ZURICH Switzerland's Lindt & Spruengli (LISP.S) has agreed to buy U.S. candy maker Russell Stover in a billion-dollar deal that makes it the third-biggest chocolate maker in the United States behind Hershey (HSY.N) and Mars.
Lindt did not disclose the price of the deal that will give it the family-owned firm whose pralines were made famous by the movie "Forrest Gump" - and with it, access to U.S. consumers' rising appetite for higher-quality affordable chocolates.
"It is a billion(-dollar) deal. How much more than one billion I cannot say," Lindt Chairman and Chief Executive Ernst Tanner told Reuters in an interview on Monday.
"We see in America, as in other places, that consumers move from the mass market product to higher-value products. We've seen that in coffee and bread, in restaurants, and now also with chocolate, there's an upgrading under way," he said.
In March, the maker of Lindor chocolate balls said its North American sales should top $1 billion this year. With the addition of Russell Stover, sales in the group's fastest-growing market should exceed $1.5 billion in 2015, it said.
Tanner said price tags for Russell Stover chocolates were slightly below those of its Lindt and Ghirardelli brands, making them "accessible premium products".
He declined to say whether the group still expected to generate double-digit growth in North America after the deal.
"At Russell Stover as on group level, we aim for 6-8 percent organic sales growth," he said.
In a separate statement, Lindt confirmed its financial targets, after underlying sales rose 9.2 percent, or 6 percent on a reported basis, to 1.2 billion Swiss francs ($1.34 billion) in the first half of the year.
Vontobel analyst Jean-Philippe Bertschy said he was surprised by the move since Russell Stover's boxed chocolates sold in drug stores and gift shops were expected to grow at a slower rate than chocolate overall.
However, he said the acquisition should strengthen Lindt's presence in the seasonal business, such as chocolates for Valentine's Day and Easter, and give it more sales outlets.
Tanner said the deal would give Lindt more weight in negotiating with retailers. "We'll likely be 'category captain' for premium chocolate, meaning we'll be able to advise our partners on their product selection and sales activities."
Russell Stover's chocolates were brought to a wider audience in 1994 when U.S. actor Tom Hanks as the eponymous hero of the movie Forrest Gump said over a box of them: "My mama always said life was like a box of chocolates. You never know what you're gonna get."
Most analysts said Russell Stover's margins were likely lower than Lindt's, but Tanner said they were comparable. He said he didn't see many synergies, but in some cases the group's Ghirardelli brand might use Russell Stover's production sites.
Helvea analyst Andreas von Arx said the move could also be seen as defensive as it prevented peers like Hershey from entering the U.S. premium chocolate market.
Shares in Lindt were up 2.9 percent at 4,633 francs by 1416, outperforming a 1 percent firmer European sector index .SX3P.
The Ward family put privately held Russell Stover, which also produces Whitman's brand chocolates, up for sale earlier this year and has been working with Goldman Sachs (GS.N) to find a buyer. Lindt was advised on the deal by Credit Suisse.
Media reports over the weekend suggested Lindt was discussing a price of around $1.4 billion.
If the price estimate is correct, Kepler Cheuvreux analyst Jon Cox said it would represent a "hefty multiple" of 23.3 times earnings before interest tax, depreciation and amortization (EBITDA).
The maker of gold foil-wrapped chocolate bunnies said the deal would be financed through cash and bank loans and is expected to strongly contribute to earnings per share from 2015.
Tanner said the company had not decided what to do about its ongoing 450 million Swiss franc share buyback. "We'll see how it goes. We have the cash to continue to buy back (...) and bank loans are cheap at the moment. We have not decided yet."
Russell Stover, based in Kansas City, Missouri, is the third-largest U.S. candy company, with sales of around $500 million. It sells its products in more than 70,000 stores throughout the United States and in more than 20 countries.
(Additional reporting by Sophie Sassard in London; Editing by Sophie Walker)