Lindt’s Russell Stover acquisition: Blockbuster or boondoggle?

Thomas Linemayr (left), president of Lindt USA, and Ernst Tanner, chairman of Lindt & Strüngli at the Lindt USA’s retail shop in Stratham, N.H in 2009.

When Forest Gump’s mother pointed out that life, like a box of chocolates, is full of surprises, I don’t think she even expected Lindt & Sprüngli to be the one to acquire Russell Stover Candies. With names such as Hershey and Godiva reportedly in the bidding, the move by Ernst Tanner, chairman of Swiss-based Lindt & Sprüngli to lay down a cool $1.5 billion surprised even the most clued-in analysts.  

And although both Tanner and Thomas Ward, Russell Stover’s president and ceo, call the purchase a strategic “fit,” there are several questions that beg answers. Yes, I realize that the acquisition provides Lindt with an immediate infusion of new distribution points within central and southern United States, areas that Lindt USA and Ghirardelli will greatly benefit from. 

Bernie Pacyniak

Still, it involves integrating a mainstream premium company, which is Lindt North America, with what I’d call a very mainstream chocolate company. Mind you, there’s nothing wrong with mainstream — as Russell Stover’s sales can attest. The trick is, do you upgrade Russell Stover’s product line? Or do you simply use their distribution network to expand Lindt and Ghirardelli brands? And/or do you take advantage of their manufacturing capabilities to produce Lindt and Ghirardelli products closer to the heartland?

Perhaps you do all three.

As a Bloomberg Business article reported earlier this week, Tanner told the publication that one of the key elements in brokering the deal was the fact that he could cite Lindt & Sprüngli’s past success with Ghirardelli.

Here was an example of a Swiss company successfully integrating a truly American chocolate company into their operations. Having visited Ghirardelli as well as Lindt USA, there’s no doubt that these two have become true flagships for the mother ship. It has taken time, however, to create such powerhouses, both of which reported double-digit gains during the first half of the fiscal year.

Even though the addition of Russell Stover will make Lindt the third largest chocolate maker in North America, garnering a 10 percent share by 2015, size doesn’t always bring success. The merger between Farley’s & Sather’s and Ferrara Pan Candy Co. two years ago produced a billion-dollar operation. Of course, then there was the mega-acquisition of Mars taking over Wrigley in 2008. I’m not exactly sure whether those moves have produced the results that were anticipated.

Then consider the purchase price, which some say is a15- to 20x multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Listen, I’m not a financial expert, but others point out that it’s going to be hard to recoup that purchase price, particularly since commodity prices and other fixed costs continue to rise. There’s a reason The Hershey Co. upped its prices 8 percent yesterday.

Moreover, Russell Stover sells a lot of chocolate. Keeping a lid on costs while maintaining mainstream pricing could prove to be quite a challenge. And what about Lindt USA’s intent to further expand its manufacturing complex in Stratham, N.H.? How does the addition of four plants affect that? More questions than answers, I know.

But I do know a few things, though. Lindt & Sprüngli runs a tight ship. They’re also experts in producing good, let’s say even excellent chocolate. And I’m willing to bet that Tanner, while paying a pretty price for America’s boxed chocolate company, will come out ahead on this. But count on it being an interesting journey.