Irish food group IAWS has just spent $561 million on its biggest takeover so far, writes Laura Slattery

In a blaze of iced double chocolate brownies, blueberry muffins and "supreme indulgence" cookies, IAWS plc has cooked up another appetising acquisition.

The Irish food group's $561 million (€448 million) purchase of US baker Otis Spunkmeyer is its biggest takeover to date and promptly helped its share price rise to a record high this week.

Otis Spunkmeyer supplies American-style cookies, muffins, pastries and bagels to the food service sector. It has a mouth-watering 60,000 customers, the biggest of these being the fast food franchise Subway.

The entirely debt-financed deal, which pleased the palates of food sector analysts as well as shareholders, is the latest to be sealed by a company that has developed a strong reputation for strategic buys.

It will also significantly enhance IAWS's presence on the other side of the Atlantic, where it already owns the La Brea bakery and has a joint venture in Canada with restaurant chain Tim Hortons.

The company has put in place a €950 million debt facility to fund the acquisition from private equity group Code Hennessy & Simmons and the company's management.

According to IAWS chief executive Owen Killian, this will leave IAWS with about €150 million for future acquisitions. But it is unlikely that IAWS will bite at another large purchase in the immediate future, he says.

The next step for the company is likely to be an attempt to harness cross-selling opportunities and marketing synergies between La Brea and Otis Spunkmeyer.

Sadly, there is not and never was a Mr Spunkmeyer. The name was bestowed upon the company by the founder's then 12-year-old daughter, according to its website.

Selling sweet baked goods to the food service sector complements rather than overlaps with La Brea's upmarket artisan bread, which is sold to food retailers.

IAWS has spent over €100 million investing in the California-based La Brea's infrastructure, adding facilities in New Jersey to give it a presence on both coasts. Sales rose 26 per cent in its last financial year, ending in July.

But crucially for IAWS, Otis Spunkmeyer has a network of 52 distribution centres.

"Its distribution capability is something we didn't have before," says Mr Killian.

The IAWS chief says he has enormous confidence in American appetites for its products. The US market already accounts for a more than a quarter of its profits, and this proportion is expected to rise to more than a third. If the Canadian business is included, profits from North America will now account for 48 per cent of group profits, according to NCB Stockbrokers.

"In the US, 50 cent in every $1 is spent on food consumed outside the home, so the food service market is important for us to be in," says Mr Killian.

The Otis Spunkmeyer deal, as well as adding 4 or 5 per cent per annum to earnings per share (eps) and sustaining mid-teen eps growth, trebles the size of IAWS's US operations at the stroke of a pen, notes Liam Igoe, an analyst at Goodbody Stockbrokers.

It was the 1997 takeover of Cuisine de France that marked the reinvention of IAWS plc from an agribusiness to one that focuses on the "food-on-the-go" market segment.

The company has also built up a 32 per cent stake in the Swiss baker Hiestand, which has operations in Switzerland, Germany, Poland, Austria, Singapore, Malaysia and Japan, giving it a truly global footprint, Igoe notes.

IAWS's last major acquisition was the €130 million purchase of French specialist bakery business Groupe Hubert in late 2004.

IAWS makes use of a process known as par baking, where the products are 90 or 95 per cent baked, then frozen, so they can be quickly baked off in supplied ovens at the point-of-sale and sold fresh.

"It is a technology, for want of a better word, that is very popular with retailers who want to upgrade their offerings to consumers," says Mr Igoe. "You might say that some of the Cuisine de France products are getting a bit tired, just because we have been looking at them for 10 years." But Groupe Hubert has made some product innovations, he notes, while La Brea bread and Tim Hortons's doughnuts have been on trial in Ireland.

IAWS could decide to test Otis Spunkmeyer's produce here, although it will perhaps not export the seasonal "red, white and blue" cookie aimed at those who want to celebrate the Fourth of July with some colour-coordinated confectionary.

Although it has taken on a lot of debt, the Spunkmeyer deal will be a great one for IAWS if it rolls out the way its management anticipates, says Kevin McConnell, head of equity research at Bloxham Stockbrokers.

Some 80 per cent of IAWS profits are now derived from its food divisions. The feed and fertiliser side of things has gone through a rough patch of late, although a foot and mouth crisis in Brazil last year did benefit the company. But it is not a growth sector.

"It is something of a cashflow generating business for them at this stage," says Mr McConnell.

The agribusiness sector is likely to start consolidating over the next couple of years and the IAWS businesses will probably be a part of that process, Mr Igoe surmises. A sell-off doesn't appear out of the question.

But Mr Killian says the company will continue to invest in the agribusiness division so that it remains "best in class".

For the moment, it is apparent that IAWS's focus will be on fast-growing segments of the food sector. Mr Killian says the company will grow organically for the most part, but make strategic acquisitions in new areas when setting up from scratch would take too long. IAWS deserves to trade at a premium on the Irish market, according to Mr McConnell.

Bloxham forecasts that eps at IAWS will be 92 cents next year. Based on Wednesday's closing share price of €16.30, this would mean IAWS would be trading at more than 17.5 times its earnings. But similar international companies frequently trade at 20 times earnings, meaning the stock is "still quite cheap".

For his part, Mr Killian, who took over as chief executive from Philip Lynch in 2003, is pleased but not surprised by the market's verdict that the deal is far from half-baked. "The market response has been positive and should be broadly positive. This is not a step outside of our usual path."

It seems, as NCB Stockbrokers put it yesterday, like a sweet deal.