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August 5, 2019

Breakingviews: KKR gets a biscuit LBO do-over Down Under

by Breakingviews.

KKR shocked the world 30 years ago with an audacious biscuit buyout – the $25 billion acquisition of RJR Nabisco. The private equity firm’s latest cookie deal won’t have quite as much impact, but it might prove financially easier to digest.

Henry Kravis’s firm is buying Campbell Soup’s international snacks unit for an enterprise value of $2.2 billion. For that it gets Arnott’s biscuits and Tim Tam chocolate-covered wafers, a household brand in Australia, if virtually unknown elsewhere. It isn’t obvious that business is booming. Campbell decided to sell almost a year ago, and said in June that sales at its international biscuits and snacks division were in decline. Increasingly health-conscious consumers throw a demographic spanner in the works.

Still, there are ways to make the deal stack up. The unit had revenue of around $885 million in the latest 12 months. Though the company doesn’t break out detailed financials, assume the same 20% margin as the division from which the biscuits comes, and it suggests EBITDA of just under $180 million. That would mean a valuation multiple of around 12.5 times, roughly in line with other Australian consumer staples deals, according to consultant Grant Thornton.

If KKR can turn sales decline into, say, 3% annual growth, and get that margin up to 25% – roughly that of cost-cutting snacks supremo Kraft Heinz – it would give the business EBITDA of over $250 million in five years. Sell at the same multiple it bought in at, and the Tim Tams maker could be worth $3.1 billion. The cream in the cookie is leverage: if KKR funds half the deal with debt, and pays one-third of that over time, it would easily double its money, with an internal rate of return of 17%, according to Breakingviews calculations.

That’s palatable if not super-tasty. Private equity firms usually see 15% as the sign of a deal gone reasonably well. But it would also be a sort of cookie do-over for KKR. After all, that iconic acquisition of RJR Nabisco proved a financial disappointment. Think of this as a smaller, but maybe more successful, bite.

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