Middleby Corporation announcing an acquisition never comes as a surprise – it’s made 20 in the past three years – but its proposed £3 billion takeover of Welbilt certainly caused industry jaws to drop yesterday. FEJ editorial director Andrew Seymour shares his immediate thoughts on the landmark deal and its possible implications…
I feel like I’m living in a bubble where American investment is having a major impact on many of the significant things in my life this month. Firstly, my football team Ipswich Town (we all have our crosses to bear) gets bought out by a US consortium backed by an Arizona pension fund, then we had this week’s furore of the European Super League – as billionaire club owners tried to impose their NFL-style structure on 130 years of tradition – and now we have two of North America’s big three foodservice equipment powerhouses deciding that the easiest way to get even bigger is to jump into bed together.
Seriously though, this is a mammoth deal as far as the global catering equipment industry is concerned. The term ‘game-changer’ gets thrown around a bit too easily these days, but more than one senior executive I spoke to after the news broke yesterday made a point of using it unprompted to describe the significance of this transaction.
There has always been speculation over whether any of the top five multi-brand catering equipment conglomerates would ever try to buy one another – now we know the answer.
Moving and shaking
Middleby Corporation has made some significant acquisitions in its time, often attaining instant market leadership in specific product categories or regions by splashing the cash. Its growth strategy is heavily pegged to inorganic expansion –more so than any other business in the industry.
Coincidentally, it’s almost 10 years to the day that Middleby spent close to £60m acquiring Lincat – still one of the largest M&A deals ever seen in the UK catering equipment market and a move that gave the business a truly meaningful UK manufacturing footprint from which it has never looked back.
The Welbilt takeover obviously dwarfs that – as it does for almost every other acquisition Middleby has made in recent times. Hoovering up well-run, category specialists that typically generate sales of $10m to $20m is Middleby’s traditional sweet spot for acquisitions, allowing it to gain access to proprietary technologies that can then be marketed through its ever-growing international sales channels.
The Welbilt deal, however, completely transforms its financial profile. Overnight it goes from being a business with a turnover of $2.5 billion to one with sales of $3.7 billion. That’s based on 2020 figures as well – pre-pandemic it would have been even higher.
In 2019, Middleby posted a turnover of $2.9 billion, with almost $2 billion of that coming from foodservice equipment (it also has interests in residential kitchen equipment and food processing equipment).
I understand that would have put it fourth in the quest for the global foodservice equipment crown by turnover, just slightly behind Hoshizaki, Ali Group and ITW. With Welbilt’s $1.6 billion 2019 turnover included, that puts some serious daylight between itself and the other frontrunners.
It is important to clarify that commercial kitchen equipment will account for around three-quarters of the combined company’s revenue, which equates to $2.8 billion in terms of 2020 figures.
Whatever the reaction to this deal has been in the boardroom of Ali Group’s headquarters in Milan, I am pretty sure the conversation in ITW’s boardroom in Glenview, Illinois would have been something similar.
I have to admit that my immediate thought when the deal first broke was that a deal involving such heavyweights will surely attract special attention from the competition regulators. Market share figures are never easy to come by in this industry but you only have to look at the categories and sectors that these two go head-to-head in to know that there is some significant overlap.
This deal unites Merrychef and TurboChef, Pitco and Frymaster, CookTek and Garland, Follett and Manitowoc. It creates an entity that will surely control an enormous amount of the product that is supplied into sectors such as QSR and hot food-to-go.
Confidentially agreements were first signed between the two parties back in December so Middleby has certainly had sufficient time to do its homework. It must be confident that it can get the deal over the finish line or it wouldn’t have entertained it in the first place, but on a conference call with analysts yesterday it was repeatedly pushed on the antitrust issue.
The company was reluctant to go too deeply into the subject, but its position appears to be that the industry is hugely fragmented and there is no shortage of individual competitors. Still, it hasn’t stopped speculation that some sort of forced divestiture could be thrust upon it. If that’s the case, it’s difficult to guess which parts of the business could be sacrificed without diminishing the value of the deal.
Additionally, one Citi analyst cited in US media reports noted that it was impossible to rule out bids from other parties for Welbilt given the valuation (a 28% premium on its share price) wasn’t outrageous. Apart from the obvious contenders it is difficult to see who might be interested unless, of course, a well-capitalised name from outside the industry fancied it. The theory here is that other bidders may be more interested in Welbilt than Middleby due to less customer and product overlap.
