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Mars’ $662m acquisition of Hotel Chocolat

Acquisition Overview 


American multinational manufacturer of confectionery, pet food, and other food products, Mars, Incorporated, has confirmed the acquisition of Hotel Chocolat Limited, a luxury British cocoa grower and chocolatier. This marks a significant point for one of the largest food companies in the world, and Britain's largest independent chocolate maker. This acquisition sees the end of another British brand taken over by an American food company but is weighed up by the potential for Hotel Chocolat’s

growth prospects outside the United Kingdom following ‘disappointing’ financial results in its most recent financial year. In mid-October, the company reported an annual revenue decline of 10% to £204.5 million in FY23 (ended June 2023). Of that, international channels accounted for £7.2 million, heavily down on £11.6 million the year prior. For Mars, already owning the household brand names of the Mars bar, Snickers, Twix and M&Ms, is now looking to expand its operations in the UK to incorporate that of the more luxurious, gift-giving confectionery that Hotel Chocolat offers. The acquisition was announced on the 16th November 2023. The board has recommended the deal. 


Deal Structure 


Mars, Incorporated secured the acquisition of Hotel Chocolat in a cash offer transaction valued at $662m, with the founders of Hotel Chocolat receiving a payday of about £280m. This represents a sizable premium on the chocolatier’s share price as of the 15th of November and comes after Hotel Chocolat made a loss this year. Mars’ offer values the Aim-listed (alternatives investment market) coca manufacturer at a premium of 169.8 per cent on Hotel Chocolat’s share price of 139p at the close of business on the 15th. Hotel Chocolat said in a statement on Thursday that it considered the terms of the deal “to be fair and reasonable” and recommended shareholders back the 375p-a-share offer (made by Hive Bidco, a subsidiary of Mars). This is at a 170% premium to Hotel Chocolat’s closing trading price on the day of the deal and hence analysts have called this a ‘knock-out bid’. As a result, shares have resultantly traded up 162% to 364 pence per share. Hotel Chocolat's Chief Executive Angus Thirlwell and co-founder Peter Harris who both own 27% of the equity, according to LSEG data, have said they will accept the offer, meaning the deal will earn them about 144 million pounds each. 


Target advisors - Lazard, Liberum, Herbert Smith and Freehills LLP. Acquirer advisors - Morgan Stanley, Freshfields Bruchhaus Deringer LLP. 


Mars, Incorporated Overview 


As a pet food and confectionary giant, Mars is one of the world’s biggest food companies and the US’s fourth-largest private firm, with brands ranging from Snickers confectionery to Pedigree dog food and Dolmio pasta sauces. Founded in 1911, Mars employs almost 140,000 people around the world, of which 10,000 are in the UK. Mars, Incorporated, is headquartered in McLean, Virginia, with annual sales of more than $45 billion in 2022. There are four divisions within the company; the Mars Wrigley division manufactures confectionery products, including M&M’s candies, and Snickers candy bars and Mars Food produces Ben’s Original and Dolmio sauces. Mars Petcare manufactures pet food products, including Pedigree dog food and Whiskas cat food, and the Mars Edge division partners with research teams around the world to create personalised nutritional products, such as supplements and protein shakes. Their largest market share is in the chocolate production industry, where they account for an estimated 27.2% of total industry revenue, but as seen above has since diversified to become a world leader in several other markets. 


Founded: 1911 

Number of Employees: 135,000+ 

Enterprise Value (EV): $10.51B 

Annual Revenue: $45bn (2022) 

