Refresco’s planned IPO. Is this a failed sale process?

Apparently Refresco, the European contract bottling company is now considering an IPO.

According to Reuters, “Hans Roelofs, CEO of Refresco Gerber, said in a statement on Tuesday that the decision to list in Amsterdam comes after months of internal deliberation in which the company explored alternatives in order to determine the path that would enable it to best capitalize on growth opportunities going forward.”

“Following a comprehensive review of all options, a stock exchange listing providing us full access to equity capital markets has proven to be the most logical step to support us in effectively implementing our strategy going forward,” Roelofs said. “After many successful years of private equity ownership, Refresco Gerber is now ready for an independent future focused on leadership in the private label and co-packing industry in Europe and beyond.”

All sounds well at Refresco Gerber – this is the logical step after all.  Or is it?

We are aware of a number of  larger  Private Equity (PE) funds who have been approached about Refresco over the past 6 months.  Many funds we spoke to were challenged  by the negative growth characteristics of the markets Refresco operates in and a picture of underlying like-for-like declines in the core business of Refresco.  However, for some of the PE funds we spoke to it was the vendor’s high price expectations that put them off scratching beneath the surface of the business to see what the real trends were and what the growth potential could be.

By all accounts, 2 PE firms, PAI and Platinum eventually took a look at the business – PAI certainly will have been comfortable with private label businesses as their investment in R&R the own label ice cream manufacturer, is apparently doing very well for them.  In January, no doubt well sourced articles in Reuters indicated a price level of $1.7bn, with the process scheduled to conclude within a month.

And now, 2 months later an IPO is being mooted at a price range of $1.0-1.3bn, well below the price level reported in the press a few months ago.  At Food Strategy Associates, we see a lot of company sale processes – and in many cases we see situations of vendors getting greedy on their price expectations.  Let’s be clear – on occasion, this strategy can be successful – if you talk up a high price it can anchor perspectives on value at that price and lead to better outcomes for vendors.  But it can also  screw up a process.  On the buy side, PE investors are pretty selective about where they invest their time and efforts and if a business is being over-hyped and it is not clear that vendors will ever get realistic, then they will simply avoid participating in a process altogether.

Refresco looks to be a case in point.  If the $1.0-1.3bn price tag had been the range expectation put out into the market by sell side bankers, then perhaps there would have been more interest in the business from the start.  And who knows, with a bit of competitive tension, perhaps those expectations could have been exceeded.

In the food and drink sector, there are so many precedent transactions that prices for assets rarely surprise.  But vendors hear what they want to hear – that their asset is unique and has a great chance of beating the norms of the market.  And so business sale processes are often designed in hope rather than reality.  For  businesses like Refresco, that hope may have deterred investors from participating in a process.  And so we have an IPO as the exit route for a low (or negative) growth business operating in highly competitive, volatile, capital intensive contract packing markets – hardly ideal for public markets.

What is the answer?  Vendors need to do more preparatory work before they jump into ill-conceived sale processes  – and that preparatory work needs to include some sensible, cold towel assessments of true business value and true buy-side interest.