Kerry Group, which has spent €4.2 billion on mainly small acquisitions to build up its taste and nutrition business since 2000, may consider a "transformational deal" as it returns to making purchases this year after a pause in 2016, according to Deutsche Bank.
The German investment bank initiated coverage of Kerry’s shares on Wednesday with a “buy” rating and €86 price target. The stock rose as much a 1.3 per cent in Dublin trading to €75.70, giving the Tralee-based company a market value of €13.3 billion.
Kerry's taste and nutrition business generated €4.9 billion of sales last year selling ingredients to beverages, confectionery and culinary food companies as well as pharmaceutical firms. By contrast, its legacy consumer foods business, where brands include Dairygold, Denny and EasiSingles cheese slices, delivered a little over a fifth of group sales, at €1.3 billion.
“Kerry is the world’s leader in the fragmented speciality food ingredients market, representing 88 per cent of the group’s ebita [earnings before interest, tax and amortisation],” said Deutsche Bank analyst Virginie Boucher-Ferte in a report. “Its integrated business model is well positioned to take advantage of shifting consumer preferences towards fast-growing small and regional brands, health and wellness and convenience.”
Kerry’s outgoing chief executive Stan McCarthy, who plans to retire in September after nine years at the helm, said last month that the company could spend up to €1 billion on deals this year. The group spent last year working on integrating €900 million of deals carried out in 2015.
Ingredients ‘pure-play’
“Despite rising asset prices, we believe Kerry’s integration expertise should maximise synergies and ensure returns can be maintained,” said Ms Boucher-Ferte. “ While Kerry has historically been focusing on bolt-on deals, we cannot rule out the group making a transformational deal and become an ingredients pure-play.”
While the low-growth consumer foods business is “run as a cash cow”, it could potentially become non-core longer-term, the analyst said. Disposal of the smaller division, which has an equity value of €1.5 billion, could prompt investors to look at the company as a “pure ingredients company” and lead to a price target of €92 for the stock, she added.
However, Mr McCarthy, who hands over the reins to the company's current Asia-Pacific chief executive Edmond Scanlon this year, insisted last month that consumer foods remains a core business.
