At the eleventh hour, KKR & Co. has clinched what is likely to be Europe's biggest leveraged buyout of 2017.
The US private equity firm's €6.8 billon agreement to buy Unilever's spreads business will need some full-fat ingredients to generate a decent return.
The Anglo-Dutch consumer giant put the business on the block in April after Kraft Heinz's unsolicited takeover attempt in February prompted a strategic rethink. Spreads are out of fashion as consumers return to butter, and the business was dragging down Unilever's organic growth.
The operation generated €680 million of EBITDA for Unilever last year. Assume some growth, deduct certain overheads that won't travel to KKR, and the figure for this year could be closer to €770 million.
That would value the deal at about nine times EBITDA - a little less than the average multiple of 10.9 in similar deals over the past three years, according to Bloomberg data.
It's far less than the 20 times multiple McCormick & Co. paid for Reckitt Benckiser's French's sauce business, according to Bernstein research.
Given the unappetising prospects for spreads, it's no surprise records aren't being set. Unilever shareholders shouldn't grumble, though.
The backdrop for the sale could hardly have been better: competing interest from Apollo Global Management and CVC Capital Partners created a tense auction, and a rising stock market is buoying valuations.
Unilever says it will return the proceeds to shareholders (unless it finds another acquisition to make). It loses some earnings, but its overall growth profile will improve.
The sale of one of its worst-performing units will also serve to remind shareholders it's getting on with its promised revamp - useful when the company's share price has drifted since the disappointing third-quarter sales figures.
For KKR, the challenge will be to make its margarine binge pay handsomely. Assume €4.4 billion of debt financing, about six times EBITDA. That's do-able given the cash-generative nature of the business. The equity cheque would be just €2.4 billion.
Under focused, entrepreneurial management, it might be possible to give the business a new lease of life. There's an opportunity to re-position Unilever's spreads to the millennial market. What's more, KKR could use the business as a platform for future deals, hoovering up some of the other unloved parts of the big food producers.
Suppose with all this KKR were able to achieve a transformation and increase EBITDA to €1 billion over five years, equivalent to 6% annual expansion.
Now assume that KKR can sell for a slightly higher multiple. If the business went for 11 times EBITDA, the business would then fetch €11 billion. The exit equity would be €6.7 billion - giving KKR a healthy 22% internal rate of return.
That would be highly embarrassing for Unilever CEO Paul Polman. But, by then, he will have moved on to other things.