Eastern Condiments will eventually merge with existing Orkla India arm MTR
Orkla has again picked India as a place to park the Norway-based firm’s M&A cash with an agreement to acquire spices maker Eastern Condiments. But does its latest investment mark a change in strategy for a business with the Nordic region at its heart? Simon Harvey investigates.
Orkla’s deal to acquire spices maker Eastern Condiments in India, its second investment in the country in more than a decade, suggests a shift in the Nordic group’s M&A strategy, which for some years has primarily centred on targets in its core Nordic markets.
However, while Orkla insists the company has not altered its approach to M&A, it is has made an open admission of further aspirations in India.
A shift in strategy is perhaps a fair assumption when president and CEO Jaan Ivan Semlitsch, who joined the Norway-based business last year, has emphasised the need to hone resources on Orkla’s local brands in the Nordic markets to improve what have been fairly stagnant organic growth rates and profit margins.
Despite a slew of M&A activity in recent years to bring in more contemporary product lines to bolster its offering, those endeavours have been increasingly difficult given the competition from private label and international brands in the Nordic region, and now the impact of Covid-19.
And while Semlitsch has continued the work of his predecessor in offloading underperforming or ill-fitting parts of Orkla’s business, and has stressed the need to scale up some of the “hidden jewels” in the portfolio, the impact on growth and margins has been limited at best.
It could easily be construed, too, that Covid-19 has ushered in a new course of direction for M&A at Orkla. Before the virus reared its head, Semlitsch had hinted at the possibility of expanding more into foodservice, which, in hindsight, would be a risky investment in right now with the whole sector in turmoil.
A potential deal for Eastern Condiments had been flagged in the Indian media back in May, suggesting discussions were already taking place prior to the Covid-19 outbreak, which hit most of the Western world in the early months of 2020.
Orkla deflects claims of strategy shift
Orkla stresses buying Eastern Condiments does not represent a change in strategy given the company first entered India in 2007 with the acquisition of MTR Foods Private Ltd., a manufacturer of vegetarian spices, snacks, ready-meals and Indian confectionery. But years have elapsed since then, giving rise to thoughts of an alternative approach, especially when the only investment Orkla has since instigated in the country was the acquisition of an undisclosed stake in local nutritional snacks brand Timios, owned by Bangalore-based FirmRoots, in 2018.
“There is no change in strategy with this acquisition,” an Orkla spokesperson tells just-food. “We have been in India for 13 years and developed MTR step by step, and this was a natural next step in India for us. We have been looking at Eastern Condiments for many, many years.”
Nevertheless, the deal formally announced last Friday (4 September) for Eastern Condiments is seen as an unusual manoeuver, yet interesting in terms of the company’s future direction.
For Markus Borge Heiberg, a research analyst at Kepler Cheuvreux in Norway, the latest M&A announcement was a surprise not least in light of the geographical location but also because it goes against the grain of Orkla’s previously outlined strategy.
“I would definitely say this was something I didn’t expect,” Heiberg tells just-food. “They have not said that they wanted to invest heavily in India – it’s not really been a story. But, of course, it fits into the whole thing that they want to own local brands with strong positions.”
The deal for Eastern Condiments has been struck for a total value of INR20bn (US$271m). In the first instance, Orkla will acquire 67.8% of the business – 41.8% from the Meeran family owners and 26% from US-based spices maker McCormick & Co. Once completed, and subject to competition approval in India, Eastern Condiments will merge with MTR, whereby Orkla will own 90.1% of the enlarged entity and the Meeran brothers Firoz and Navas 9.99%.
While Eastern Condiments portfolio is complementary to MTR – predominately blended and single spices, but also condiments, snacks, pickles and frozen vegetables – it offers both vegetarian and non-vegetarian products.
Kjetil Lye, an equity analyst at Handelsbanken Capital in Norway, says the purchase price is a tad high, despite the potential India offers, and so the asset-management arm of the Sweden-based bank has a hold recommendation on Orkla’s shares.
“We like the increasing exposure to a fast-growing Indian food market, as the combined entity should provide a stronger platform for further growth over the next years,” Lye writes in a research note. “However, we believe that the valuation, corresponding to an EV/EBITDA of 18.6 times, appears relatively high.”
Further ambitions in India
Still, despite Orkla refusing to class the deal for Eastern Condiments as a shift in strategy, the company indicated it has further ambitions for India. It could be the vice president for M&A and strategy, Sverre Prytz, brought in late last year, has had some influence in the decision-making process.
“With this transaction, Orkla will establish a platform for further growth in India in several categories”….with a “solid base for future growth in the Indian branded food market”, Orkla said in the deal announcement last Friday.
But the Orkla spokesperson was coy on what those categories might be: “I don’t want to give you details … but in general we will start with the set-up MTR and Eastern Condiments now have, and we have some very strong positions we can develop from that.”
