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Cargill flavours buy not transformational but good fit for Kerry, analyst

By Jane Byrne , 26-Sep-2011

Kerry’s acquisition of Cargill’s flavour systems for €168m ($230m) is by no means transformational but will boost the Irish ingredient firm’s beverages and dairy flavours portfolio, claims an analyst.

James Targett, a broker at UK-based Berenberg Bank, remarked that the takeover, which was first mooted in the summer of 2011, is “bang in line” with Kerry’s strategy to acquire bolt-on flavour companies.

In terms of whether the Irish group landed the Cargill flavours arm for a good price, he told this publication that as the “profitability of the division acquired was not disclosed,” it is difficult to determine whether the final outcome completely favours Kerry.

Beverage and dairy synergies

But Targett reckons the acquisition “makes sense” as it creates “synergies” in terms of both firms dairy and drinks flavour competencies, and allows Kerry to meet its objective of becoming a “one-stop-shop” for food and drink manufacturers.

The Cargill business is particularly strong in the beverages and dairy flavours sectors, the latter of which includes products geared towards sectors such as cheese, ice cream and yoghurt.

The purchase, continued Targett, also allows Kerry greater foothold in emerging markets such as South Africa, and parts of Asia and Latin America, an important factor considering much of the market’s recent growth has come from less developed parts of the world.

“The Cargill acquisition reflects recent M&A activity in the flavours sector,” added the broker. “There aren’t very many targets out there in terms of really transformational acquisitions so the bolt-on approach continues to inform expansion strategy in the category.”

Liam Igoe, an analyst with Dublin-based Goodbody Stockbrokers, said the Cargill deal was "at the lower end of the price/sales spectrum for ingredient deals, so it should add to earnings for Kerry."

He notes the gains for the Irish group are the exposure it gets in terms of the beverage sector as well as developing markets, two key segments, he added, that have been identified by Kerry for investment over the coming years.

The takeover - which is subject to regulatory approval - is expected to be completed by year-end, confirmed Kerry last week.

Acquisition history

Kerry has been increasing its presence in the global market via acquisition in recent years.

It purchased the US-based Nutritional Food Products (which produced sweet flavours for cereal-based products) in 2009, having taken control of X Cafe, a US supplier of premium coffee flavours and extracts, the previous year.

The past few years has also seen it acquire flavours manufacturers located in Belgium, Brazil and Costa Rica, as well as PT Armita, an Indonesian-based supplier of savoury flavours.

Global outlook

The global market for flavourings used in food and beverages was worth an estimated $7.35bn in 2010, estimates Leatherhead Food Research in a recent overview of the flavours industry.

Factors such as tightening legislation, rising ingredient prices and ever more demanding consumers, as evidenced by the recent trend away from artificial to natural flavours, continue to drive consolidation within the global food flavours industry.

Since Givaudan gained global market leadership with its purchase of Quest International in 2006, further deals have taken place. Firmenich took control of Danisco’s flavours division in 2007 and Symrise acquired Chr. Hansen’s flavourings business the following year.

In 2009, Symrise then purchased Futura Labs Group, a flavourings company based in the Middle East.