Vice President: Joshua Green
Analysts: Aristotle Ferrer, Kostadin Iliev, Lili Jing, Steven Brakespeare
Deal Overview
Acquirer: Mars
Acquiree: Hotel Chocolat
Deal Size: £534mn
Buy Side Advisors: Morgan Stanley
Sell Side Advisors: Lazard
Introduction
Britain’s Hotel Chocolat has agreed a deal with American pet food and confectionery giant Mars to be acquired for £534mn, the sum will be paid fully in cash. This deal came because of several failed expansion attempts to the states by Hotel Chocolat, as well as the cost-of-living crisis which has been the primary contributor to their fall in UK sales. The effects of a fall in demand, inflationary pressures, weak consumer sentiment, and the costs that arose from expansion plans, can be seen in Hotel Chocolat’s balance sheet through the significant loss they made this year. This deal is set to aid in Hotel Chocolat’s attempt at expanding their business abroad by utilising Mars’ global supply chain and commercial relationships.
Mars
Mars Incorporated is a private, family-owned company known for its confectionery, pet care, and other food products. Founded in 1911, Mars is now ranked as the fourth largest privately held company in the United States by Forbes, operating in over 80 countries with its headquarters in McLean, Virginia. Mars has established itself as a key player with a diverse portfolio of iconic brands. In the confectionery and food sector, Mars is famous for their Mars bars, Snickers, M&M’s, Twix, Milky Way, Uncle Ben’s and Dolmio brands. Whereas in the pet care sector Mars owns well-known brands such as: Pedigree and Whiskas. Mars’ acquisition of Wrigley in 2008 was significant in Mars’ move in becoming one of the world’s leading confectionery manufacturers, this move expanded their portfolio to include popular chewing gum brands like Wrigley’s, Extra and Orbit.
Hotel Chocolat
Hotel Chocolat is a British chocolatier renowned for its commitment to premium-quality chocolates, aiming to make chocolates exciting and bringing an ethical, affordable luxury to the British high street. Founded in 1993, Hotel Chocolat is now listed on the London Stock Exchange (LSE) after the company went public with an IPO in 2016. The company distinguishes itself through a unique “tree-to-bar” approach, owning its cocoa estates in Saint Lucia. This vertical integration allows them to ensure control over the entire chocolate-making process and maintain quality. Hotel Chocolat prides itself on their dedication to ethical sourcing and sustainable farming practices by contributing to the advancement of responsible, quality-driven practices in the cocoa industry. Nevertheless, their main source of revenue lies in the sales of a range of gourmet chocolates, or cocoa-infused products, such as gin and balsamic vinegar. Currently, the company operates cafes, restaurants, subscription services, and online and physical retail stores.
Deal Rationale
Revenue Synergies
This acquisition of Hotel Chocolat by Mars weighs deeply upon their strategic alignment amongst the combination of success and prestige. Mars characterises these two organisations as "culturally aligned, with shared values of quality, sustainability and purpose among their guiding principles" which emphasises the significance of impact-driven strategies, essential for their long-term partnership. By joining forces, the pillars on which Hotel Chocolat is built may be strengthened through investing behind these for a synergistic advantage. Conversely, Mars perceives this transaction as a pathway towards achieving objectives, particularly in terms of developing their market position within the higher value premium chocolate category, where this move is expected to result in a notable increase in revenue. In view of these factors, the acquisition of Hotel Chocolat, which values Britain's largest independent chocolate maker at $661 million, is poised for accelerated growth outside of the United Kingdom. Furthermore, as they succumb to Mars for international growth, this transaction goes beyond individual capabilities; Mars' "long-time admiration" of Hotel Chocolat's differentiated product offering as a premium brand operates as the primary motivator behind Mars, which offers a competitive edge within the chocolate industry amidst market trends, where consumers are increasingly favouring high-end products due to the growth of healthier snacks. Most prominently within travel retail environments, premium luxury offerings are in demand. Therefore, with Mars' expertise and resources, successful entry into these new markets facilitates revenue progression. Coupled with the strong global supply chains and commercial relationships administered by Mars, improvement of Hotel Chocolat's business abroad indicates a harmonious fit between the two companies, allowing for enhanced market access and distribution capabilities. Further commitment by Mars to long-term capital access aids this brand growth through supporting strategic objectives that revolve around product innovation, loyalty and driving online sales.
