a worldwide leader food & consumer goods · a worldwide leader food & consumer goods ......

PAI Europe V – Froneri – September 2016 Strictly private & confidential

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A worldwide leader FOOD & CONSUMER GOODS

Company name Froneri

Sector Ice cream manufacturing

Areas of business World

Head office UK

CEO Ibrahim Najafi

Website www.froneri.com

Executive summary ► In April 2016, Nestlé and R&R Ice Cream (“R&R”) signed an agreement to create Froneri, a joint venture (“the JV” or “the

Company”) combining R& R and Nestlé Ice Cream (“Nestlé IC”) activities in more than 20 countries in Europe, the Middle East (excluding Israel), Argentina, Australia, Brazil, the Philippines and South Africa. Froneri also includes Nestlé’s European frozen food business (excluding pizza and retail frozen food in Italy), as well as its chilled dairy business in the Philippines. Froneri’s name is a combination of the beginning letters of Frozen, Nestlé, and R&R Ice Cream.

► Following the successful conclusion of the required regulatory clearances, the transaction closed on 30 September 2016, creating the new entity in which PAI and Nestlé will be equal shareholders, with combined 2015 pro forma sales of around €2.6 billion and EBITDA of €305 million (c. 12% EBITDA margin). PAI’s equity share contributed into the JV corresponds to a cash-on-cash multiple of 2.9x. A €150 million dividend will be paid to shareholders, distributed equally between PAI (and its co-investors) and Nestlé in two installments.

► The transaction brings together two highly complementary businesses, leveraging their respective strengths to create a global ice cream company with leading market positions. Froneri will be the second largest manufacturer of ice cream in Europe with a 26% market share, the global leader in private label ice cream and the third largest manufacturer of ice cream globally. The group now operates 28 factories in more than 20 countries and employs about 15,000 people.

► Froneri was financed with a €800 million shareholder loan from Nestlé and a €800 million term loan B. The term loan was priced at E+3%/par, the lowest all-in yield for a widely syndicated EUR leveraged loan post crisis. Part of the proceeds from the new financing were used to repay all current R&R financing instruments (vendor loan, PIK toggle notes and senior secured notes).

► PAI and Nestlé’s decision to create Froneri is based on the following key considerations:

> A unique combination of branded and private label businesses: the combination of R&R’s own brands, licences and private label offering as well as Nestlé’s portfolio of brands, will enable the JV to offer a total category model with a comprehensive and attractive product portfolio, balanced between (i) private label and branded, (ii) local and global ice cream brands such as Mövenpick of Switzerland, Extrême, Pirulo and Connoisseur, as well as (iii) international licences for well-known brands such as Mondelēz brands (e.g. Cadbury and Oreo) and others;

> Two balanced distribution channels: R&R is focused on ice cream products typically purchased in supermarkets and consumed at home (“Take Home”), while Nestlé IC is focused on the impulse and catering ice cream segment, typically purchased and consumed outside of home (“Out of Home”) with a different route to market and a higher number of points of sale in which Nestlé IC’s owned freezers are positioned. The combined ice cream portfolio will therefore be present across all occasions of consumption (Out of Home & Take Home) and across all product categories (e.g. sticks, cones, sandwiches etc.);

> A global geographical presence covering all of Europe and key emerging markets: Nestlé and R&R are largely complementary in terms of geographical presence in Europe, together covering every key market and with limited overlap. Moreover, Nestlé benefits from an exposure to several attractive emerging markets (Brazil, Egypt, Russia, Argentina and the Philippines) which will complement R&R’s presence in Australia and South Africa and further de-seasonalise the business;

> Improved operations and capacity with large synergy potential: the creation of Froneri is expected to deliver strong operational synergies supported by (i) R&R’s agility and best-in-class manufacturing capabilities owing to its private label model and ability to manage a very wide range of product references, high changeovers and historically demonstrating its capacity to generate brand-like margins, combined with (ii) Nestlé’s scale, which has grown through a number of acquisitions with limited integration; and

> Proven and experienced management team: Luis Cantarell, currently Executive VP Nestlé and Head of Zone EMENA with 40 years of experience with Nestlé will act as a Chairman of the JV. Froneri’s new CEO, Ibrahim Najafi, has been with R&R since 1998, and has been appointed R&R’s CEO by PAI in 2013. Froneri will benefit from a strong and experienced management team as well as R&R’s proven track record of integrating businesses and generating synergies in multiple geographies.


