Givaudan Acquires Minority Stake of Naturex

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1 MAY Givaudan Acquires Minority Stake of Naturex AUTHOR JULIA KLINKENBERG JULIA.KLINKENBERG@EDHEC.COM Flavors and fragrances are essential components of different consumer goods and packaged foods. Natural and synthetic essence compositions make the cool mint flavor of toothpaste, the cinnamon aroma of pumpkin lattes and the cherry taste of cherry cola. Moreover, fragrance compositions add the fresh smell of pine to exotic top notes to fine perfumes and household cleaning products. Transparency Market Research On March 26, 2018, the Swiss company Givaudan announced it will acquire a minority stake of 40.6% of the French company Naturex for 522m. Givaudan has agreed to pay 135 per share and intends to launch a mandatory cash tender offer at the same price for all outstanding shares of Naturex. The market responded positively to this deal Naturex share price skyrocked by 42.6% from (March 23, 2018) to (March 26, 2018) and has been slightly below the agreed share price of since. Givaudan s share price increased from CHF 2,153 (March 23, 2018) to CHF 2,176 (March 29, 2018) after suffering a fall to CHF 2,105 on the day of the announcement. 1 Several analysts defined the deal to be strategically valuable but evaluated the price (approx. 20x of Naturex s EBITDA) to be very high. This leads to the question: what could be Givaudan s reason to invest in Naturex? Givaudan and Naturex Exhibit 1: Givaudan's key figures in CHFm Sales EBITDA Net Income Flavour Fragrances Total Let us have a closer look on the acquirer. Givaudan was founded in 1895 by two brothers Leon and Xavier Givaudan, and since then, the company has grown organically as well as externally to the leading flavours and fragrances (FF) producer around the globe, employing approx. 11,170 people. The company has more than 100 locations and over 45 production cites worldwide with its headquarter in Vernier (Switzerland). Givaudan s business activity is divided in two divisions. The flavour division represents approx. 54% of the group sales and focuses on areas like sweet goods, beverages, savoury and dairy. The fragrances division is responsible for 46% of the group sales and relates to fragrance ingredients and active beauty, fine fragrances and consumer products. 2 Exhibit 1 shows Givaudan s key figures of 2017: the company achieved total revenues of CHF 5,051m, representing a 4.9% growth compared to 2016 (CHF 4,663m) 3. Givaudan was able to generate an EBITDA margin of 21.5% in this particular year. While EBITDA of the flavour division increased significantly by 15.3%, from CHF 523m to CHF 603m due to strong cost settings, EBITDA of the fragrances division reduced significantly from CHF 603m (2016) to CHF 483m (2017). This drop is driven by the implementation of the Givaudan s Business Solutions (GBS) project The fall in Givaudan s share price was affected not only by the deal announcement, but also by its dividends pay-out on March 28, Sectors in the divisions by percentage of sales generated in 2017: Flavour: sweet goods 13% (i.e. confectionery, baked goods, sugar confectionery, chocolate, chewing gum), beverages 33% (i.e. soft drinks, fruit juices, instant beverages), savoury 39% (i.e. ready-made meals, snacks, soups & sauces, meat and poultry), Dairy 15% (i.e. ice cream, yoghurt, desserts, yellow fats) Fragrances: fragrances ingredients and active beauty 13%, fine fragrances 18% (i.e. signature fragrances, line extensions), 69% consumer products (i.e. fabric and personal care, hair and skin care, household and air care, oral care) The growth rate of 4.6% from 2016 to 2017 is based on a like-for-like basis without the impacts of currency, acquisitions and disposals; otherwise the persentual change is approx. +8.3% in CHF.

