Acquisition overview
On November 18th, 2021, CVC Capital Partners had agreed to buy Unilever’s tea division, renamed Ekaterra, for 4.5 billion Euros. CVC Capital Partners beat rival private equity groups Advent and Carlyle to business-owning popular brands such as PG Tips, Lipton and Brooke Bond, generating revenues of 2 billion euro worldwide in 2020. This investment represents 6 per cent of the total assets CVC is managing. The disposal of this division by Unilever also fits its trend of portfolio realignment to focus on brands with higher growth spaces. However, Unilever has retained its tea business in Asia and the Lipton joint venture with Pepsi. This deal is expected to be completed in the second half of 2022.
Deal Structure
The transaction values Ekaterra at 4.5 billion Euros on a “cash-free, debt-free” basis. This means that Unilever had paid off all Ekaterra’s debt and extracted all excess cash before the completion of the transaction. This represents 2.4 times Ekaterra’s revenue and 14.5 times Ekaterra’s EBITDA, which is above market expectation as largely thought the price would land in the range of 12- or 13-times EBITDA. CVC capital partners are advised by Spayne Lindsay while Ekaterra is advised by Wyvern Partners.
CVC Capital Partner overview
CVC Capital Partners was founded initially as the European arm of Citigroup Venture Capital in 1981. In 1993, Michael Smith negotiated a spinout from Citibank to form an independent private equity firm known as CVC Capital Partners. It is a private equity and investment advisory firm with inception across European and Asian private equity, credit and growth funds. CVC Capital Partners is currently managing 92 billion USD worth of assets. CVC has over 400 full-time employees working at their 24 local offices. In the last twelve months, CVC Capital Partners recorded $27 million in revenue and $26.65 million in EBITDA. Its main competitors are other large private equity firms such as Blackstone, KKR and Carlyle when purchasing desirable assets. With the latter, Carlyle, one of the competitors in the purchase of Ekaterra.
Ekaterra overview
Ekaterra is a standalone business consisting of the tea business formerly under the Unilever umbrella. This includes classic tea brands such as Lipton and Brooke Bond (Acquired in 1984), as well as more recent acquisitions of premium tea brand T2 in 2013 and the organic herbal tea business Pukka 2017. It retains a large portion of Unilever’s tea business with the exception of Unilever’s tea business in Asia and the Lipton joint venture with Pepsi. Unilever has an EV of 158.06 billion and a market cap of 134.79 billion. In the past twelve months, Unilever recorded 52.44 billion in revenue and an EBITDA of 11.37 billion. Ekaterra generated 2 billion in revenue in 2020 which roughly represent 3.8% of Unilever’s revenue and 31.03 million in EBITDA. The purchase of Ekaterra would also indicate the purchase of three tea plantations in East Africa that have been plagued by violence and allegation of sexual harassment.
Strategic Rationale
The purchase of Ekaterra by CVC Capital Partners is a textbook private equity acquisition as the private equity firm purchased the seemingly neglected tea business owned by Unilever and by paying more attention to it under the management of CVC Capital Partners, generate more returns and superior performance and will eventually look for sales of the business unit at a higher price. The completion of the acquisition will be beneficial to both companies although there will be factors that can affect Ekaterra’s performance after the acquisition.
From Unilever and Ekaterra’s point of view, this acquisition helps Unilever with their strategy to reduce a sprawling and low growth portfolio of consumer priced goods, particularly in the food and refreshment sector. This is another disposal of one of Unilever’s large business units, following the sale of its spreads to KKR, another private equity firm in 2019, and the sale of its frozen foods business to Permira in 2006. These disposals reflect Uniqlo’s strategy to maintain higher growth divisions and revaluate its existing portfolio to get rid of the business unit with lower growth potential. Unilever’s tea business has been underperforming for several years with a market share increase averaging 0.1% a year. This is correspondent with the revenue generated from the food and refreshment sector of Unilever has decreased since 2015. Therefore, it makes sense for Unilever to revaluate its product segments and identify low growth brands. In this case, the tea industry is under heavy competition with substitute products such as coffee, kombucha and herbal teas. The traditional black tea bag might fall victim to changing consumer preferences and therefore it would make sense for Unilever to focus on their other high growth brands rather than their tea brands. However, this acquisition excludes Unilever’s tea business in Asia due to the still high demand for tea in the area.
