How sweet is the Ferrero deal for Thorntons?
Chocolate – indulgence, gift, comfort food the world over. The sweet treat is many things to many people, and a permanent part of the snack landscape – the snackscape if you will.
Yet in a minor repeat of the infamous Kraft/Cadbury collision of 2010, the number of players in the chocolate world just declined by one as Ferrero (of Rocher fame, of course) announced its acquisition of Thorntons (THT) for £112 million.
Since the financial crisis, when people probably didn’t have luxury chocolates high on their list of priorities, Thorntons has had a rollercoaster of a ride. From a £2 peak in the middle of 2007 Thorntons had tumbled all the way to £0.10 by the start of 2012. Unsurprisingly from such a dramatic nadir Thorntons underwent a pretty robust recovery, and across 2012, 2013 and the start of 2014 the chocolate company managed to climb back to a 6 year high of £1.69 at the start of March last year.
Thorntons’ price has melted a bit since then; a string of profit warnings, inspired by some precipitous sales drops, ate away at the company’s stock price, and saw it hit a 2 year low in February. Yet much like in 2012 this low was the catalyst for a turnaround and by the start of June Thorntons was back above the £1 mark. Add in the news of the Ferrero deal, and Thorntons jumped 44% higher to the offer price of £1.45.
So will Thorntons satisfy Ferrero’s sweet tooth, or will it leave a bitter taste in the mouth?
Considering the name Ferrero immediately reminds us of a very specific chocolate, the Italian company has an impressive selection of recognisable products: Nutella, Kinder Eggs and Tic Tacs, all compliment the company’s Rocher namesake, and are staples of sweet aisles up and down the land. Thorntons, on the other hand, has its name and name alone to offer in terms of brand recognition, meaning it lacks the varied clout of Ferrero’s brand-line.
Yet there are reasons why this deal may work out well for both parties. Thorntons’ half-year report in March painted a troubled picture, with the company’s revenue falling £11.7 million year-on-year to £128.2 million, whilst its profit before tax slipped to £6.5 million from £7.2 million the year before. Thorntons could do with a new tactic (or Tic Tac), and following the departure of long-term CEO Jonathan Hart in May the time is ripe for some fresh blood in the company.
If Thorntons’ reasons for accepting the offer are clear, what is in it for Ferrero? Well, it likely got Thorntons on the cheap given the decline since last March. There were also some interesting figures amongst the dross in Thorntons’ half year results that may have piqued Ferrero’s interest. International sales in Thorntons’ FMCG division were up 19.9%, largely through growth in the USA, an area Ferrero can work on due to its own global presence and can help compensate for Thorntons’ home-based issues.
And despite Thorntons’ flagging sales, the Derbyshire-based company gives Ferrero something it doesn’t have: a manufacturing presence in the UK. With the Italian company seeing its best ever results in the UK in 2014, it has plenty of reasons to expand into the territory, and by acquiring a brand that carries with it a certain air of luxury and UK-familiarity it can make this transition easily. Importantly the deal will also see Ferrero climb the chocolate-company ladder, leap-frogging Lindt to become the fourth biggest in the world behind Mondelez (formally Kraft Foods), Mars and Nestle.
Yet there is another interesting twist in this M&A tale. Just as Thorntons is in a transitional period, so too is Ferrero. Michele Ferrero, son of the company’s founder and the man largely responsible for Ferrero’s modern success, died in February (incidentally as Italy’s richest man). Whilst he was alive Michele was opposed to major mergers and acquisitions, and despite not being CEO since 1997, the company appeared to follow his lead. However, his death appears to have brought with it a new era for Ferrero, and this big move for Thorntons will reawaken questions over whether Giovanni Ferrero, long-term CEO, son of Michele and grandson of the founder Pietro, will finally take the chocolate-company public.
And that might be the most significant thing to take away from this deal; whilst it extends a lifeline to Thorntons, if could portend bigger things for Ferrero in the future.
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