2 MAY Exhibit 2: Revenue distribution by high growth and mature markets 51% 45% 43% High growth market 55% 57% 47-49% Mature market Strategy 2020 which includes a centre for delivering excellence service in Kuala Lumpur. The FF producer was able to raise its total net income margin from 13.8% (CHF 644m) in 2016 to 14.2% (CHF 720m) in Givaudan follows its five-pillar strategy 2020 among others to develop markets, support research and development (R&D), focus more on the area of health and wellness, rely on sustainable sourcing of raw materials, and maintain and enhance targeted customers and segments. Givaudan s strategy aims to achieve a compound average growth rate (CAGR) of 4-5% in each of the divisions (CHF + 1.4bn) and to shift the revenue stream from mature markets, exemplarily Europe or North America, to high growth markets such as Latin America and South Asia & Middle East. A closer look to exhibit 2 reveals that, up to now, mature markets are responsible for more than 50%, whereas Givaudan s strategy 2020 targets the opposite: revenues generated in the flavour and fragrances divisions should be only 47% and 49% respectively. So how will Givaudan benefit from the acquisition of Naturex? Naturex is a French company, headquartered in Avignon, specialised on plant extraction and the development of natural ingredients. The company focuses on two divisions: natural selfcare and natural products. Exhibit 3 illustrates how a standard production process to get from natural raw materials to liquid or solid ingredients. Exhibit 3: Standard diagram of ingredient production in a plant Source: Naturex What we do Exhibit 4: Naturex's revenue distribution per region in % 35% 8% 404-9m in % North America EMEA Asia/ Pacific Latin America Naturex produces natural ingredients for the areas of food and beverage (i.e. snacks, seasoning, soups, baby food, bakery, confectionery), nutrition, health and personal care. The 1992-founded company employs 1,700 people in manufacturing, sales and purchasing locations and sources its raw materials from over 90 countries. Since the 2000s, Naturex performed a strong and profitable development to become the world s market leader. At the beginning of the 200os, Naturex s sales increased to 93.2m (2008). In 2009, a partial integration of Natraceutical Group led to a doubling of revenues to 186.1m. Over the following six years, Naturex s revenues rose significantly to (2014), and after a jump in 2015, the company s revenues have been close to the 400m. Exhibit 4 reveals that 75% of the company s revenues were earned in North America and EMEA. In the past year, Naturex generated 53% of its total revenues of 404.9m in its natural food division ( 213.4m), 33% in its natural self-care division ( 135.1m) and the remaining 14% refer to other activities. A reduction in the operating expenses improved Naturex s EBITDA margin from 13.6% (2015), 15.2% (2016) to 15.8% ( 64.0m) in The net income decreased by 6.1m to 11.8m in 2017, affected by higher non-operating expenses and lower financial income. The 2017 balance sheet shows that the company achieved a balanced debt-to-equity ratio ( 281.6m: 376.2m), of which the majority of debt refers to financial obligations. The company supports the general shift in demand from synthetic to natural ingredients and expanded its portfolio over time by several acquisitions such as the Chile-based company Vegetable

