15 Oct 2018

How market consolidation can transform businesses by extending global reach – as well as diversifying activities and growing the bottom line.

At our 2018 AGM in Paris on 30 May, a panel discussion chaired by Gilberto Pozzi, Partner and Co-head of Global M&A at Goldman Sachs, featured Ibrahim Najafi of ice cream business Froneri, Hans Roelofs of drinks bottler Refresco, Frédérick Bouisset of Labeyrie Fine Foods, and Hugues Lecat of speciality pharmaceutical company Ethypharm. All CEOs with fascinating insights into why and how consolidation works for them. And, most importantly, all very generous with their tips on how best to do it.

Gilberto posed some interesting questions – and received some even more interesting answers.

When growth takes place across vast geographical distances, how do you manage the process?

As a joint venture between R&R (the European ice cream group owned by PAI) and Nestlé, Froneri now includes operations in more than 20 countries, as far apart as the UK, Australia, Brazil and South Africa. So CEO Ibrahim Najafi knows a thing or two about bringing disparate regions together. For him, it’s vital to create a shared vision the whole team can believe in and anchor themselves to – so, wherever they are in the world, they can use it as a target, day in, day out. For Froneri, the vision is simply to be the best ice cream company in the world. With such an ambitious goal, everyone must understand what it really means, and how the business is going to achieve it. As Ibrahim says, “They need to understand the journey. So communication is vital. Get all the team in one room, and answer all the ‘what’, ‘how’ and ‘when’ questions.”

For Labeyrie Fine Foods, most of the geographical expansion to date has been within Europe. The focus tends to be on acquiring and developing new products to stay ahead of consumer trends, rather than on exploring far-flung markets. But this is a company with very deep French roots, so every acquisition in another country requires very careful handling, and a lot of hard work, to ensure an appropriate fit – even with businesses involved in the same product areas.

And now, with operations in the UK, Benelux, Italy, Spain and Switzerland, the business has plans to extend further – into the US and China. CEO Frédérick Bouisset spent 11 years in the US, so he is confident his company can achieve growth there.

Integration is a big part of the consolidation process. How do you successfully integrate the businesses you acquire or merge with?

As Hans Roelofs of Refresco points out, integration is really what consolidation is about. It’s relatively easy to buy companies, but it’s not so easy to change them to work with you. Integrating two company cultures can be very difficult – and integrating operations and systems to achieve synergies can be even harder.

Labeyrie Fine Foods has achieved this many times over with bolt-on acquisitions, and there’s a simple secret to its success. As Frédérick says, “We have a 70-year-old company, very rooted in foie gras and smoked salmon. These are the two pillars of the company. It’s much easier to integrate companies in these two areas – because we know everything about them, and we can list all the possible synergies and make it happen quickly.”

In the case of Froneri, complementary team qualities have been a major benefit – and an important requirement – of successful consolidation. The latest chapter in the group’s story has been the joint venture between R&R (which had already grown rapidly through 15 mergers or acquisitions in 15 years) and Nestlé. Integration here was very much about blending the skills that existed within the two organisations, and developing new ones to meet new shared goals. The R&R team was highly experienced in building the business, adding company after company. In contrast, at Nestlé, management’s strengths lay in maintaining the procedures and systems of a big corporate business. Now, working as one team, they need to be multi-skilled to achieve synergies across diverse markets. And they act quickly. As Ibrahim says, “There’s no such thing as doing this first and that afterwards. Our all-new Formula-1 style culture is all about speed and improvement year on year.”

How do you choose your targets for external growth – where do the ideas come from?

For Ethypharm, M&A activity is very specific. In an industry where acquisition is really the only way to grow (due to the time, expense and risk involved in the clinical trials needed for organic growth through new product development) businesses tend to use M&A to expand their product ranges. But Ethypharm’s consolidation has a different focus. It used to be a B2B company, developing and manufacturing products, and then selling them through other pharma businesses – big pharma, generic companies or speciality pharma.

Refresco’s most recent acquisition was by far the biggest in the Netherlands-based company’s history – of North American beverage and foodservice business, Cott. But before that, Refresco was busy consolidating in a very fragmented industry, buying mainly family-owned companies, and doubling the company’s size every three to five years. Whatever the scale of the deal, in CEO Hans Roelofs’s experience, it’s a very long-term process to ensure that it’s right for both parties. “You need to build trust”, he explains, “because the companies we consider usually have either a succession issue or a big investment that’s difficult to swallow. Or, what happens very often in our industry, they’ve grown too big with only one customer – we get nervous about that. So it takes time to build trust on both sides. And that can only be done at the top-to-top level. Choosing targets is about developing relationships, and that’s usually down to my CFO and myself.”

