Weetabix adopts a Chinese Flavor

Baring Private Equity Asia said on Tuesday it has completed its purchase of a 40% stake in Weetabix Food Company and is working on enticing Chinese consumers away from their traditional morning bowl of congee and towards the firm’s British breakfast cereals.

The terms of the transaction were not disclosed but a person familiar with the deal said the stake purchase values Weetabix at about £1.3 billion, slightly more than the £1.2 billion China’s Bright Food paid for a 60% stake in the Northamptonshire-headquartered firm back in 2012.

The deal was structured so that Bright Food first bought the 40% stake in Weetabix from private equity firm Lion Capital, which has been a shareholder since 2004, then sold it on to its new partner Baring Asia.

China’s regulators have already cleared the deal so Baring Asia and Bright Food can get on with reenergising the maker of Ready-brek and Alpen cereal bars in its core UK market as well as drive growth in China.

To cater to the increasingly eat-on-the-go culture in Britain, Weetabix is developing yogurt drinks for breakfast. It is also adapting some of its products to suit Chinese tastes, for example green tea Alpen bars are now on the shelves in China. There will also be a new management lineup for Weetabix in China.

The cereals and snacks produced in Burton Latimer and Corby are selling well in the China market, where a number of food safety scandals in recent years have shaken consumer confidence in domestic brands and the government’s ability to police the food processing industry. Weetabix, whose Chinese name translates as vitamins with much wheat, is espousing the health benefits of eating cereals soaked in milk.

So far so good. In the first year of Bright Food’s ownership of Weetabix sales were up 3.6% to £366 million and operating profits grew 2.2% to £102.5 million.

This bodes well for the financing of the deal via a leveraged loan, which is well underway, according to the person familiar with the transaction. The 83 year-old company is a very well-known credit among bankers, the food business is easy to understand and Weetabix is highly cash-generative.

More importantly, Bright Food is majority state-owned – so it ultimately has the backing of the Chinese government. Unsurprisingly most of the loan will be taken up by Chinese lenders, such as Bank of China, so limited supply for international banks is serving to create tight pricing for the borrower, said a person familiar with the transaction.

The loan is covenant-lite and in sterling. Gross leverage is about seven times, net is over six times, the person said.

Bright Food and Baring Asia’s aim is to ultimately list Weetabix on a stock market. This is in line with the company’s aim to become more market-oriented by having more of its businesses publicly listed and subjecting itself to pressure from investors. China’s government is pushing all of its giant state-owned enterprises to be more transparent and profitable.

Bright Food’s global push
Bright Food, which has businesses ranging from logistocs to dairy, has been on a global expansion drive of late, which is starting to weigh on its credit profile.

About 20% of Bright Food’s business is now outside of China after buying Synlait Milk in 2010, Manassen Food in 2010, Salov Group in 2014 and Israel’s Tnuva this year.

Credit rating agency Moody’s on Tuesday lowered Bright Food’s baseline credit assessment to ba3 from ba2 due mainly to its rising debt following these overseas acquisitions. Bright Food’s adjusted gross debt increased by around RMB12 billion in 2014, with its adjusted debt/EBITDA rising to around 8.4x at end-2014 from 7.2x at end-2013.

However Moody’s also increased the uplift to three notches from two notches, based on the expectation of a high level of support from the Shanghai municipal government in the event of financial distress after it merged with another state-owned group Shanghai Liangyou Group, which manages grain reserves for the Shanghai municipal government.

In addition, the Shanghai municipal government has made Bright Food a key platform for consolidating the city’s state-owned assets relating to food and agriculture.

Baring Asia lends hand
Baring Asia has a track record in helping Western brands crack Asian markets and recently raised $4 billion for deals.

The Hong Kong-headquartered private equity firm invested in the UK’s Cath Kidston last year and has helped the clothing to home furnishings retailer famous for its chintzy fabrics expand in Asia, particularly Japan.

Cath Kidston recently bought back the franchisee in Japan and now wholly owns the rights in this large luxury brands market. The firm’s China business only consists of one flagship store. Baring Asia is proceeding cautiously with Cath Kidston’s China expansion as it sees retail sales flagging as economic growth slows.

This is the first deal Baring Asia has sealed with Bright Food but it has worked with other state-owned enterprises in China’s food sector such as Cofco. It invested in Cofco Meat last year, a unit of Cofco.

The deal came about via Baring Asia’s China-based team’s realationship with Bright Food and its main shareholders. Baring Asia’s managing director in Beijing Guy Cui led the private equity firm’s deal team. Cui joined the firm in 2011 from Hopu Investment Management.