Cost Synergies
Hotel Chocolat recently faced unfortunate challenges as an online retailer, reporting a loss of £800,000 in the year to July which was a significant reduction from a pretax profit of £21.7 million. Such financial setbacks were driven by inflationary pressures, weakened consumer sentiment and most notably the expenses incurred during restructuring initiatives after a disorganised international expansion in the US and Japan. However, Mars being recognised for their efficient supply chain has the potential to rejuvenate Hotel Chocolat's financial performance by leveraging these robust capabilities to transform the historically high margins of Hotel Chocolat into profits. CEO Thirlwell, who will continue under Mars, expresses confidence in developing growth prospects as he acknowledges how the brand coincides with consumers overseas. Hence, through the partnership, these operational challenges may be overcome, and international presence can be grown much more quickly, with Thirlwell describing Mars as an "excellent long-term steward of the Hotel Chocolat brand." The confectionary giant Mars also outlines its commitment towards investments in expanding Hotel Chcolat's presence across the UK which underscores dedication to sustaining and strengthening the brand's footprint. Furthermore, Mars has affirmed its intention to maintain existing manufacturing sites suggesting vision for shared resource optimisation. This transaction not only secures the continuity of these distribution sites but expects no considerable reduction in overall headcount of Hotel Chcolat's management and employees as there may be a limited need for adjustments in certain back-office and listed company functions.
Industry Analysis
Executive Summary
The confectionery segment in the United Kingdom has experienced remarkable growth in recent years. This analysis delves into the performance of two primary sectors within this segment: chocolate confectionery and sugar confectionery since 2017, highlighting the growth patterns and consumer trends driving the market.
Chocolate Confectionery Sector: A Stable Indulgence
In 2022, the total turnover for companies producing chocolate confectionery was estimated at approximately £5.1 billion, underscoring the UK's robust appetite for chocolate products. Despite fluctuations between 2011 and 2022, consumer spending on confectionery has remained steadfast, with an average weekly expenditure of £1.32 on various confectionery forms. Particularly, filled chocolate bars lead in popularity, followed closely by regular chocolate bars, indicating a consistent consumer preference for traditional and familiar tastes.
Sugar Confectionery Sector: The Sweet Rebound
The sugar confectionery sector witnessed a significant turnaround post-2017. After a decline to about £9.44 million in sales value in 2016, there was a notable rebound, with the sales value soaring to £34.12 million in 2022. This substantial increase suggests either a revitalized product offering that resonated with consumers or an effective marketing strategy that reinvigorated sales within the sector.
Pricing Trends: The Cost of Sweetness
The pricing dynamics offer further insight into the industry's health. In 2022, the price per kilogram of sugar confectionery manufactured in the UK stood at £4.13. This pricing point could reflect multiple factors, including raw material costs, production efficiency, and market demand. The ability of sugar confectionery producers to maintain price stability while increasing sales volume points to effective cost management and a well-calibrated understanding of market elasticity.
Conclusions and Future Outlook
The post-2017 era has been generous to the UK's confectionery segment, with chocolate confectionery maintaining its market stronghold and sugar confectionery witnessing a remarkable recovery. As consumer preferences evolve and the demand for indulgent yet affordable treats continue, the sector's potential for innovation and expansion remains high. Confectionery producers should monitor consumer trends closely and adapt to sustain growth and profitability in the upcoming years.
Valuation
DCF
Utilising a DCF model, we valued Hotel Chocolat’s pre-merger share price £5.88 GBP.
The model is built off the key assumption that Hotel Chocolat’s future yearly revenue growth will remain at a constant rate of 15% over the 5–year forecast period. The model also uses the perpetuity growth method to predict the PV of the company intrinsically. The calculations done can be observed below:
Comparing this £5.88 share price value to the actual deal share price (£4.77) it can be observed that hotel chocolate was bought for a lower value than that predicted by our DCF model. This difference generated from negotiations likely comes from the long-term constrains surrounding Hotel Chocolat. As we have seen, Hotel Chocolat has found it difficult to enter new markets such as the Unites States. If this were to continue it puts a ceiling on the future growth, revenue, and profits that the firm can achieve/earn. However, as this cannot be overserved within the forecast period, the DCF cannot utilise this information, leading to an overvaluation. Therefore, the price agreed is likely to extremely reasonable for both parties.
Risks
As an international brand Mars inc. already is doing business in the UK selling some of their signature sweets. What this means is that there is an already established logistics network which might cannibalise some of Hotel Chocolat’s departments leading to employees being made redundant. It is important to note that Mars has pledged to keep things the same and is planning on leaving Thirlwell as CEO.
