For the moment it's just a courtship, but some expect the relationship between the world's largest olive oil producer and the global leader in bottled olive oil to end in union. Olive oil cooperative Hojiblanca is about to become a core shareholder of Deoleo. On Thursday, the group approved the purchase of 10% of Deoleo, formerly SOS, through a capital increase. It is the first major step towards sealing the deal on a promising relationship. Antonio Luque, Managing Director of Hojiblanca, has already announced his desire to strengthen the alliance with Deoleo, which owns Carbonell and Koipe, and to buy the stake held by Bankia, which would turn it into the core shareholder, with 26%.
Luque has justified the Deoleo-Hojiblanca alliance based on the need to strengthen Spanish olive oil around the world at a time with the popularity of this "green gold" among consumers is on the rise. Olive oil has already become a valued product in developed countries, and sales have been expanding in emerging economies at a rate of 13% per annum since 2007, with continued growth expected.
Hojiblanca, which comprises 96 cooperatives and 55,000 olive farmers, is a global leader in olive oil production. However, internationalization remains a pending issue. A considerable amount of olive oil is sold beyond Spain's borders, most of it in bulk and with scant margins. It needs the commercial strength and international promotion of a major player with premium brands such as Bertolli, Carapelli and Carbonell. A Deoleo and Hojiblanca team would have better access to the raw material and weather price fluctuations more comfortably. But, more than an industrial partner, Hojiblanca would become Deoleo's "white knight", helping it during this new era on which the company recently embarked, after years of sweeping restructuring.
Just four years ago, Deoleo (at the time SOS), was on the verge of bankruptcy, having uncovered a debt of almost 1.5 billion euros due to fraudulent management by the Salazar brothers. Since then, the company has worked to pare down the business considerably, which included offloading large assets (such as the rice division and Proyecto Tierra), cutting back staff (shedding 66% of employees since December 2010), and closing plants. "We have completed the bulk of restructuring," says a company spokesperson, who highlights the notable progress in slashing debt. At the end of the first quarter of the year, the company had 597 million euros in outstanding loans, i.e. 63 million less than one year ago and 27 million less year-to-date. Excellent progress but still a considerable distance from the final objective, say financial analysts. Debt is more than double its market capitalization, and the company still has major payments due to creditor banks. Though the company has left "intensive care" and the “illness” is under control, its hefty debt continues to impede a full recovery.
And massive debt is not Deoleo's only problem. The company is directly impacted by weak consumer spending in two of its main markets: Italy and Spain, where olive oil sales dipped by 6% and 9.8%, respectively, between January and March, as private label products continue to go from strength to strength, reaching a market share of 70%. "The first quarter has been very complicated. The crisis has been especially acute in both countries," says the company in an effort to justify the 4.4% slump in group earnings in that period, to 198 million euros. And with the ongoing crisis, the outlook for the two countries during the rest of the year is quite bleak. In other words: Jaime Carbó, the owner of Carbonell, has to double-up internationalization efforts if he wants to return to a path of growth.
The Spanish and southern European market accounts for 64.3% of the company's total sales and 26.3% of EBITDA. North America accounts for 19.9% of revenues, though with a contribution to pre-tax profit of 54.8%; other international markets account for 13.6% of sales and 16.6% of EBITDA. "We clearly have to focus on the foreign market, on the US and Canada, and on emerging markets where olive oil is gaining in popularity among growing middle classes in countries such as China, Malaysia and Colombia," says a company spokesperson, adding that sales departments are being opened in these new business areas.
CHANGE IN STRATEGY
Back at home, in Spain and Italy, Deoleo has also shifted its strategy to increase efficiency and profitability. The days of fighting in the price wars in which the mass market sector has been immersed since 2008 and selling liters upon liters of oil for distribution brands with meager margins are over. The company is committed to strengthening its leading brands through advertising and marketing campaigns and new products with greater added value. The change in sales strategy is starting to bear fruit: the margin has increased from 6.5% to more than 10%, according to the company. "We are now selling a smaller quantity but with a higher margin," it adds.
In this complex economic context, and with the need to increase sales abroad to ensure growth and maintain a leading international position, the alliance with Hojiblanca is a strong option. However, this relationship has worried large distribution chains, who tried to pressure Spain's National Competition Commission (CNC) to stop Hojiblanca from buying a stake in Deoleo, according to industry sources. However, the argument by agricultural trade associations and the Ministry of Agriculture for the need and opportunity to create a large Spanish oil group prevailed in the end. The agricultural media is convinced that it's only a matter of time before Hojiblanca buys Bankia's stake, through which it would become a core shareholder. This operation would be viewed favorably by the Minister for Agriculture, Miguel Arias Cañete, who expressed his concerns that a foreign group would take advantage of Carbonell's low share price to snatch up a leading company in a strategic sector for Spain.