Why Arnott's $3 billion sale could spell the end of Orange Slices

Authors: Dominic Powell
Publication: The Sydney Morning Herald
Publisher: Fairfax Media
Publication date: 26/07/19

A sale of Arnott's to investment powerhouse KKR could see a number of the much-loved biscuit maker's products discontinued in an effort to increase the company's value.

On Wednesday, storied private equity firm KKR emerged as the winning bidder for Campbell Soup Co's international brands division, which includes Arnott's after it bought the company in 1997.

With the deal, said to be worth around $3.15 billion, expected to be finalised in the next few days, questions remain as to what the US multinational plans to do next with the iconic Aussie business.

Generally, KKR's strategy involves purchasing companies, making changes to improve their bottom line, then selling them off again at a profit, either through a direct sale or a listing.

Brendan Wykes, a partner at Holding Redlich who's an expert in private equity transactions, told The Age and The Sydney Morning Herald he expects KKR will run the "usual mantra".

"I imagine they’ll do what most private equity firms do, which is look to realise their investment in around two to five years," he said.

"KKR will look to improve the earnings of the business, and as they’re likely funding this deal with debt, they’ll seek to pay down as much of that debt as possible in the meantime."

Professor Daniel Samson, manufacturing and business operations expert at The University of Melbourne, agrees this will be likely KKR’s plan for Arnott’s. But he says its strategy will probably also involve getting rid of some "lazy assets".

"One way to increase a company’s value it to lower its operating costs, which might involve reducing the number of different products it sells," he said.

Cutting down on biscuits?

Arnott’s has an extensive range of biscuits which it sells in both stand-alone and variety packs. Some of the less popular choices, such as Orange Slices or Milk Arrowroots, could get the chop, Professor Samson reckons.

"Like all businesses, Arnott’s has some big selling products and some very niche products, so one way to make the business more profitable would be to combine or eliminate the more niche options," Mr Samson said.

Orange Slice biscuits are loved by some, but are not Arnott's bestsellers.

Other cost-reducing methods could involve streamlining management or raising efficiency for the company's resources, Mr Samson said.

Arnott's employs around 2400 Australians across its offices and manufacturing plants and posted a profit of $76.5 million in the 2018 financial year, up 14 per cent from the year prior.

"One way to increase a company’s value it to lower its operating costs, which might involve reducing the number of different products it sells." - University of Melbourne academic Professor Daniel Samson

KKR's local portfolio already includes a number of Australian companies, such as accounting software firm MYOB which it purchased for $2 billion earlier this year, and pubs and restaurants group Australian Venue Co.

The US private equity giant also owns stakes in laser hair removal business Laser Clinics Australia, healthcare business GenesisCare and lender Pepper Group, which it reportedly plans to list on the sharemarket later this year.

Mr Wykes says KKR could also look to acquire other businesses in a similar sector to Arnott’s, with the eventual goal of rolling them up together and listing them “when the time is right”.

In that case, Arnott’s would go back into Australian hands, with retail investors able to get a bite of the popular brand.

'How degrading'

Despite Arnott’s being foreign-owned since the late 1990s, some customers have reacted negatively to the news of KKR's acquisition, with some lamenting that yet another ‘Australian’ brand was moving into US hands.

"Fancy Tim Tams belonging to anyone but Australia," one biscuit fan noted on Facebook.

"How degrading for us."

This short-term backlash should be expected, according to behavioural economics expert Bri Williams, who said disruption of a nostalgic Australian brand like Tim Tams would likely evoke emotional responses from customers.

"In the short term, customers will probably be resistant due to that sense of nostalgia. Brands we perceive to be Australian we hold close to our heart, even if in the background they’re owned by multinationals," Ms Williams said.

"But before long consumption habits will prevail and customers will likely fall back into their old routines and revert to those family favourites."

Main thing is the private equiteers don't change the recipe.

A drastic change to product formulation, such as its recipe or size, could stoke real opposition from shoppers, Ms Williams warns.

Companies such as Cadbury and Glad have attest to that.

In 2015 Glad was forced to backflip on a controversial redesign of its cling-wrap box, which moved the serrated cutter from the base of the box to the lid. The backlash was so fierce the company said it would make changes as "soon as humanly possible".

Cadbury copped similar flak earlier this year after announcing it would shrink the size of its chocolate blocks to 180 grams, from 200 grams previously.

"Product changes are not typically received very well, and if handled incorrectly can incite some serious backlash from customers," Ms Williams said.

"But for most customers, it will be business as usual."

Local representatives for KKR did not respond to requests for further information on the deal, and its plans for Arnott's.

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