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► The creation of Froneri is a solid example of PAI’s ability to partner with leading industrial players to create strategic value. It is the first time Nestlé has entered a 50/50 joint venture with a private equity firm, demonstrating Nestlé’s confidence in PAI’s industrial approach and further validating PAI’s strong consumer sector expertise.

► Nestlé and R&R have a longstanding relationship, with R&R operating Nestlé’s brands in the UK since 2001 and subsequently in Australia and South Africa. These successful precedents have proven the value creation potential of Nestlé’s ice cream operations combined with R&R’s industrial model and were critical in gaining the support of Nestlé to form Froneri.

Business description

R&R Ice Cream

R&R is the #1 manufacturer of private label ice cream and the #2 manufacturer of take home ice cream in Europe, with leading market shares in each of the UK, German, French, and Italian ice cream markets. Since the acquisition of Peters in 2014, R&R also is one of the largest ice cream manufacturing players in Australia with leading market share.

► R&R’s EBITDA has more than doubled between 2012 and 2015 (from €82 million to €188 million). Under PAI’s ownership, R&R has pursued its growth strategy through (i) continuous growth of its branded offering from 23% in 2012 to 48% in 2015 (ii) the consolidation of ice cream manufacturing operations in well invested, large scale factories and (iii) continuous M&A with the acquisition of Fredericks in the UK in 2013 and outside Europe in high-growth markets with the acquisitions and integration of Peters (formerly part of the Nestlé group) in Australia in 2014 and Nestlé’s South African ice cream operations in 2015.

► The successful integration of the latter entities has proven R&R’s ability to transform into a global group present in 3 continents, while continuing to deliver operational improvements.

► The creation of Froneri is a game-changing operation for R&R, which becomes a global ice cream company. The objective shared by both shareholders is to IPO Froneri in the coming years.

Nestlé Ice Cream

With FY15 sales of c. €1.6 billion, the asset perimeter Nestlé contributed to the JV aggregates its Ice Cream business in more than 20 countries in Europe, the Middle East (excluding Israel), Argentina, Brazil, the Philippines and Russia, Frozen Food excl. Pizza and retail frozen food in Italy, as well as a smaller Chilled Dairy business in the Philippines.

► Ice Cream represents 77% of revenues. One third of sales are realised through the Take Home channel and two thirds through the Out of Home channel with a well-established and well-diversified brand portfolio across segments and customers, benefitting from a highly recognised brand image and strong awareness.

> Nestlé IC has developed a wide portfolio of ice cream brands across different formats, from sticks and cones to water ice, bulk retail and cups to access the spectrum of price segments: super premium, everyday premium, mainstream, affordable and family/kids;

> Its brand portfolio combines key global brands (notably Extrême, Mövenpick, Pirulo and Maxibon) distributed in the majority of Nestlé’s markets and complemented by local hero brands (including Pingviini on Nordic countries, Motta, Mega, etc.) inherited from historical acquisitions; and

> Nestlé holds the #1 position in several of the markets in which it operates such as Switzerland (14% of sales), Egypt (8% of sales), Finland (4% of sales), Greece (2% of sales) and Argentina (2% of sales) and #2 positions in almost all of its other markets. Its top five markets by sales are Germany, Switzerland, Italy, Spain and Egypt, which together represent more than 60% of total sales.

► Frozen Food (22% of revenues): the segment includes Nestlé’s frozen food business in five countries: Switzerland, Germany, Austria, Italy and Spain.

> The frozen food business is strongly interlinked with the ice cream business from a manufacturing and also sales perspective, providing cross-selling opportunities to the Out of Home segment. Key products include frozen bakery (croissants, cakes and pretzels), prepared meals, vegetables, meat and fish;

> The frozen food portfolio transferred to the JV excludes frozen pizza and retail frozen food in Italy which have limited synergies;

> Key brands include Nestlé Schöller, Findus and Buitoni; and

> Nestlé’s chilled dairy business in the Philippines (1% of revenues) is also included in the scope due to manufacturing synergies.


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Froneri

► Nestlé IC and R&R are two highly complementary businesses, leveraging their respective strengths to create a global ice cream player with strong ‘A’ brands, industry-leading EBITDA margins and best-in-class manufacturing efficiencies.