A big part of Hotel Chocolat’s image is offering high quality chocolate with a markup which is considerably different from the other brands Mars has in their portfolio. Mars inc. is spread out between several brands which are mostly low budget and sold in any location possible such as petrol stations, big supermarket chains and small shops. As Hotel Chocolat’s products are perceived as a higher quality good, they cannot be sold in the same way as most of Mars’s other products which could negatively impact the business’ performance going forward. Furthermore, Hotel Chocolat might not be able to fully utilise the supply chains of Mars as the quality of ingredients utilised in production will be different. Hotel Chocolat is known for paying a premium for their cocoa as well as investing 10% of their profits into its sustainability initiatives, whilst on the other hand Mars is still struggling with keeping their promise of eliminating child slavery from its supply chain (a goal which originally was aimed at being achieved in 2005) and more recently was mentioned in a class action lawsuit regarding them knowingly engaging in forced labour of children. One thing to note is that a major reason for the acquisition of Hotel Chocolat was the sustainability practices so Mars might seek to reform its business and implement some of the practices of their newly acquired brand.
Conclusion
Overall, the deal will likely have a positive impact on both sides however, it does run the risk of not seeing its full potential. By joining Mars’ worldwide network, Hotel Chocolat should now have the expertise, capital, and connections to help launch themselves as a brand recognised and sold globally. However, the fact that Mars’ and Hotel Chocolat’s brand images and target customers do not align could potentially limit the success of the acquisition. This is because if they cannot seamlessly merge operations, there is potential to either miss out on huge benefits from greater economies of scale for the organisations or for Hotel Chocolat’s brand reputation to be hurt as it is classified as just another budget brand by consumers.
References
Sarah Young (November 16th 2023) U.S. giant mars to acquire hotel chocolate for $662mn. Reuters - https://www.reuters.com/markets/deals/mars-buy-britains-hotel-chocolat-662m-2023-11-16/
Gwen Ridler (November 16th 2023) Mars acquires Hotel Chocolat in 534mn deal. Food Manufacturer. - https://www.foodmanufacture.co.uk/Article/2023/11/16/mars-acquires-hotel-chocolat-in-534m-deal
Arhi Kivilahti (November 21st 2023) What does Mars want from Hotel Chocolat? ADA Insights. - https://www.adainsights.fi/blog/what-does-mars-want-from-hotel-chocolat
Flora Southey (16th November 2023) Mars buys UK based Hotel Chocolat with ‘international responsibilities’ on the horizon. Food Navigator -https://www.foodnavigator.com/Article/2023/11/16/mars-acquires-hotel-chocolat-in-confectionery-m-a
Shares (16th November 2023) Hotel Chocolat shares soar 160% on sale to Mars, City Pub joins young’s stable. - https://www.sharesmagazine.co.uk/news/shares/hotel-chocolat-shares-soar-160-on-sale-to-marscity-pub-joins-youngs-stable
Financial Times (16th November 2023) Mars joins push into premium with Hotel Chocolat deal. - https://www.ft.com/content/4ef8449c-69c0-4078-80eb-a617ba5b0c98
Hanna Ziady (16th November 2023) Mars is paying $661 million for Britans biggest chocolate maker. CNN - https://edition.cnn.com/2023/11/16/investing/mars-hotel-chocolat-takeover/index.html
Maxine Kelly & Madeline Speed (16th November 2023) Mars to buy Hotel Chocolat in £534mn deal. The Irish Times - https://www.irishtimes.com/business/2023/11/16/mars-to-buy-hotel-chocolat-in-534mn-deal/
Retail Navigator (2023). Hotel Chocolat Strategy. - https://www.retail-week.com/retail-navigator/hotel-chocolat/strategy/70.supplierarticlelist
Statista (2022). Turnover of enterprises for the manufacture of coca, chocolate, and sugar confectionary in the United Kingdom from 2008 to 2022. https://www.statista.com/statistics/481625/chocolate-and-sugar-confectionary-sales-turnover-united-kingdom-uk/
The opinions expressed in the reports are those of the members of the Junior IB team and are not affiliated with any university or institution. The financial recommendations provided are for educational purposes only and the Junior IB team takes no responsibility for any losses that may occur from implementing any ideas presented in the reports. The Junior IB team is not authorized to provide investment advice. The information, opinions, and estimates presented in the reports reflect the Junior IB team's judgment at the time of publication and are subject to change without notice. The price, value, and income of any securities or financial instruments mentioned in the reports may fluctuate. The Junior IB team has no business relationship with any of the companies mentioned in the reports and does not receive any compensation for their inclusion.
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