Nestle, Kraft Heinz, Hindustan Unilever, Tata, ITC, Orkla and Nissin Foods are among the contenders for an estimated $1-$1.25 billion-plus buyout of Capital Foods Pvt Ltd, the maker of condiments, food products and ingredients under the Ching’s Secret and Smith & Jones brands, said people with knowledge of the matter.
Capital Food’s three main shareholders decided to put the company up for sale late last year. The three are Invus Group, a European family office and investment arm, with a 40% stake, US private equity group General Atlantic (35%) and Ajay Gupta (25%), founder chairman of Capital Foods and a former advertising boss turned food entrepreneur. ET was the first to report on the sale plan on November 14, 2022.
Nestle SA, the world’s biggest food group, is competing with the Tata Group, ITC, Hindustan Unilever Ltd, Japanese instant noodle multinational Nissin Foods, Norway’s Orkla and Kraft Heinz Co, the world’s fifth-largest food and beverage company, in a keenly contested race that has picked up momentum in the last few weeks, said at least six people directly involved with the matter.
Orkla owns the packaged foods business of MTR and Eastern Condiments.
Several likely buyers have held meetings with the management already and others are underway before non-binding bids are made in early May.
Nestle, HUL, ITC and Tata Consumer said they don’t comment on market speculation. GA, Gupta, Nissin, Kraft Heinz and Orkla didn’t respond to queries. Invus Group could not be contacted.
PepsiCo and Reliance Industries are among those said to have been sounded out by Goldman Sachs, the investment bank mandated to run the auction process. However, according to executives close to the developments, Reliance is not keen on pursuing the potential offer, given the steep valuations.
It’s not clear if the transaction will be all cash or part stock. Some potential suitors have suggested acquiring up to 75% of the company and taking it public, said the people cited above.
Capital Foods was launched by Gupta in 1995 with a ‘desi’ Chinese and Italian portfolio. The range included Ching’s Secret instant Chinese noodles, soups, condiments, curry pastes and frozen entrees along with the Smith & Jones range of ginger garlic paste, sauces and baked beans. Kishore Biyani, the first external backer, bought a 33% stake in Capital Foods for Rs 13 crore, exiting the company in 2013. GA came on board in 2018.
Analysts said the potential acquisition would be accretive for any buyer given the unique ‘desi Chinese’ positioning, despite about a dozen players in the noodles and condiments space. However, they said negotiations could stall over price.
“Generally, valuations have significantly corrected, so such a high valuation looks steep,” said Abneesh Roy, executive director of Nuvama Institutional Equities. “While HUL already has a good presence in the category with Knorr, Ching’s could be more in sync with the portfolios of Nestle, ITC or Tata Consumer.”
Several suitors have expressed interest in Capital Foods, according to a Nuvama note on Friday. “It was the first to identify and label the unique cuisine ‘desi Chinese,’ which is native to India,” it said.
ICICI Direct said a potential acquisition would “expand Nestle India’s portfolio in noodles, cooking paste and masala mixes”. Nestle India has not been active in terms of M&A, while most other listed players have made several acquisitions in the past five-six years.
Capital Foods is expected to close FY23 with a Rs 900 crore top line with an Ebitda margin of 25%. The core business is growing at a compounded annual growth rate (CAGR) of 30% while peer brands are expanding in single digits, said executives close to the company.
In the year ended March 2022, Capital Foods posted revenue of Rs 580 crore, a 14% decline from FY21. It also slipped to a loss of Rs 7.4 crore in FY22, compared with a net profit of Rs 68.7 crore in FY21, according to financials sourced from AltInfo.
Last February, Capital Foods appointed S Raghunandan as chief executive officer. The consumer industry veteran is known for turning around operations before selling them or buying out their foreign partners. His previous stints include HUL, Dabur India, Paras Pharmaceuticals, Reckitt Benckiser India and Jyothy Laboratories. While Paras was sold to Reckitt, Jyothy bought the loss-making India business of German company Henkel in India.
The Rs 7,000 crore noodle market is dominated by Nestle’s Maggi which currently controls about three-fourths of the market, followed by players such as Indo Nissin’s Top Ramen, Hindustan Unilever’s Knorr, CG Foods-owned Wai Wai, Capital Foods’ Ching’s and ITC’s Yippie. The cooking paste and condiments categories are largely unorganised and Capital Foods competes with the likes of Mother’s Recipe, Dabur and ITC in the branded space.
But industry players said the growth rates seen in the last few years — when consumers stayed mostly at home due to Covid-related restrictions and loaded their pantries with packaged food, sauces and dips — will see a dip in the coming quarters. Noodles, sauces and condiments that Capital Foods sold at key channels — hotels, restaurants and caterers (the HoReCa segment) — were impacted due to reduced mobility and the work-from-home trend. While sales have now recovered across food segments, the market is getting increasingly competitive, analysts said.
The food and beverage segment is witnessing mega consolidation as both large headline-grabbing transactions as well as niche D2C brands, appealing to specific cohorts, are grabbing attention. Hindustan Unilever pipped Nestle in 2018 to announce the merger of GlaxoSmithKline Consumer Healthcare Limited (GSKCH) with itself in a Rs 31,700 crore deal that gave HUL access to nutritional brands such as Horlicks apart from Boost, Maltova and Viva.
The same year, Ahmedabad-based Zydus Wellness, jointly with Cadila Healthcare, bought Heinz India, a subsidiary of Kraft Heinz for Rs 4,595 crore which values it at four times annual sales giving them ownership of Complan, one of India’s top-selling health drink brands along with the oldest prickly heat powder Nycil (sold since 1951), India’s best-selling nutrition solution Glucon D and premium ghee brand Sampriti. Kellogg’s was engaged in intense negotiations with Haldiram’s before talks collapsed while ITC bought Sunrise Foods for a foray into the Rs 30,000 crore branded powdered spices segment and then went on to acquire popular D2C brands Yoga Bar and Mother Sparsh to expand into adjacent categories. In 2021, Tata Consumer Products acquired Kottaram Agro Foods, makers of Soulfull, a breakfast cereal brand. However, its recent negotiations to buy the Bisleri water brand collapsed after months of negotiations. Last year Dabur acquired a 51% stake in Badshah Masala while Marico took over D2C health food brand True Elements.
Norway’s Orkla began the wave of large ticket consumer brands acquisition in mid 2013 – buying MTR Foods and then Kerala’s largest spice brand Eastern Condiments.
