The Elephants Are Starting to Dance

On 30 October 2020, Nestlé USA announced the acquisition of U.S.-based healthy meal delivery start-up, Freshly, for a potential total consideration of $1.5 billion.

Non-tech: Nestlé is a Switzerland based nutrition, food and beverage company with a broad portfolio of products including powdered and liquid beverages, dairy products, prepared meals, confectionary and pet care products. In 2019, Nestlé recorded total sales of ca $103 billion, generating a 1.6% CAGR in revenue since 2017, and 2019 EBITDA of ca $21 billion. The company operates worldwide in ca 200 countries, and its American division accounted for more than a third of total revenue in 2019.

Tech: Founded in 2012, Freshly is a weekly subscription service delivering fresh, chef-cooked meals that can be heated and served in 3 minutes directly to customers’ doors. The company’s mission is to make healthy eating a convenient and fast process, offering customers weekly plans with 4, 6, 10 or 12 meals. As of November 2020, the company has shipped ca 100 million meals across 48 states in the U.S. Prior to the acquisition, the company had raised a cumulative $107 million from financial investors including Highland Capital Partners, White Star Capital, Insight Venture Partners and Nestlé. Nestlé USA had previously led Freshly’s $77 million Series C funding round in 2017, in which it acquired a ca 16% stake.

DEAL IMPACT

Nestlé’s acquisition of Freshly followed its investment in a $77 million funding round in 2017 in which Nestlé secured a 16% minority interest in Freshly. At the time, Nestlé’s motivation was to enter the prepared meal delivery market, a sector that was attracting capital (e.g. HelloFresh and Blue Apron both executed IPOs at valuations around $2 billion).

Since then, the meal delivery kit market has been volatile, but the constraints caused by the COVID-19 pandemic, and better technology, have been a catalyst for a resurgence of the industry. The acquisition of Freshly could be considered to be well timed to take advantage of this new norm.

The deal consideration comes in two parts: an initial $950 million payment for the 84% of Freshly that Nestlé did not own and a potential earnout payment of up to $550 million, which represents a potential total deal value of $1.5 billion.

Assuming the Freshly 2020 sales forecast of $430m, the transaction values Freshly at 4.2x EV/Revenue (including the earnout(s)(1)), which is nearly 60% higher than the multiple of its German counterpart, HelloFresh, whose EV/Revenue is 2.6x based on LTM revenue as of September 2020.

However, Freshly’s revenue multiple is in line with Just Eat Takeaway.com’s acquisition of Grubhub Inc., which was similarly priced at a forward EV/Sales multiple of 4.7x (taking into consideration a control premium).

Considering the potential synergies from the combination of Freshly’s well established digital platform and customer analytics capabilities with Nestlé’s product portfolio, investors saw the acquisition as a positive step. Nestlé’s share price increased by 1.3% on the day after the announcement, contributing to a €3.9 billon uplift in market capitalisation.

By end of the week after the announcement, Nestlé’s share price had increased by 3.3%, lifting the company’s market cap by €9.9 billion, effectively paying for the Freshly deal several times over.

The Swiss Market Index, on which Nestlé is listed, also experienced a similar increase in value, potentially because Nestlé contributes ca 18% of the index.

NESTLé’S TECHQUISITION STRATEGY IS TRANSFORMING THE COMPANY

Poised to fall behind due to its very limited presence in delivery services and e-commerce, Nestlé saw the potential of tech-enabled delivery systems around 2016. Tasting the market in 2017, Nestlé purchased a minority shareholding in Freshly to test the direct-to-consumer meal kit market.

The 16% stake was acquired only five days before Nestlé shareholders, Third Point, who owned 40 million shares equivalent to $3.5 billion at the time, criticised Nestlé’s management for its poor share performance relative to its U.S. and European consumer staple peers on a three year, five year and ten year total shareholder return basis. Daniel Loeb of Third Point mentioned that for Nestlé to keep up with its competition it should consider “…accretive, bolt-on acquisitions in high growth and advantaged categories.”

In a sense, Nestlé was planning to take part in this trend years before the COVID-19 crisis accelerated customers’ acceptance of digital delivery. In an attempt to leverage the strong and resilient demand for online delivery, Nestlé tied the knot with Freshly and capitalised on the e-Commerce industry for good.