► Froneri will operate in the Take Home and the Out of Home ice cream channels, combining R&R’s and Nestlé IC’s leading positions in both of them respectively. The Company will be the second largest manufacturer of ice cream in Europe, the global leader in private label ice cream and the third largest manufacturer of ice cream globally. The combination of its global footprint, strong brand portfolio, and cost leadership in production will result in a highly profitable ice cream market leader

> The JV will be a global challenger to Unilever, with a 26% combined market share in Europe as well as a significant presence (c. 21% of sales) in emerging markets (Middle-East, Africa, Latin America, Asia and Oceania).

1 #1 position held by Unilever, #2 position for Nestlé Ice Cream includes Nestlé North America

► Froneri’s global product portfolio will mostly comprise ice cream products representing 87% of revenue and frozen food activities representing 10% of revenues. Finally, Erlenbacher, a standalone frozen bakery business in Germany, will represent 3% of revenues.

► In the ice cream segment, Froneri will rely on a diversified product portfolio across a wide range of product categories

> Branded products (owned and licenced brands) - 75% of revenues

- Nestlé strong brand portfolio comprised of both local and global well-known brands e.g. Extrême, Mövenpick of Switzerland or Pirulo; and

- International licences notably Mondelez (e.g. Cadbury or Oreo).

> Private label products - 25% of revenues

- Froneri will be the global leader in private label ice cream. It will notably be the largest manufacturer of private label ice cream in the UK, Italy and France by volume and value, and estimated to account for approximately 55%, 62% and 55%, respectively, of total private label sales in those markets in FY15. In Germany, the Company will be the second-largest manufacturer of private label ice cream by volume and value with 23% market share.

Ice cream revenue €1.0bn sales

€1.3bn sales

€2.3bn sales

Frozen food revenue - €350m sales

€350m sales

Ice cream “A” brands

Global market position1 #3 #2 #3

Position in Froneri’s territories #3

10% market share #2

16% market share

#2 26% market share

Global reach 7 countries 19 countries 22 countries

Manufacturing sites 11 sites 17 sites 28 sites

Number of employees c. 4,500

employees c.10,500

employees c. 15,000

employees


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2015 revenue split by segment 2015 revenue split by geography

► Germany, the UK, France, Italy and Spain will generate c. 60% of Froneri’s total revenue and EBITDA.

► The combination of Nestlé IC and R&R will also result in a well-balanced geographic portfolio with no single country accounting for more than 15% of ice cream revenue. Nestlé’s leading position in the Out of Home channel (owning c. 750,000 freezers positioned in hundred thousands of point of sales) will provide Froneri with a global presence across Europe, Middle East and North Africa, Australia, Latin America and the Philippines.

Asia / Pacific


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Equity story

Gaining market share by investing in brands and private label

► The branded strategy will be focused on:

> Supporting and building key priority brands (5+ global brands c. €100 million revenue brands including Extrême, Mövenpick of Switzerland, Pirulo, Maxibon and a new sticks brands);

> Developing global Mondelez confectionary brands; and

> Maintaining local heroes.

► This strategy will be focused on establishing international brands across markets in order to rejuvenate Nestlé’s brands.

> Froneri will drive investment in brand building and marketing through re-investment of cost savings (investment of c. €25 million p.a.); and

> For everyday quality and mainstream brands, Froneri will also focus on improved product quality and price competitiveness to enhance its brand portfolio and market penetration.

► In the Take Home category, Froneri will leverage its strong relationships with customers, working alongside them to develop, commercialise and produce innovative new private label products and offer a total category model:

> Froneri will seek to expand by cross-selling to its large existing customer base, with many of its existing customers being leaders in their respective national markets, including Aldi, Carrefour, Coles, Conad, Rewe, Sainsbury’s, Tesco and Woolworths.

► Froneri’s private label strategy will aim to support its leading current position as well as penetrate new geographies. Upside is expected from market share gain in smaller but attractive markets such as Spain, Finland and Brazil where R&R previously had no presence.

► The frozen food segment also offers potential by growing and leveraging several strong brands, notably Erlenbacher, and putting a renewed focus on the retail frozen food business in Switzerland.

Optimising operations

► Due to scale efficiencies, its best-in-class manufacturing footprint, procurement organisation efficiencies and leading innovation capabilities, R&R has demonstrated over recent years its ability to generate brand-like margins from its private label products.