From CVC Capital Partners' point of view, this is aligned with their strategy of acquiring potentially underappreciated business units or brands, paying more attention to it and creating more value than it could have created, and looking for potential sales in the future. Ekaterra fits this trend as it is an underperforming unit within the large conglomerate consumer priced good company, Unilever. Therefore, as Unilever needs to focus on a multitude of brands and business units, it will be unable to pay as much attention to Ekaterra as CVC Capital Partners and therefore a transaction on a cash-free debt-free basis is something that benefits CVC Capital Partners. In the process of the acquisition, CVC Capital Partners faced competition from fellow private equity firms such as Advent International and Carlyle, this shows that rival private equity firms also saw the development potential of Ekaterra and are interested in taking over.
After the acquisition, CVC Capital Partners will be more motivated to invest in Ekaterra than Unilever ever was, and as Ekaterra is still the largest tea production company in the world, CVC Capital Partners has the potential to better utilise Ekaterra’s competitive advantage derived from owning the production line of tea “from plants to kettle”. However, the main concerns from the competitors such as Advent International and Carlyle were the three tea plantations in East Africa that is included in the deal for CVC Capital Partners, whereas Advent International’s offer excluded these plantations due to historic and ongoing social problems. These plantations were plagued by violence after the 2007 election, and another election is due to take place in August 2022. Working conditions and reduction in living wage after automated tea picking are also problems CVC Capital Partners need to face after the acquisition. It would be a challenge for CVC Capital Partners to be responsible for the housing, education and health care of 30000 plantation workers, especially due to historical problems associated with these tea plantations. Despite the term of the acquisition protects CVC's capital partners from future costs incurred during Unilever's leadership, competitors still consider these plantations to be high risk in terms of cost and public reputation of the private equity firm.
Industry Insight
For the tea industry, the purchase of Ekaterra by CVC Capital Partners will further threaten the market position of its main competitors, Tata global beverages and Associated British Foods. Due to the likely increased investment into Lipton, PG Tips and other brands, Ekaterra is likely to reclaim its dominance despite a highly fragmented global tea market. However, losing the lucrative tea business in Asia as it is retained by Unilever will cause an impact on Ekaterra’s revenue and profit. However, Ekaterra’s growth rate will likely increase and capture a larger segment of the market due to its diversified portfolio of tea brands.
Long-run prospects
The treatment of workers in the plantations will also test CVC Capital Partner’s resolute in fulfilling ESG responsibilities. As more and more private equity firms are reporting their ESG impact, for example, KKR and TPG, two large private equity firms have started reporting ESG metrics from April 2020. This combined with the ESG framework in development resulting by COP26 reflects the trend of more responsible investing behaviours displayed by general investors. This is both a risk and an opportunity for CVC Capital Partners as it can maintain and enhance its reputation by fulfilling the promise of paying all workers a living wage by 2030, however, the risk of bad publicity is also high and might cause a bigger impact on CVC Capital Partner’s revenue due to increased investor emphasis on social responsibility.
There are talks of more private equity firms going public and CVC capital partners is one of these firms. As IPOs of the European private equity market increases drastically in 2021. CVC Capital Partners might look to go public in order to compete with their rivals due to the increased capital received from IPOs. As private equity valuations have surged during 2021 with buyout groups collectively gaining $240 billion in market value, CVC Capital partners could be tempted to go public due to higher valuations being likely. The acquisition will certainly increase the available assets investors consider when CVC Capital Partners decide to go public and belong to a series of holdings in popular brands such as La Liga and the Six Nations.
Written by Tiyani Pu (Jesus College, University of Oxford)
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