Deals

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

To British people of a certain age, Weetabix and its fellow brands Alpen and Ready Brek evoke a warm glow of nostalgia -- luminous schoolchildren, skinhead cereal bricks, Doctor Who marketing tie-ins. Problem is, they don't mean half as much to the rest of the world.

Bright Food Group Co., the Shanghai-government-owned maker of China's famed White Rabbit vanilla candy, bought 60 percent of the business at a 1.2 billion pound ($1.5 billion) valuation in 2012. The Chinese owners thought they could extend Weetabix's reach outside the U.K. by using its distribution network to get it into 100,000 Asian retail outlets.

Some hope. Four years on and overseas sales are actually 3.4 million pounds lower in 2015 than they were in 2011, according to filings by the brands' parent company, Latimer Group Ltd. The U.K., far from falling behind faster-growing overseas divisions, continued to make up a stubbornly persistent two thirds of group sales.

Lost in Translation
Weetabix's revenue mix is every bit as British in 2015 as it was in 2012 when Bright Food bought the brand
Source: Company reports

No wonder Bright Food is seeking an exit, with Reuters reporting Tuesday that Goldman Sachs Group Inc. has been hired to study a 1 billion pound sale.

Weetabix's failure to break through globally hasn't been for want of trying. Alpen, a packaged muesli still associated in British minds with a certain prissy wholesomeness, added a green tea-flavored variant to its range of breakfast bars. Even so, Bright Food's attempts to wean Chinese consumers off a breakfast diet of congee, fried dough sticks and steamed buns weren't successful enough to warrant China being broken out as a separate market in Latimer Group's 2015 accounts. None of Weetabix's products register on a Euromonitor ranking of the top U.S. breakfast brands, either.

Building brands is a crap-shoot, of course, so Weetabix could be forgiven for its failure on that front. What's less excusable is its failure to translate a halving of the price of one of its core raw materials into better profits. Chicago wheat futures, which reached a five-year high of 947 1/4 cents a bushel in 2012, have been steadily declining ever since, touching a 10-year low of 386 3/4 cents a bushel in August. Meanwhile, Latimer Group's net income and Ebitda in 2015 were both at their lowest levels since the Bright Food investment.

If You Know What's Good for You
Profits at Weetabix's parent Latimer Group failed to take off after its acquisition by Bright Food
Source: Company reports

Is the business worth the 1 billion pounds Bright Food is reported to be seeking? Give Latimer Group's 121 million pounds in 2015 Ebitda a valuation multiple of about 12.3 times and take away its 852 million pounds in year-end net debt and its equity looks to be worth about 639 million pounds. Even on General Mills Inc.'s best-in-class 13.2 times multiple, it would only reach to 745 million pounds.

While that wouldn't be a great return on Bright Food's initial equity investment, not to mention the 500 million pound loan it's extended to Latimer Group, the closely held Chinese company is looking more able to sustain the hit than it has for a while.

Too Much Investing?
Bright Food's free cash flow looks okay now but spent much of the past eight years in negative territory
Source: Bloomberg

Since Wang Zongnan, Bright Food's chairman when it made its 2012 offer for the company, was sentenced to 18 years in prison for embezzlement and bribery last year, free cash flows have bounced back to their best levels in almost a decade.

Weetabix may have been a misbegotten deal, but Bright Food has other ways of keeping its stomach full now.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Ebitda is probably the better measure of performance, since the private equity-type model under which it's owned loads up the group with related-party debt, which depresses net income.

  2. There aren't many direct comparisons for breakfast-cereal businesses, but 12.32 is the average of Kellogg Co.'s enterprise value of 12.77 times trailing 12-month Ebitda, General Mills' 13.2 times and Post Holdings Inc.'s 10.77. The median EV/Ebitda multiple for all companies globally in the packaged foods and meats business is 12.6 times.

To contact the authors of this story:
David Fickling in Sydney at dfickling@bloomberg.net
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net