LTM EBITDA: $9.67B 

Market Capitalisation: $38.22B 


Hotel Chocolat Overview 


The UK company Hotel Chocolat was founded by entrepreneurs Angus Thirlwell and Peter Harris with a vision to sell premium chocolate with higher cocoa content and less sugar than incumbent confectionery firms were. Together they own 54.2 percent of the company. They set up the company over 20 years ago to bring ethical affordable luxury to the British high street, with over 130 stores and its luxury hotel and cocoa estate in Saint Lucia that the brand is named after. But taking Hotel Chocolat’s decadent treats such as trillionaire shortbread and champagne chocolate truffles further

has proved difficult, and Thurwell has admitted he has taken the company as far as he could as an independent player. The chocolatier, which was founded as an online retailer in 2004 made a loss in the year to July, falling from a pre-tax profit of £21.7mn to a loss of £800,000. It blamed inflationary pressures, weak consumer sentiment and the cost of restructuring efforts following an abortive international expansion in the US and Japan. Hence, this acquisition presents an opportunity for Mars’ global supply chain and commercial relationships to potentially help the company get the expansion of its business abroad back on track. While the brand is making some slow progress in Japan and the United States, the company would soon need to set up manufacturing and build infrastructure in these markets, requiring capital and resources. Thus, parenting with Mars opens up the possibility that those things are more easily achievable. 


Industry Insight 


The confectionary industry has seen a shakeup recently with many big chocolate companies changing up their portfolios in response to consumer demand for healthier and more sustainably sourced options and government crackdowns on unhealthy foods. Whilst some have developed lower-sugar versions of popular teats, they have not proved popular, thus promoting makers including Mars, Hershey and Nestle to focus on buying up higher-quality or healthier brands. This inorganic growth through acquisitions allows them to completely branch outside of the well-known supermarket brands, and take hold of much of the existing customer base for these higher-end confectionery gifts. The nature of the industry is one with a high market concentration, with many conglomerates that make it difficult for independent companies to expand their global presence. Chocolate and the wider confectionery market require a heavy sunk-cost investment in capital and infrastructure to have complete control over the supply chain from raw materials through to the retailer. As a result, these confectionery giants provide high barriers to entry for any independent brands looking to expand beyond a more boutique-style chain of stores. 


More broadly, the confectionary industry is undergoing systemic change. Three main trends stand out. 


Changing consumer habits: The cost of living crisis has not stopped consumer goods firms from focusing on expensive products, as noted by Bloomberg. The move away from cheap bulk-bought confectionery from the supermarket appears significant, not least catalysed by government intervention concerning sugary foods. This is reflective of a wider consumer habit to be more health conscious and brand aware when buying their confectionery goods. Many now are more willing to opt for a higher price point if the chocolate is seen as more ethically sourced, more sustainable, or healthier than the cheapest on the market. Particularly in light of Christmas and the festive season, Hotel Chocolat’s high street presence means many of its over one hundred shops in the UK are positioned for last-minute present-buying when time-preseed shoppers are at their lowest price resistant, and often very brand loyal.


Tightening government pressure: Governments particularly in developed, advanced economies increasingly taking action on sugary and unhealthy foods. The ‘sugar tax’ in the UK, and restrictions on supermarket BOGOF on confectionery is just one example of this, as countries and their electoral populations become more aware of the long-term health effects on the population, human capital, and healthcare systems. The consequences go beyond the consumer, for manufacturers such as Mars, the increasing crackdown adds pressure to develop new solutions to avoid the increase in tax from increasing costs too much, as well as a simultaneous decline in demand due to more health-conscious living. 


Not seeing increasing demand for lower-sugar versions of popular treats: For the big confectionery giants, moving to acquire higher-end luxury brands comes as their existing products and brands fail to see much enthusiasm about lower-sugar options. The deeply ingrained nature of these classic chocolate bars in culture and weekly food shops likely explains why consumers are cautious to try out a new version that appears inferior or sacrificing taste to avoid government tax or health critics. However, by acquiring a more luxury brand that has a higher markup in price, it seems easier to persuade customers the extra money is going towards a product that is higher in quality, whilst being more beneficial be it ethically in its production and/or in its health intake. 


Thus, changing consumer habits, increasing demand for healthier and more upmarket confectionery, and a greater focus on government intervention in unhealthy foods provide a strong context for Mars’ acquisition of Hotel Chocolat, positioning the company to capitalise on emerging opportunities to ensure long-term success in the face of numerous incoming difficulties for the industry. 