When challenged on potential global expansion beyond India, the spokesperson was even more reserved in providing a definitive response. “No, we have defined India, or to be more precise the south of India, as one of our home markets. So, this is defined in Orkla as a home market together with the Nordic/Baltic countries, as well as the Czech Republic and Slovakia.”
But in terms of acquisitions in India, the message from the spokesperson was quite clear. “We are always looking for possibilities, also in India.”
Kepler’s Heiberg explains his take on the proceedings, which he agrees is a “tweak” in strategy.
Orkla, he says, has talked before “about increasing organic growth and strengthening their Nordic portfolio and to try to take that Nordic portfolio abroad and utilise their strong local brands and to try and market them through other channels … Now they are doing this geographical expansion.”
Heiberg adds: “The strategy has always been to have local brands – it’s very important for them – and now they are trying to expand their local presence in India and the region they have been strong in with MTR. They [MTR] have a very strong position within spices and ready-to-go meals in that region.”
While Eastern Condiments doesn’t manufacture ready-meals as such, it offers a range of meal-specific blended spices.
Subdued growth rates
Orkla’s organic growth rates have been relatively flat in the past few years for its branded consumer goods division, despite a 0.2% dip in 2018. The metric was up 1.4% last year and 1.6% in 2017.
It’s a similar picture for adjusted EBIT margins, which for the past three years have been stagnant too – 11.3% in 2019, and 11.1% and 11.2%, for the preceding two years, respectively.
Project Future, launched last year with an objective to make cost savings and speed up organic growth rates, needs more time to have an effect. The first-half results for the calendar year issued in July, showed a 0.7% uptick in growth, and an EBIT margin of 10.4%.
Fostering an acquisition in a country where Orkla already has a presence makes sense, given management would be familiar with the market dynamics and business environment, and especially when the company, like other food manufacturers, is facing the difficulties from coronavirus.
But India is also suffering the effects of Covid-19, and was this week revealed as the country with the second-largest number of cases after the US, with the state of Karnataka in south-west India, from which MTR generates most of its business, one of the most-heavily hit.
MTR, led by CEO Sanjay Sharma, has two production plants in Bangalore, Karnataka, and Pune in Maharashtra, and exports to 32 destinations including North America, Australia and New Zealand.
Eastern Condiments, headquartered in the city of Kochi in the southern state of Kerala, has seven manufacturing facilities in four states. Kerala generates about half of the company’s turnover, with the remainder coming from the rest of India and exports.
Sharma said in a statement: “Eastern and MTR have a strong combined portfolio of complementary products, an attractive geographical presence and good export potential. The Indian branded food and spice markets are growing by double digits, and we see positive long-term demand dynamics with increasing purchasing power and more urban lifestyles.”
Turnover is similar for both companies. MTR generated revenues of INR9.2bn in the year ended 30 June, comparable to Eastern Condiments’ INR9bn over the same year-end. “Orkla will grow its position as one of the leading branded food players in India and have a platform for further growth in the spice category and in adjacent categories,” the statement read.
Orkla said Eastern Condiments’ turnover has grown at a compound annual growth rate (CAGR) of 8% from 2014 to 2020, based on the years to the end of March, a figure Kepler’s Heiberg says is a “decent growth rate” despite high inflation in India.
“Orkla Foods is generally growing say 2% organically, so having this growth in their portfolio is important for them and strengthens their position in a growing market because Orkla’s positioning now is very much in mature markets where you have very low growth rates. And, of course, one way to grow is to expand geographically.”
A different story
But will the new deal in an emerging market such as India serve as a stepping stone into other international locations or is Orkla purely focused on developing local brands in the country?
“That’s also what I struggled with because it’s not in the story, as all of these fast-moving consumer goods companies are taking their international brands and branding them in developing markets where people are trading up to buy more recognised brands,” was Heiberg’s response. “Whereas Orkla, they are just focused on having these local brands. So I agree, I also find it a bit strange from the perspective of I thought they would try to take their brands internationally.”
The same question was posed to Orkla but was met with a vague reply.
“We have to, of course, understand the business of Eastern before we do anything else,” the spokesperson says. “If you ask persons from the south of India what sort of brand names that they know in our industry, both MTR and Eastern have been mentioned. So we now have a strong combined portfolio of complementary products in core categories.”
So what about the rest of India?
“With Eastern Condiments, we have a much more interesting geographical presence than we had before. We have here knowledge and diversification that Orkla never had in India,” the spokesperson adds.
Generally speaking, Kepler’s Heiberg believes Semlitsch is “doing a good job”, despite less than a year occupying the CEO mantle. Still, he flagged concerns over previous acquisitions, as have other Orkla analysts in the past, as they have “not really always made sense”.
And with Orkla noting the full merger agreement with Eastern Condiments may take around 15 months “after completion of the acquisition”, it could be some time before investors can weigh up the latest deal’s success.