By Pierre PINSAULT, Axel Mebarek and Mikail Boudouda (Grenoble Ecole de Management) and Hannah Farrell, Liam Smith and Liam Ryan (Trinity College Dublin)
Overview of the deal
Acquirer: Nestlé S.A. (NESN)
Target: Freshly, Inc.
Total Transaction Size: $1.5B: $950m cash and $550m potential earnouts
Closed date: 30 October 2020
Target advisor: Unknown
After acquiring a 16% stake in the company’s capital through a Series C funding round in 2017, Nestlé finally took the decision to acquire Freshly, Inc. this year, strengthening its external growth strategy, especially after the $2.6 billion purchase in August of Aimmune Therapeutics.
Although Freshly is already a well-established company in the US with a presence in 48 states and projected sales of $430m for 2020, this operation paves the way for it to strengthen its position through Nestlé's financial resources and experience. This is significant considering the highly competitive market with competitors such as HelloFresh and Blue Apron.
As for Nestlé, this deal is a first step in the direct-to-consumer food market and the opportunity to benefit from an economic windfall given the current global pandemic.
Company Details: Acquirer – Nestle
Nestlé is a Swiss multinational and the world’s largest food company. The company is mainly known for offering baby products, bottled water, cereals, chocolate and coffee products, although it is present in numerous other markets. Furthermore, it is one of the main shareholders of L’Oréal, the world’s leading cosmetic company.
Founded in 1866, headquartered in Vevey, Switzerland
CEO : Ulf Mark Schneider
Number of employees : 291,000
Market Cap: $329.9bn (as of 12/11/2020)
EV : $371.4bn (as of 30/09/2020)
LTM Revenue: $96.5bn
LTM EBITDA: $19.5bn
LTM EV/Revenue: 3.75x
LTM EV/EBITDA: 16.86x
Company Details: Target - Freshly
Freshly, Inc. provides fresh chef-cooked meals that can be delivered directly to your doorstep. From entrees to breakfast, with a weekly or monthly subscription, you can order various meals including dairy products. Freshly focuses on the quality and nutritional value of its products by offering dishes that are less processed than others. Formerly known as F3 Foods of Arizona, Inc., the company changed its name to Freshly, Inc. in 2014 and, as of October 2020, became a subsidiary of Nestlé USA, Inc.
Founded in 2013, headquartered in New York, NY
CEO: Michael Wystrach
Number of employees: Approximately 300
Forecasted sales: $430m
Projections and Assumptions
Short-term consequences
The COVID-19 pandemic has had a devastating effect on the restaurant and food industries. Given the ever-changing restrictions facing restaurants globally, Nestle’s move towards a home delivery meal service makes sense. In 2017, Nestle purchased a minority stake in Freshly. The acquisition of Freshly indicates that Nestlé has been benefiting from the company’s performance since then. Evidently, the company has high expectations for Freshly’s performance over the coming months, with the acquisition including potential earnouts of up to $550 million based on future growth. Freshly currently supplies over one million prepared meals a week in the US with predicted earnings of $430m for 2020, adding to Nestlé’s already impressive portfolio with upwards of 2,000 brands. The acquisition allows Nestle to gain a foothold into a market that will see rapid growth and changes in the next few months in light of the resurgence of Covid-19 lockdowns, with the global meal kit delivery service’s market size expected to reach $19.92 billion by 2027. This is expected to have a CAGR of 12.8% from 2020 to 2027, with further traction realized from the Covid-19 pandemic.
Long-term Upsides
Nestle’s acquisition of Freshly will combine the former’s R&D aptitude with the latter’s consumer analytics and wide distribution network. Due to COVID-19, home consumerism is at an all-time high -- people are utilizing online shopping and home dining like never before. Nestle USA’s chief executive officer, Steve Presley, described how this new reality has taken the world by storm and is here to stay. He went on to compliment the success that Freshly’s innovative business has had and explained how it will be beneficial to both companies in taking on the new landscape of the American food market. As the end of the year approaches fast, it is posited that the future of the food industry will be at the crossroads of nutrition and convenience. Nestle’s acquisition put them at the forefront of this new standard with an already expanding menu of weekly, ready meals delivered on a subscription basis. As the largest food and beverage company in the US, Nestle is forecasted to grow even further as the two companies will look to tackle the coming months in stride.
Risks and Uncertainties
The concept of Freshly is one that has suited the work-from-home lifestyle that took over during the pandemic. Freshly had been successful before the pandemic but they thrived under increased coronavirus fear and social distancing restrictions that limited indoor dining and numbers in super markets across the US. This created a widespread appetite for Freshly, who provides services for both of these needs. As such, news of vaccines from Pfizer and Moderna, as well as the possible return to normality sooner rather than later, is likely to work against the meals-at-home service Freshly provides. Something that Freshly, and now Nestle, should be particularly wary of is the market perception of this acquisition in light of positive vaccine news. The performance of ‘COVID friendly’ stocks has been less than impressive since news of the Pfizer vaccine hit, with stocks like Peloton and Netflix losing billions in market value since November 9th. The question for Nestlé and Freshly is now whether they can continue to grow a company, that has thrived under corona-virus restrictions, in a world where those very restrictions may soon be a thing of the past.
Freshly’s operations in such a competitive space, in addition to low barriers-to-entry, are another worry for Nestlé. Freshly’s current unique selling point is its offering of high-quality, precooked meals that need only be heated, also known as a ‘Heat and Eat’ offering. Its main competitors, such as Blue Apron and Dinnerly, provide artisan ingredients that then need to be cooked, requiring more work for customers. However, as Freshly continues to prosper their competitors might find it easy to emulate this idea and move into their space. This could erode profit and create a price war between brands. For Nestle, their main priority will be to enhance the Freshly brand so that rivals appear as inferior goods, rather than competitive substitutes, in order for Nestlé to expand its business.
“With the acquisition of Freshly we are strengthening our position in the U.S. and expanding our ability to deliver a wide variety of delicious food to our consumers when and where they want.” – Laurent Freixe, Nestlé CEO Zone Americas