It’s also a case of accepting that you’re investing time in something that may or may not happen. As Hans says, “It’s building a pipeline, which is continuously filled – five, six or seven different projects, and every now and then one falls out. And if it falls out at the right end of the tunnel, we have a good project and a good finish.”

Ibrahim Najafi of Froneri agrees about the need to build trust when choosing acquisitions. “I can give you examples of having discussions with people for five or ten years before anything happens. We have a pipeline of targets, which we build based on our knowledge about the businesses out there and the competitive environment.”

Like Hans and Ibrahim, Hugues Lecat of Ethypharm sees sourcing potential targets as a CEO job. “The difficulty is to find potential targets before they’re on the market and not really known – and then establish contacts and relationships so that when they come to the market you have an advantage. That’s really key.” But in pharma, it’s also good to have help within the specific country or region you’re aiming for. Hugues continues: “All the markets are very, very different in pharma, even in Europe. Germany, France and the UK all function differently from one another. So you need local people to help you understand the market you want to enter.”

When you’re involved in the long-term task of developing relationships with potential targets, how do you keep managing the day-to-day running of your business?

If the CEO is leading consolidation initiatives, there can be a considerable risk of taking the eye off the ball in the game of competing as usual. Allocating sufficient time to the two tasks is vital. Hans Roelofs identifies two considerations here: “First, you need the conviction in yourself that investing time in consolidation is a key part of your modus operandi. You must really want to dedicate time to it. If not, it doesn’t work. And secondly, you need some very good people around you to run the business – because, effectively, I spend at least one third or maybe closer to 50% of my time getting to know new targets, building projects, finding new owners, and so on.” In other words, if consolidation is your value-creation model, it’s worth spending time on it. In fact, you have to spend time on it. Some CEOs might even say it takes priority over maintaining business as usual – but only once you’ve ensured that business as usual is in safe hands.

Consolidation is obviously about growth, but do you aim mainly for top-line growth or bottom-line growth – or both?

Of course, most businesses would ideally have both – and many do. But whether the main focus is on sales growth, or profit growth by cutting costs through synergies, seems to depend on a range of factors – not least, the industry you happen to be in. For example, certain conditions affecting drinks bottling mean Refresco’s primary aim is bottom-line growth. Hans Roelofs explains why it isn’t the top line: “We could easily buy a company with a revenue of $150 million and still go down in sales in that year, and yet have organic growth. Why is that? We’re probably the number one or two buyer of orange juice in the world. We buy around $350 million value of orange juice, and if there’s a bad crop, or a really good crop, that can easily make a difference of $200 million in procurement pricing, which has a knock-on effect on retail pricing. And with a swing of $200 million, we could do an acquisition of $150 million and still be negative.”

At Froneri, Ibrahim Najafi has a slightly different approach. “If I look back on our business and all the acquisitions we’ve made, we’ve always asked ourselves three questions. Can we sell more? Can we buy better? Can we take cost out? And in my view, you have to say yes to all three. Because if you can’t deliver the sales, there’s no point.” He admits that, since doing the deal with Nestlé, the synergies are substantial. But ultimately, it’s top-line growth he’s looking for. “If we do further M&A – and we want it to be transformational – it doesn’t matter how big it is, growth has to be at the heart of it.”

For Labeyrie Fine Foods, the bottom line is important. As Frédérick Bouisset says, “When we do an acquisition, it’s mainly about cost-cutting – our expertise is to cut costs. It’s key for us to nurture the pipeline of savings. Yes, acquisition can be a good way to increase our exposure in Europe – and to create new product opportunities – but it’s the synergies we’re really looking for.” However, future plans to expand further afield might lead to a slightly different emphasis: “We’re working now to make acquisitions in the US and in China – and these will be different. With these deals, we want to extend our European leadership to worldwide leadership.

Having heard from the four CEOs, it was interesting to compare their perspectives with an investor’s take on this question. As Gilberto Pozzi pointed out, “Synergy is something investors can value very easily, in particular cost synergy. Top line growth is a little more tricky. A company with high growth often comes with a high price, so the equation can be complicated. I think their preferences are specific to each acquisition and the category.”

So, what can we conclude from this exchange of views on market consolidation? All agree that it’s largely about integration, in culture, skills and operations. And it’s crucial to take plenty of time to get to know your targets before anyone makes a move. But after all this patience, persistence and balancing of priorities, you can look forward to impressive growth – of whatever kind your industry favours.