From a broader perspective, from the wider industry and economy, the deal will raise further concerns over the attractiveness of UK firms given the continued weakness of the pound versus the US dollar, which makes the purchase of companies based in this country cheaper. The takeover would also see the end of Hotel Chocolat's London listing, exacerbating worries over the health of the City of London. 


Strategic Rationale 


For Hotel Chocolat, the acquisition whilst ending their independent and Lonond-listed status, proves an invaluable opportunity for the company to overcome their lacklustre financial performance and expansion this year. During the coronavirus pandemic, Hotel Chocolat experienced a surge in online sales as spending was directed away from pubs and restaurants – and its closed stores – and its chocolate subscriptions benefited. However, it then slumped to a loss as costs rose, prompting the company to try to cut back. Thirlwell said Mars would help Hotel Chocolat to “scale much more quickly” for reasons including economies of scale, expertise in expansion and infrastructure and ability to invest much more into capital through its other streams of reinvested profits.

Thirlwell, who is staying on as chief executive, said he was reinvesting 80 per cent of his shareholding “in the future of the business alongside Mars” and Harris would reinvest “a fair proportion” in the business. He defended his decision to sell out to a confectionery giant whose products he had vowed to disrupt. “Looking at the Mars portfolio, it’s very clear that the brand values behind each of those brands are alive and there’s a place with a consumer-centric approach for confectionery,” he said. The deal from the perspective of the founders seems positive, as Clarke ruled out changing Hotel Chocolat’s recipes whilst they receive a generous payout. 


For Mars, the strategic rationale of the acquisition is clear - it posits a stepping stone in its broader move into the higher-value premium chocolate category. Competition in the market is crucial for this, with Nestle making a similar move with its acquisition of the Brazilian premium chocolate marker Grupo CRM earlier this year. This push into premium chocolate comes after changing consumer tastes and government pressure has led the confectionery sector to mix up its offering. Andrewe Clarke, the global president of Mars Snacking, said: "The Mars and Hotel Chocolat businesses are highly complementary, and during our discussions with Hotel Chocolat's leadership it has also become clear that there is a very strong cultural fit - with purpose at the heart of both organisations, and a shared passion for quality and sustainability." Therefore, with synergy to be gained across the deal, and cultural clashes not a worry for the president of Mars, the rationale behind the deal is sound. This depends now on how well the acquisition plays out in the medium to long term. 


Long-term prospects 


In terms of long-term prospects, the confectionery market as a whole is in a period of changing and reflecting on their tried and tested recipes and brands. The unique external factors of changing consumer tastes, government intervention, and economic outlook among other things have caused the conglomerates to pursue strategies outside of the normal realms of the boardroom. There is much uncertainty as to how far and how fast the shift to the more health-conscious lifestyle will be, and how exactly this affects the bottom line of confectionary companies like Mars. Moreover, what we are seeing today with a growing trend to favour more upmarket, luxury chocolatiers like Hotel Chocolat seems like a preference that is here to stay, but again we cannot be sure about. The long-term prospects of this acquisition depend on these factors, and also how well Hotel Chocolat is able to overcome the challenges faced in expanding abroad, if it is merely an issue of financial power and expertise. 


From the point of view of the target company, Hotel Chocolat, the outlook is mixed. There are clear positives to be gained, the expertise, manpower and investment capabilities behind Mars Incorporated will catalyse its expansion internationally where its independence has held it back. However, this comes at a cost. Perhaps less so for Hotel Chocolat itself, and its owners receiving generous payment from the acquisition, but for another British brand being taken over by another American giant in the name of globalisation. This is not all negative though, as the CEO of Mars has

promised not to alter the recipes of Hotel Chocolat, and its CEO is to remain on the board for the next 5 years to help guide and direct the new direction. 


It seems overly critical not to analyse this acquisition in the context of it following several years of challenges for Hotel Chocolat. Perhaps without this opportunity to both expand and strengthen its foreign footholds, the chain would have fallen into further financial turmoil in the next few years. This way, the brand and its employees remain on the high street for the foreseeable future, and may well reap the benefits to be gained from its new potential growth. 


Written by Angela Shi (Trinity College)


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