> Over the last five years, R&R has demonstrated a solid track record of continuously improving margins resulting in industry leading profitability levels (EBITDA margin of 18.9% in FY15 compared to 13.5% in FY13); and

> R&R’s manufacturing base is characterised by efficient changeovers, minimal waste and high capacity utilisation. Froneri will draw on this experience and will further increase the efficiency of its manufacturing platform. In order to optimise profitability, Froneri will continually assess the performance of all of its product lines and seek to introduce higher margin, innovative products while reducing lower margin products.

► The combination of the two businesses presents a large synergy potential.

> Identified cost saving opportunities in procurement will come from a conversion of the procurement organisation to the R&R model and review of the combined supplier base as well as products purchased. There is a significant overlap in purchasing by R&R and Nestlé IC in the same countries. In addition, there are also similar products purchased by both businesses that can be further harmonised while the insourcing and own production of certain products offers additional cost saving potential;

> Potential cost savings along Froneri’s entire supply chain can be achieved by taking tried and tested practices throughout the business and sharing them across the enlarged manufacturing, logistics and R&D platform; and

> The Company will extend the use of proven technologies such as the production of ripple and sauces, Combined Heat and Power, pallet automatisation all of which R&R has used to improve profitability. It will also explore further opportunities in vertical integration such as manufacturing of some of its own packaging.


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Transaction structure ► The parity offer agreed with Nestlé is based on a valuation of 10.0x EBITDA for both businesses, which compares to the 8.5x

acquisition multiple for R&R in July 2013, acknowledging the transformational journey undertaken by R&R under PAI’s ownership. The shareholding structure is the following: PAI and its co-investors own 48% of the JV, Nestlé 48% too and the Company’s management 4%.

► R&R is valued based on the €188 million reported FY15 EBITDA and Nestlé Ice Cream on the €123 million FY15 standalone EBITDA (excluding non-EMENA countries). On that basis, the combined business was valued at an implied Enterprise Value of c. €3 billion. PAI’s equity share contributed into the JV corresponds to a cash-on-cash multiple of 2.9x investment cost.

► Nestlé provided 50% of the financing through a €800 million subordinated shareholder loan with no guarantees or security and a fixed coupon of 4.5%, further highlighting Nestlé’s support and commitment to Froneri.

► The remaining quantum of debt of €800 million was raised through the issuance of a covenant-lite term loan B. Proceeds from new financing were used to repay all current R&R financing instruments (existing vendor loan, PIK toggle note and R&R senior secured notes), make equalisation payments between PAI and Nestlé to reach ownership parity and pay transaction related fees and expenses. The term loan was priced at the lowest all in yield for a widely syndicated EUR leveraged loan post crisis.

► Net leverage pro forma for the transaction will significantly decrease from current R&R’s leverage of 4.7x to 2.1x, or 4.4x including the Nestlé shareholder loan, based on 2015 reference EBITDA of €342 million (including €37 million of synergies to be realised in 2017).

► The Company also raised a €220 million pari passu ranking revolving credit facility.

► A €150 million dividend will be paid to shareholders, distributed equally between PAI and Nestlé. The €75 million dividend due to PAI Europe V and co-investors will be paid in two instalments, with €37.5 million paid on closing and the remaining €37.5 million payable shortly thereafter. The second dividend will be distributed in Q1 2017.

Sources of funds (€m) Uses of funds (€m)

Term loan B 47% 800 Repayment of SSNs 650

Nestlé shareholder loan 47% 800 Repayment of PIK notes 262

Repayment of vendor loan 75

Total debt 94% 1,600 Debt refinanced 986

Financing fees 10

Transaction fees 37

Cash on balance sheet 6% 106 Equalisation payment to Nestlé and other adjustments

427

Dividend to PAI & Nestlé 150

Cash kept on balance sheet 96

Total sources 100% 1,706 Total uses 1,706

Deal team

Frédéric Stévenin +33 1 43 16 63 49 [email protected]

Colm O'Sullivan +44 207 297 4661 [email protected]

Richard Howell +44 207 297 4663 [email protected]

Gaëlle d’Engremont +33 1 43 16 63 23 [email protected]

Chris Afors +44 207 297 4667 [email protected]

Guillaume Leblanc +33 1 43 16 63 34 [email protected]

Maximilian Harrington +44 207 297 4666 [email protected]

Ana Aliyari +33 1 43 16 63 99 [email protected]

a worldwide leader food & consumer goods · a worldwide leader food & consumer goods ......

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