Since then Nestlé has acquired 8 companies in the last 3 years, with the most recent acquisition being meal kit business, Mindful Chef in the UK, announced on 9 November 2020.

Underlying Nestlé’s strategy to onboard innovative, tech-enabled consumer focused companies, its bolt-on acquisitions along with goals to improve efficiencies has led to Nestlé outperforming Danone and Unilever.

FROM A NURTURED PARTNERSHIP TO A GAME-CHANGING TECHQUISITION

Throughout the year, with the unfortunate pandemic event that the world has been facing, many traditional businesses have been struggling to stay afloat. Nevertheless, the pandemic has presented the opportunity for technology to prove how it is already capable to deliver a strong enough customer experience that justifies a complete shift to a fully digital service.

In the Quick Service Restaurant (QSR) sector, for example, players with limited to no e-Commerce and delivery presence have been falling behind. On the other hand, companies that specialise in tech-enabled food delivery have managed to bridge the gap with their customers by leveraging two fundamental forces of change:

1. Customers’ adoption of grocery and food delivery services
2. Quarantine-induced restaurant closures – a fall in demand for indoor dining and increased demand in food delivery

To this extent, Freshly has been one of the success stories. Considered a pioneer in managing the direct-to-consumer prepared meal delivery channel, the company is known for its use of state-of-the-art technology and analytics.

These technological capabilities have allowed Freshly to acquire new consumers during the pandemic lockdowns and to grow its recurring customer base, reaching a projected growth of 50% in sales by the end of 2020. Therefore, even though the demand for takeout is expected to gradually return to pre-crisis levels in 2021, the accelerated consumer adoption of online delivery will persist.

The acquisition by Nestlé should enable Freshly to access a wealth of resources, research and development and years of experience that could help the business maintain its strong growth post the COVID-19 pandemic.

Nestlé has leveraged the past three years to achieve a better understanding of the meal-kit and online delivery markets and learn how the technology could be implemented to improve its operations. Even so, Nestlé decided to acquire the remaining 84% of Freshly and keep the Freshly operations independent.

This deal is yet another testament to how tech start-ups have been infiltrating an ever-larger proportion of non-tech industries and how they can offer the ultimate competitive edge to even the largest and most well-known brands in these industries.

Over time, the success of Nestlé’s strategy will depend on how well it embraces Freshly’s well established technological infrastructure and capabilities.

THE QUOTE

The leading established companies such as Nestlé, Walmart, Compass Group, McDonald’s and P&G are now overcoming their fears about paying different types of valuation levels for loss-making companies, as they see the power inherent in the strategic leverage that these target companies can spark across their value chain and existing assets.

(Freshly is most likely still a loss-making business, if we compare it to HelloFresh in 2016, which was losing $96 million on an operating profit basis when it generated $660 million in revenue in 2016, while Freshly is smaller today with $430 million in estimated revenue).

Similar to how these industry leaders are investing in and acquiring tech companies to gain a competitive edge and leverage their market power to the maximum, Nestlé’s acquisition of Freshly is an example of how a non-tech company is actively engaging in the journey of transforming itself to deliver greater value to its shareholders and customers by properly positioning itself for the future.

The essence of these transformations is embedded in a strategy execution methodology we have trademarked and call Techquisition, which my firm, Aquaa Partners, designed and delivers to its clients as an experienced and trusted partner.

If you would like to learn more about why Techquisition is becoming the value creation strategy of choice today for ambitious C-suite leaders, check out my recently published book, Go Tech, or Go Extinct, which dives deep into the topic:

Go Tech, or Go Extinct: How Acquiring Tech Disruptors Is the Key to Survival and Growth for Established Companies.

If you'd like to receive regular updates from us at Aquaa Partners, please click here to subscribe.

Paul Cuatrecasas is the founder and CEO of the investment banking firm, Aquaa Partners, and the author of Go Tech, or Go Extinct in which he shares his revolutionary approach to transforming legacy companies into forward-thinking industry leaders through the strategic acquisition of disruptive technology companies. 

Sources: Company Website and Annual Report, Reuters Eikon, Capital IQ, McKinsey, TechCrunch

Note(s): (1) An implied Enterprise Value of $1.8 billion, based on Nestlè’s acquisition of the remaining 84% stake for $1.5 billion, was used to calculate the forward EV/Sales figure