Multi-billion dollar mergers make good headlines and leave lots of investors very rich. But once they are announced they set off a whole chain of events on the ground as employees, partners and customers inevitably ponder what the implications are for them in the long run.
It’s only human nature that Welbilt employees will be thinking about where they might fit into a new ownership structure and what sort of changes could lay in store. Partners that deal heavily with one brand or both will be contemplating what it might mean for their portfolios in future. Will it give them access to a wider range of technology? Better margin opportunities?
Customers that have standardised entire kitchen templates around specific brands will inevitably seek assurances that they still have a future and will continue to be sufficiently supported; others will feel excited at the prospect of accessing new innovations.
Then there will be the competition. Not everyone will fear the might of a combined Middleby-Welbilt enterprise. Many rivals will seek opportunities to exploit any customer uncertainty that might be detected during those limbo months while the deal awaits approval and later on when any integration takes place.
One clear motivating factor in most deals of this magnitude is the extent to which costs can be optimised. Big corporations don’t like duplication. Middleby reckons there is a clear path to driving $100m in operational improvements by year three of the deal, courtesy of what it calls “run-rate cost synergies”. I suspect there will be plenty of realignment and readjustment to get to that figure – think areas such as supply chain and manufacturing in particular – and not all of it will be painless.
Middleby said itself yesterday that it has a history of driving efficiencies in acquired companies. Stripping out unnecessary cost improves profitability. And higher earnings mean a better share price. It isn’t one to mess around.
The UK angle
What sort of entity does this merger create in the UK? To get a true picture of this, we’re better off looking at how both organisations performed pre-pandemic – using 2019 figures gives us a pretty accurate picture of the situation.
Welbilt generated an operating profit of £25m on sales of £102m for the year to 31 December 2019. In comparison, Middleby UK recorded an operating profit of £500,000 on sales of £10m, IMC an operating profit of £1m on sales of £11m, and Lincat an operating profit of £12m on sales of £46m.
Add those together and you’re looking at a business that is highly profitable on paper and worth around £170m in combined turnover, should the industry eventually return to pre-Covid levels. As an aside, Ali Group-owned AFE Group made sales of £120m pre-pandemic, so the combined Middleby-Welbilt business in the UK would jump ahead of it into second place, breathing down the neck of ITW.
The fact that Welbilt is currently significantly larger than Middleby’s overall UK operation is an interesting local quirk of the agreement given that Middleby is the acquiring party. However, it should also be noted that if we’re making a comparison between the two then the geographic destination of Welbilt UK’s sales need to be considered. In 2019, UK sales accounted for £44m of the £102m it booked (around 43% of the total). The rest came from export.
Middleby UK operates out of Wigan, where it houses a state-of-the-art innovation centre showcasing the full breadth of its brand offering, while the Lincat factory on the outskirts of Lincoln is among the most advanced of its type in the UK foodservice equipment market.
Welbilt’s HQ is based down in Guildford, Surrey, while Merrychef ovens are famously manufactured in Sheffield and beverage systems are produced at its facility in Halesowen. The deal therefore significantly expands Middleby’s manufacturing capabilities in the north of England. Merrychef recently announced a seven-figure investment into its plant and the creation of 50 extra jobs to meet high levels of demand for accelerated ovens, particularly from overseas.
So what’s really in it for Middleby?
This is a deal that is about scale and reach on every level – manufacturing, distribution, product development and customer acquisition. It creates a truly powerful force responsible for somewhere in the region of 80 brands and 60 manufacturing facilities. On top of that, you’ve got the pooling of resources in areas such as new product development – both businesses are already betting big on future innovations around cloud kitchen technology, IoT enabled solutions and artificial intelligence.
Middleby described one of the benefits of the merger as “streamlined customer relationships” – don’t underestimate how important this is.
With a vastly expanded product portfolio, accelerated product innovation and greater aftermarket support, there isn’t much it won’t be able to offer operators. And all of this makes it easier to reach more markets, sell more kit and invest in areas such as engineering and technology.
They say you should go big or go home. We might still be in the middle of a global pandemic but it is crystal clear which one Middleby is proposing to do.