Arnott’s sale: How new owner KKR will make a killing in Aussie biscuits

It’s official: A giant investment company has today formally been named the new owner of Arnott’s. So how will it shake up the Aussie biscuit maker? Peter Taylor outlines the battle plan.

It’s one of those ’90s TV ads seared into the minds of anyone old enough to remember them.

A young couple finds a brass oil lamp in a room full of relics gathering dust. The woman (a youthful Cate Blanchett) rubs it. Out pops a genie and grants her three wishes.

“A packet of Tim Tims that never runs out,” says Cate. Her wish is duly granted.

With two wishes to go, her wide-eyed mate chimes in.

“Then we’ll have two more of those,” he says.

Ponder this: How would the same scene play out if it were a couple of private equity executives who found the lamp?

Here’s a tip. They wouldn’t ask for a never-ending packet of Tim Tams.

No, first they’d ask for a stonking great pile of cash (a never-ending one, of course) — although publicly they’d refer to it as a return on investment.

Then they’d ask for a quick and tidy exit. And finally they’d ask for no repercussions.

This, harsh but fair as it is, is the broad objective of private equity houses.

They pick off companies that are low-hanging fruit — usually loading up on debt in the process — and restructure them, only to sell up and move on.

Get in. Strip it back or juice it up. Then get out (just as soon as you can make a lavish buck).

And if there’s a chance it will all go pear-shaped later, try to ensure your fingerprints will have long since washed away.

That’s why Arnott’s employees, biscuit buffs and all Australians should be concerned about the $3.2 billion sale — formalised this afternoon — of the Tim Tam maker to just such a private equity house.

That said, the business buying Arnott’s from its existing owner, Campbell Soup Company, is not any old private equity house.

KKR & Co is arguably the private equity house — the trailblazer of, and flag bearer for, the modern private equity industry.

The original deal that swept it to prominence (notoriety, if you prefer) was the fiercely fought 1980s buyout of another biscuit company, cookies and ciggies conglomerate RJR Nabisco.

It was the cigarettes that seduced KKR, then called Kohlberg Kravis Roberts & Co.

That was in the era before the tobacco industry — up-ended by legal action around the toll of smoking — became anathema to investors.

The private equity house offloaded a suite of RJR Nabisco’s brands and eventually split the remaining company, selling off the biscuit operation.

The new owner of Arnott’s was once invested in RJR, the owner of Camel-brand cigarettes.

All up, it had money in the business for more than a decade. And it made a mash of it. For various reasons, including a suffocating debt pile, the souring fortunes of the tobacco industry and questionable executive appointments, RJR withered.

The private equity house also shouldered a nasty loss.

More than hundreds of investments since, it has finetuned its model. Now it rarely blunders.

At Arnott’s, it won’t make the same mistakes it made at RJR. But that doesn’t mean Arnott’s will emerge a better company for its ownership. In all likelihood, it will emerge worse.

WHAT’S IN STORE

So how will the private equity house stamp its mark?

Here’s a little crystal ball gazing.

Publicly, KKR will say Arnott’s is ripe for growth, there is scope for new brands and enormous opportunities to boost sales in overseas markets, particularly in Asia.

Nevermind that the outgoing owner, Campbell’s, has consistently tinkered with the brand portfolio and, with mixed success, marketed Arnott’s products around the world. (“Selling into Asia? Why didn’t we think of that?!”)

Is there scope to sell more of Australia’s favourite chocolate biscuits in Asia? Picture: Ross Marsden

Expect KKR to be ruthless in “finding efficiencies”, trimming Arnott’s portfolio of 170 products, cutting jobs, and potentially consolidating the group’s three factories into one or two.

It will sell all three plants — in Sydney, Brisbane and Adelaide — and pocket the coin. Then it will lease back the plants Arnott’s needs in the short-term.

KKR won’t shift manufacturing overseas. That decision will be left to the next owner of Arnott’s as costs mount, courtesy of rental bills it previously didn’t have.

More specifically, the private equity house won’t carry out a wholesale shift of manufacturing overseas.

It may, though, outsource production of a few brands to factories in other countries (or trial some foreign products in Australia, stamping them with the Arnott’s marque).

That will allow it to test how Australian consumers react when, say, their Malt’O’Milks are shipped in from Thailand.

And more importantly, that will begin conditioning consumers to accept imported Arnott’s biscuits — a classic “thin edge of the wedge” manoeuvre.

As for packet weights, dry biscuits at a consistent 250g and chocolate biscuits at a broadly consistent 200g are so yesterday. They’ll be shrunk.

Arnott’s will likely be forced to lease its own factories. Picture: Justin Lloyd

Then, in several years, KKR will wax lyrical about its great success in breathing new life into Arnott’s.

It will do so as it flogs the company off — perhaps to Turkish biscuit titan Yildiz or Cadbury owner Mondelez, from the US.

Or, market conditions permitting, it will float Arnott’s.

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WHAT ELSE DOES KKR OWN?

ARNOTT’S THROUGH THE AGES

You can only imagine the spin. Every Australian, we’ll be told, can again have a piece of our iconic biscuit maker.

For the first time since the 1990s, we’ll be able to have our biscuits and eat them too.

What happens to Arnott’s then?

Well, be wary. KKR has the biscuit barrel and it’s not known for its benevolence.

When it sells out, Arnott’s may have had a spit and polish. But odds on, the next buyer will just be getting the crumbs.

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