Is private ownership just what Finsbury Food needs?

Finsbury Food Group effectively called time on its journey as a publicly traded company last week as it recommended a £143m private equity bid to shareholders.

The bakery’s management team and potential new owner DBay Advisors argued the supplier could achieve more with private backing after being held back by the shackles of the London Stock Exchange.

Should the deal win shareholder approval, DBay will embark on an ambitious M&A strategy to transform Finsbury into a bakery powerhouse.

But will Finsbury really be better off as a private company? And what assets can it go after?

Chris Stott, KPMG’s food and drink lead in the UK, has no doubt the deal is good news for both Finsbury and shoppers.

“With an ambitious private equity backer, Finsbury is freed up to make longer-term investment decisions rather than focusing on six-month KPIs for the City,” he says.

“It should also give consumers better prices and options as consolidation leads to more efficient business models, product innovation and investment.  Finsbury has been starved from a lot of that as a listed company having to manage the requirements of the public markets.”

Finsbury has been too small on London’s junior AIM exchange to garner much attention and the share price pre-DBay offer was no higher than in 2006, points out Charles Hall, Peel Hunt head of research.

“There hasn’t been much creation of shareholder value,” he says. “And the takeout value is 11x earnings, demonstrating a low multiple and limited conviction in longer-term prospects as a public company.”

James Murray of investment bank Oppenheimer, who advised Finsbury on the DBay offer, agrees the group’s valuation rating on public markets has made it hard to pursue big-ticket M&A. “As a public business you can borrow maybe 3x EBITDA and the gap has to come from raising equity and issuing shares,” he says.

“DBay, with its access to larger, more flexible capital sources, will leave Finsbury better placed to evaluate transformational opportunities in a sector that continues to consolidate.”

Murray adds bigger deals will help Finsbury achieve the scale required to be successful in an increasingly competitive and demanding marketplace.

Finsbury is no stranger to growth by acquisition. It was born in 2002 when a cash shell chaired by Maurice Saatchi swooped for supermarket supplier Memory Lane Cakes in a reverse takeover. A series of deals followed for newly named Finsbury, expanding it into breads, muffins, celebration cakes, and licensed brands.

Then came a £56m deal in 2014 for morning goods specialist Fletchers, pushing the group into foodservice and doubling revenues to £300m.

Growth ambitions

CEO John Duffy – who will continue to lead Finsbury under DBay ownership – at the time signalled ambitions to boost the top line further to £500m with more deals. However, it has since only managed to complete a handful of small bolt-on acquisitions, including snowballs maker Lees of Scotland in January this year.

To Duffy’s credit, group revenues jumped 16% to a record high of £413.7m in the year ended 1 July 2023 (according to Tuesday’s annual results), following years of upheaval with Brexit, Covid and inflation.

But DBay’s argument about missing out on big growth opportunities looks compelling.

Murray highlights considerable consolidation within the bakery category in the past 18 months, including Grupo Bimbo swooping for St Pierre and Cérélia buying the General Mills European dough business.

“However, there are still a number of opportunities over the medium term as businesses adapt and respond to the evolving operating environment,” he adds.

DBay, with backing from a trio of banking partners, will be able to go after big deals.

Cake maker BBF and embattled bread brand Hovis are obvious options, having both been held by private equity firm Endless for a number of years, while Mayfair Equity Partners has owned Ireland’s Promise Gluten Free since 2017 and PE house Rhône may sell doughnut specialist Baker & Baker.

Own label supplier Park Cakes also hired advisors earlier this year to explore a sale, while, in Europe, Valeo’s Italian bakery Balconi could be considered non-core.

After a dearth of food and drink M&A since the outbreak of war in Ukraine and the closing of capital markets, Stott thinks this transaction could be the starting gun for a long-predicted deluge of sector deals.

“These are the sort of catalyst deals that get things moving again,” he says.