn.

They are reported to be sounding out investment banks with a view to either running an auction for the entire business, carving up snacks and biscuits for separate sale or listing UB in an IPO. But, given that all of these routes are fraught with problems, just how realistic is the prospect of a sale?

Boasting major brands such as McVitie's and Penguin, UB should be an attractive proposition, especially for those looking to boost their share in the biscuits and snacks markets the sectors largely responsible for UB's 5% sales uplift to £1.3bn last year.

The consensus is that domestic trade buyers would be queuing up had their balance sheets not been battered by the recession. As it is, although the appetite is there, the shape and size of UB's business means it would probably have to be split up to sell.

On paper, this would make it attractive to a number of domestic and global trade buyers, believes Catalyst Corporate Finance principal Simon Peacock.

"It makes more sense for a pure biscuit player to consolidate that market, whether Burton's or a US cookie manufacturer," he says. "Neither of those will want to swallow UB whole, they will want to break it up."

However, none of the names touted are surefire bets. Unilever and AB Foods are joint favourites as far as Cantor Index goes (see boxout), but there are reasons for both to steer clear, believes Shaun Browne, MD of corporate advisory firm McQueen. "Given that neither Unilever or AB Foods are in the category of salty snacks nor biscuits, it would be a surprise for them to enter, particularly ABF, which actually was in biscuits but chose to get out of it a few years ago," he says.

A leading dealmaker also ruled out third favourite Nestlé, tipped by some following its failure to buy Cadbury. It wasn't even interested in Cadbury, he claims. Fourth favourite Kraft, which had a stake in the company prior to its acquisition by PAI and Blackstone and has been suggested as a possible suitor for the biscuits business, probably won't have the appetite for it either, says Browne.

"It could have presumably bought it last time around in December 2006 when it changed hands," he argues. "Since then, Kraft has invested a large sum of money in Cadbury. I'd be surprised if it decided to fork out that sort of money for what is fundamentally a series of excellent British brands when it is focusing on creating a small number of global brands."

Other European snack companies such as Intersnack have been touted as contenders for snacks, but PepsiCo would be a strong contender to cherrypick key brands if it weren't for the fact it holds a 46.2% market share, making a sweeping acquisition of the snacks business unlikely under competition rules.

Indeed, suggests the dealmaker: "You look at any of the other companies operating in the UK who would want to buy UB and you can think of a reason why they couldn't right now."

As for private equity buyers, their interest would primarily be in the potential break-up value of UB, so they would be looking to buy UB outright in the first instance. Most would find the £2bn price tag a bit steep in the current climate, believe experts. The other possibility an IPO would also be far from straightforward, they add.

"IPOs have been harder to get away recently so it is lower down the agenda than it might have been two or three years ago," says one.

There's a very real prospect that PAI and Blackstone, which bought the business from private equity firms MidOcean and Cinven in 2006, will fail to get UB away.

But the Birds Eye Unilever deal is a sure sign that confidence is returning. PAI and Blackstone clearly have the will perhaps they will find the way.

Favourites for UB’s business

Unilever 5/2 JF
AB Foods 5/2 JF
Nestlé 3/1
Kraft Foods 9/2
Burton's Foods 5/1
Mars 5/1
Premier Foods 6/1
Northern Foods 6/1
PepsiCo 7/1
Kellogg's 8/1
Intersnack 8/1
Lorenz Snack-World 10/1

Source: Cantor Index 28/07/10

Read more
United may be divided as backers look for trade sale (24 July 2010)
Biscuit giant UB put up for sale (21 July 2010)