3 MAY Juice Inc. (2014) and the Swedish oat supplier and manufacturer Oat Fibre (2017). Naturex s strategy Bright 2020 aims to achieve an 8-10% organic growth in revenues, 10% of the global sales should be generated by new products and an EBITDA margin of 20%. In order to meet its objectives, Naturex has enhanced its partnerships with other companies such as its recent announcement of its long-term cooperation with Neovia to find innovative solutions for the increasing demand of natural products. Flavours and Fragrances Market Exhibit 5: Global consumption value of flavour and fragrances in 2013 and 2018e 2018: outer circle 2013: inner circle Africa Asia Central America Central Europe Eastern Europe Middle East North America South America Western Europe Exhibit 6: Top 10 global leading FF producer, by revenue in US$ Givaudan CH 4,576 4,734 2 Firmenich CH 3,331 3,411 3 IFF US 3,023 3,116 4 Symrise DE 2,279 2,312 5 Takasago JP 1,171 1,261 6 Mane FR 1,052 1,171 7 Frutarom IL 872 1,068 8 Sensient US Robertert FR Hasegawa JP Source: Statista In order to better understand Givaudan s potential motivation, we may look at the flavours and fragrances (FF) market. The global market has increased over the years up to approx. US $25bn in 2016 and is expected to raise up to US $30bn. 55% of the global market value refers to flavours and 45% to fragrances. The general expectation is that the FF producers have to implement convincing innovations relating to natural products, otherwise this market division might become very challenging. A contrary prediction is made for the fragrances division because the industry consolidated in the past and the end-consumers incentives have changed, i.e. more focused on natural products for hair and skin care. A closer consideration of exhibit 5 shows the global consumption values in the market for 2013 (inner circle) and 2018e (outer circle) divided by regions. Although the value increased by approx. 17% over the years, there was no significant change of consumption in the regions. The development was mainly driven by the demand of produces of food, beverages, cosmetic, perfumes and other consumer products. The chart demonstrates that 50% of the global consumption of flavour and fragrances refers to North and South America and Western Europe. While these regions represent mature markets, there is growth potential in regions such as Central and Eastern Europe, Middle East and Africa. Exhibit 6 lists the top 10 leading flavours and fragrances producer worldwide, and in relation to the total market value, these companies are responsible for approx. 75% of the global FF production. A more detailed consideration reveals that the top 4 companies Givaudan, Firmenich, International Flavors & Fragrances (IFF) and Symrise account for more than half of the total FF market value. As already mentioned, our acquirer Givaudan is the world s leading flavours and fragrances producer. The global no. 2 is Firmenich, a Swiss company based in Geneva, and the largest privately-owned corporation in this area. Founded in 1895, the company employs today more than 7,000 people in its 63 facilities worldwide. In December 2017, Firmenich acquired Natural Flavors (U.S.), a manufacturer of highquality organic-certified natural flavors with a focus on the food and beverage market segments and closed the deal in February In addition, Firmenich also acquired the South-African flavours producer Flavourome to follow Firmenich s strategy of expanding its market presence in Africa. 4 Following the two Swiss companies as no. 3, International Flavors & Fragrances (IFF) operates 66 sites in 34 countries. The company is the result of the merger of Polak & Schwarz (founded 1889) and van Ameringen-Haebler (founded 1920) in The New York (U.S.) based company generated approx. 85% of its revenue 2017 in EMEA, Greater Asia and North America. Over the past years, IFF could keep its EBITDA margin close to 20% mark (2017: 20.6%). In order to meet the present demand of natural ingredients, IFF acquired PowderPure (U.S.) in 2017 because the company patents an innovative technology for creating all-natural food ingredients. 5 Contrary to the top 3 companies, Symrise, German producer with its headquarter in Holzminden, can be seen as a quite young 4 The financial details for both acquisitions were not disclosured. 5 The financial details were not disclosured.

4 MAY company. The FF producer is a result of the merger of Haarmann & Reimer and Dragoco in 2006, while both companies were founded in 1874 and 1919, respectively. Since then, the company has significantly increased its business activity and operating areas. According to Symrise s financial statements, the company was able to generate an EBITDA margin of 21.0% in A milestone in Symrise s history is the acquisition of Diana which today provides Symrise s nutrition division by creating customised solutions from natural raw materials for the food industry, including pet food. Symrise faced critics for the acquisition of Diana because some experts believed that 1.3bn as deal price and an EBITDA multiple of approx. 14x was by far too high considering Diana s financial figures of the year before the acquisition (2013 sales: 425m, EBITDA margin 21%). Givaudan s interest in the French producer Naturex can be seen as a strategic move. The Swiss flavours and fragrances producer intensifies its portfolio for the current market trend for natural ingredients. We have seen that Givaudan s main competitors have already strengthened and expanded their business activity in this market segment to meet the consumer s demand to shift from synthetic to natural-based ingredients. Considering this point, Naturex, as one of the leading companies in this field, could be seen as a good fit for Givaudan, the leading FF producer. Additionally, Naturex has already expanded its business activity by recent transactions and the company operates profitably. However, we have to take into account that Naturex s revenues were mainly generated in North America and Europe, while Asia and Africa represent only a small percentage. These two regions are exactly the ones Givaudan wants to improve its market presence and therefore Naturex might not be very supportive yet for realising this objective, based on public available information. Perhaps this is why Givaudan acquired a minority stake of 40.6% at first to observe the future development of both companies as well as the market. Regarding the critiques about the expensive deal price, we cannot determine Givaudan s exact reasons to agree on a share price of As a consequence, the EBITDA multiple of approx. 21x is viewed as very high; however, we only can assume that Givaudan believes in a hidden growth potential for Naturex and in the realisation of synergies for both companies in the near future. Sources: Bloomberg, Firmenich, Foodnavigator, Fung Global Retail & Technology FGRT, Givaudan, IFF, Leffingwell, Naturex, Statista, Symrise, Transparency Market Research

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