By Freya Berry and Arno Schuetze
LONDON/FRANKFURT (Reuters) - U.S. agribusiness Archer Daniels Midland has agreed to buy Swiss-German natural ingredient company Wild Flavors for 2.3 billion euros ($3 billion) to enter the flavoring and the health-conscious food sectors.
ADM, one of the world's largest grain traders and a major food processor, said on Monday it would establish a new business unit called Wild Flavors and Specialty Ingredients and expected to complete the deal by the end of the year.
Wild Flavors - ADM's first venture into the flavors market - specializes in natural ingredients. The acquisition, which ADM said was its biggest ever, comes as consumers have been showing increasing appetite for foods made of only natural components.
The deal comes eight months after Australia rejected ADM's attempt to acquire grain handler Graincorp Ltd for A$2.8 billion ($2.55 billion) because of concerns the deal was anti-competitive.
Illinois-based ADM, which has been seeking to expand globally, will need regulatory approval from eight jurisdictions, including the European Union, to acquire Wild, Chief Executive Officer Patricia Woertz said on a conference call.
"We have been known often as a commodity business only," she said. "Now that's probably a misunderstanding."
Private equity group KKR & Co, which bought a 35 percent stake in Wild in 2010, has more than tripled its investment, a person familiar with the investor said.
Sources told Reuters in May that ADM was among private equity and strategic bidders for Wild Flavors, which sources said expected 2014 core earnings (EBITDA) of almost 140 million euros.
"This was an asset with scarcity value, so we always thought there's value for a strategic player on this," said Christian Ollig, director for private equity at KKR. "It was a competitive process to the end."
The transaction, which includes around 100 million euros of net debt, values Wild Flavors at a hefty multiple of 16.4 times its core earnings against a peer multiple of 11, according to Thomson Reuters data. ADM is targeting 100 million euros of cost savings by the third year of the acquisition.
"I think it will be very difficult for them to extract value at such a high valuation," said Evgenia Molotova, an analyst at Berenberg.
Wild Flavors, headquartered in Zug with management offices in Heidelberg-Eppelheim, Germany, is the world's sixth-biggest flavor provider. Hans-Peter Wild, son of founder Rudolf Wild, owns 65 percent of the group. Wild is also the owner of a separate company that makes the drink Capri-Sun but is not part of the deal.
With the purchase of Wild, which is advertising a new summer fruits range on its website, ADM will obtain access to a variety of flavors, seasonings and colors derived from natural sources and used in processed foods and drinks.
Wild's strong position in Europe and in the beverage sector will complement ADM's operations in North America and the food sector, Woertz told analysts.
Still, Citi analyst David Driscoll said he considered ADM a bulk commodities company and “not as a science-y type organization.”
During the conference call, Woertz referred to Wild’s team of scientists and “flavorists.”
RECIPE FOR SUCCESS?
The acquisition of Wild could be a platform for ADM to further expand its specialty business, ADM President Juan Luciano said.
The flavors market is considered less volatile than commodities trading, a sector in which global weather events can send prices for crops on a roller coaster ride.
Almost 30 percent of new food manufacturing product launches over the past two years have been based on the health sector, Molotova said. The sector is "very cash-generative with stable earnings growth," she added.
Barclays acted as financial adviser to ADM while Citi and Freshfields advised the sell side. Skadden, Arps, Slate, Meagher & Flom LLP acted as legal adviser to ADM.
($1 = 0.7345 Euros)
(Additional reporting by Tom Polansek in Chicago, and Alexander Hübner and Supriya Kurane; Editing by Jane Baird and Lisa Shumaker)