With its $2.3 billion acquisition of competitor Quest International last week, fragrance supplier Givaudan vaulted to the top of the heap and redrew the competitive map.
Givaudan, based in Vernier, Switzerland, and Quest, the flavors and fragrance business unit of U.K.-based Imperial Chemical Industries plc, expect the deal to be finalized during the first quarter of next year. The acquisition, which is valued at 1.2 billion British pounds, or about 2.8 billion Swiss francs, or $2.3 billion at current exchange, is subject to regulatory and shareholder approval.
Along with flavors and fragrance suppliers Firmenich, International Flavors & Fragrances and Symrise, Givaudan and Quest are in the top tier of players within the flavor and fragrance supply industry. Their business segments include fragrance production for consumer products such as perfumes, shampoo and detergent, as well as flavors for the food and beverage industries.
Givaudan expects the acquisition of Quest to “extend Givaudan’s leadership position in all strategic segments of the fragrance and flavor industry,” the company said in a statement.
Combined annual revenues of the companies are expected to be about four billion Swiss francs, or $3.26 billion, of which 44 percent would be derived from its fragrance business and 56 percent from flavors. That would mean its fragrance sales would weigh in at approximately 1.76 billion Swiss francs, or $1.43 billion.
Givaudan said it expects to achieve annual synergies of 150 million Swiss francs, or $122.2 million, with “full benefits” realized the third year after the acquisition. The deal is to be funded by debt and an issuance of one billion Swiss francs, or $815.6 million, in equity.
The Givaudan-Quest deal marks one of the biggest acquisitions — in an industry punctuated in recent years by consolidation — since the 2002 merger of Haarmann & Reimer and Dragoco, which at the time had combined sales of $1.42 billion, a deal that spawned Symrise. Givaudan itself was merged with fragrance supplier Roure in 1991 by then parent company Roche and was known as Givaudan Roure for about a decade.
“In fragrances, Givaudan will become the global market leader in fine fragrances and [fragrances for] consumer products,” the company said. “Furthermore, it will expand the customer base and strengthen its position with existing clients.”
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To put that in context, according to a ranking commissioned by WWD Beauty Report International earlier this year, Firmenich topped the list of the 10 largest fragrance suppliers worldwide in 2005 with sales estimated by industry sources to have hit 1.53 billion Swiss francs, or $1.23 billion at average exchange for 2005, followed by IFF with $1.14 billion. Givaudan took the third spot with 1.13 billion Swiss francs, or $910 million; Symrise was fourth with 609 million euros, or $758 million, in sales volume, according to industry sources, and Quest came in fifth with sales of 301 million pounds, or $548 million.
In 2005, Quest rang up total sales, including its fragrance and flavors businesses, of 560 million pounds, or $1.02 billion at average exchange, while Givaudan generated 2.8 billion Swiss francs, or $2.3 billion.
“I am genuinely very excited about the opportunity we have to combine Givaudan and Quest,” said Gilles Andrier, Givaudan’s chief executive officer, during a conference call on Wednesday. “This is a transformational event for both companies, and we are we convinced that this transaction will reshape the status quo of our industry.”
Andrier outlined the strategic rationale behind the acquisition, noting the deal expands Givaudan’s global reach, enhances its pool of creative talent, expands its consumer understanding, improves its product and service offering and strengthens its technological and research-and-development capabilities.
“Together with Quest, we will form an unrivaled platform to provide an even more comprehensive service to our customers around the globe,” said Andrier. “Combined, the companies give rise to a balanced global footprint with significant sales in all global regions.
“Acquiring Quest is a key step to realizing our strategic vision of becoming the essential source of sensory innovation for our customers,” continued Andrier.
Quest, which has headquarters in Naarden, the Netherlands, was acquired by ICI from Unilever in 1997.
“This is an outstanding opportunity for Quest,” said Isabelle Parize, group vice president of fragrances at Quest, in a statement from the firm. “Givaudan has an inspiring and long history in fragrance creation. We will be joining the most respected and profitable business in our industry and creating a clear market leader. The combined businesses provide a powerful innovation platform and we are delighted about the extra value we will be able to offer our clients. Through this deal we will be in a position to better leverage our joint capabilities in the areas of consumer and sensory understanding, technology and science.”
Fragrance consultant Ann Gottlieb, president of Ann Gottlieb Associates, sees the deal as a beneficial marriage that will help both Givaudan and Quest, particularly in light of the recent advent of manufacturers restricting the number of their suppliers with “core lists.” Some manufacturing clients had listed one company but not the other.
“It’s going to be easier for the fragrance companies to have relationships with the cosmetics companies,” she noted. “This is a great move for Givaudan,” she said, but pointed out that the benefits are more mixed for Quest. The management of Quest, led by executives like Parize, was beginning to make headway in moving the company forward.
“Now, no one will ever see where the company could have gone,” Gottlieb noted.
Indeed, John McAdam, ceo of ICI, said in a letter to colleagues, “Quest has for many years been one of ICI’s ‘Grow Aggressively’ businesses and the management team has done a good job of progressively improving performance and developing its market position. The business has been growing its top line faster than its markets’ rate of growth and expanding margins. It is clearly heading in the right direction and on track to return to its pre-2003 margin levels.”
He added in the statement, “At the same time, it was well known that the flavors and fragrance industry was likely to experience further consolidation. Quest is one of five leading global players, amongst hundreds of national and regional flavor and fragrance houses. The combined Quest/Givaudan business will be number one in all regions in almost all flavors and fragrance sectors. I am genuinely excited by the opportunity this gives Quest, not just to continue its growth but to be part of the industry leader in flavors and fragrances with all the advantages, opportunities and challenges that come with such a position.”
When asked what effect core lists had when the deal was being drawn up, Cosimo Policastro, Givaudan’s executive vice president of fine fragrances for North America, said, “It’s a reality of our business. But I don’t think you can slice this down and say core lists had any major influence,” he said during an interview in New York Wednesday. “It certainly has influence, but I wouldn’t suggest any more or less than the other things one considers when one looks at growth opportunities.
“To make an acquisition of this size, there were a lot of things taken into consideration,” he said, adding that the deal “makes us number one in fine fragrance and puts us in a better position with our top consumer products companies.”
In terms of perfumery, the two companies complement each other, Gottlieb added. Givaudan has been strong recently in men’s fine fragrances, winning the contracts for Ralph Lauren’s Polo Double Black and Sean Combs’ Unforgivable. But it has been weak on the women’s side of the business and that’s where Quest is strong.
Industry consultant Allan Mottus compared the union to Federated Department Store Inc.’s acquisition of May Co. “You might as well get the stronger players together while you can,” he remarked. Mottus noted that beauty firms are asking suppliers for better prices, which in turn has forced suppliers to knock down overhead.
“You have more global companies today, so having corporate size and financial wherewithal is important,” he said.
— With contributions from Pete Born and Molly Prior