Fancy a few Birds Eye fish fingers in your portfolio? Well, now’s your chance. Some of the biggest brands in the frozen food industry have been gobbled up by an unknown business. Its buy-and-build strategy is moving at a fast pace, so if you like the prospects for frozen food make sure you get acquainted with the name Nomad Foods (NHL).

Floated last year (15 Apr ‘14) as Nomad Holdings with an associated US$500 million (£320.4 million) fundraising, the British Virgin Islands-registered company was founded as a special purpose acquisition vehicle by billionaire Noam Gottesman and British-born corporate raider Martin Franklin.

Nomad’s stated brief at float was to acquire a company or business ‘with a nexus (such as ownership, formation, management, operations, sales or research and development activities) to Israel or the Middle East’, though the story has since taken a tasty twist.

Founding fathers

The aforementioned bumper IPO funds were raised off the back of the track record of Nomad’s founders, boasting bulging contact books and deep consumer products nous alike.

Gottesman, the founder and CEO of investment firm Toms Capital and co-founder of GLG Partners, boasts deep ties and contacts in the Middle East, while Franklin is founder and executive chairman of Jarden (JAH:NYSE), a consumer products roll-up selling products as diverse as fishing rods, fire alarms and baseball mitts.

Franklin is also founder and non-exec chairman of Platform Specialty Products (PAH:NYSE), which last month pounced on chemicals rival Alent (ALNT) in a £1.35 billion deal.

Deep-freeze focus

Earlier this year (20 Apr), Nomad Holdings moved away from its Israel/Middle East brief, instead announcing the reverse takeover of Iglo Foods, Europe’s leading frozen food company, from private equity player Permira for €2.6 billion (£1.8 billion).

This transaction was funded through cash, equity, proceeds from a $795 million private placement with institutions priced at $10.50 per share, with Nomad assuming Iglo’s debts. More importantly, the deal, triggering a name change to Nomad Foods, provided the platform for a buy-and-build strategy in fragmented international food markets.

Nomad’s focus is on market-leading, niche consumer foods companies with diversified sales and strong free cash flow characteristics and UK-headquartered Iglo fits the bill. Europe’s biggest frozen food company, it manufactures everything from frozen fish and vegetables to meats and meals, selling into 12 different countries with a particular focus on the UK, Germany and Italy.

It brought iconic brands including Birds Eye in the UK and Ireland, Iglo in Germany, Austria and the Netherlands, as well as Findus in Italy, under Nomad’s control. Permira had backed Iglo’s acquisition of Findus Italy in 2010.

‘We took a highly disciplined approach to evaluating opportunities for Nomad’s initial investment,’ commented Franklin at the time, adding Iglo ‘is a well-run business that has cemented itself as a leader in an attractive, yet highly fragmented sector, which paves the way for both organic and inorganic opportunities.’

The plan appears to be marry complementary businesses, take out cost and reinvest the savings in new products and marketing budgets to drive growth.

Nomad confirmed on 3 June that it was in exclusive talks to acquire Findus’ continental European businesses and the Findus brand, going on to raise (9 Jul) $320 million for acquisitions through a placing priced at $20.75.

The Findus discussions, believed to be in the latter stages, include a sale of Findus Nordic (spanning Sweden, Norway, Finland and Denmark) and Findus Southern Europe (including France, Spain and Belgium), though they exclude Young’s Seafood, Findus’ Grimsby-based fish and seafood company.

Acquired taste?

This focus on the frozen foods sector has divided opinion. Frozen foods aren’t exactly flavour of the month with consumers - sales are in decline in developed markets and the category, rightly or wrongly, fares worse than chilled food when it comes to quality perception.

Margins for frozen food businesses are also thin; they must bear the costs of refrigerated vans and retail units and face private-label competition from the supermarket multiples and the discounters.

Yet frozen food players make money and throw off plenty of cash. In 2014, Iglo managed to generate an adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of €306 million off a top-line of €1.5 billion - an adjusted EBITDA margin of 20.4% - and its cash conversion was high at 90%. Though its return on sales hardly sets pulses racing, Iglo is focused on driving growth and expanding margins through product innovation.

Owned by private equity firm Lion Capital, Findus is a leading international frozen food brand, growing, developing and marketing products spanning vegetables, prepared meals and recipe dishes. The brand, beloved across the retail and foodservice channels and spanning everything from cottage pies to crispy pancakes, is market leader in its frozen niche in Sweden, Norway and Finland. In France, it has the highest recognition of any frozen brand, while it is also the market leader in frozen vegetables in Spain.

All that said, Findus was at the centre of the horsemeat scandal in 2013, an episode that tainted the brand. Findus was caught up in the scandal after it emerged that some of its beef products in fact contained 100% horsemeat. Products were eventually withdrawn from the shelves, though the company was accused of reacting to the crisis too slowly, Findus’ sales are understood to have recovered strongly, which in part explains Nomad’s present interest in a deal.

In favour of frozen

It is also important to understand that a number of trends are supportive of frozen foods, which have practical advantages over chilled alternatives. Consumers have become more concerned about the amount of waste they produce, and frozen food is useful in restricting waste, while hectic lifestyles mean frozen foods are ideal for time-poor consumers who don’t want to cook with raw ingredients. Indeed, the freezing process preserves the intrinsic qualities of food such as nutritional value and taste, and also lends itself to lower waste and value, meaning frozen food has scope for margin-enhancing innovation.

Though the market backdrop is challenging, by crashing Findus and its biggest frozen food rival Iglo together, Nomad’s canny management team should be able to generate savings and even top-line progress in time.

The UK frozen food market, one of the most profitable of its kind in Western Europe, actually performed steadily in 2014, with growth stimulated by low prices in comparison to chilled foods as well as a recovery in consumer trust following the horsemeat debacle. From a European perspective, frozen foods’ price-competitiveness versus their chilled and fresh counterparts also augurs well for Findus and Iglo alike, as eurozone consumers are seeking value.

Heavyweight backing

Nomad, thought to be running the rule over other potential food deals, including in sectors adjacent to frozen food, bolstered its boardroom through the appointment (12 May) of Stefan Descheemaeker as CEO.

Descheemaeker is a seasoned food retailing and consumer goods player, able to point to a pivotal role in the merger that created Stella Artois-maker Anheuser Busch Inbev (ABI:EBR). It is also worth noting that the buy-and-build’s backers include astute US hedge fund manager Bill Ackman, with a 19.6% stake through Pershing Square Capital Management, as well as Dan Loeb’s Third Point.

Shares says:

Though the frozen food sector’s margins are slim and competition cut-throat, Nomad’s management has the credentials to drive significant shareholder value creation. Put Nomad on your watchlist at $21.26 as this could become a tasty treat you won’t want to miss.