INSIDE THE DEAL
Hormel goes nuts for new asset Planters
By Dean Best
Some eye-catching M&A news out of the US last month, with Spam owner Hormel Foods announcing the largest acquisition in its history.
But it wasn't a deal necessarily universally welcomed by the market, looking at how Hormel's share price reacted in the wake of the announcement.
Hormel is to pay more than $3.3bn for Kraft Heinz's Planters snack-nut arm, assets the Skippy peanut-butter maker's CEO, Jim Snee, described as "an excellent addition" to the company.
Snee told analysts that the acquisition is part of the company's "evolution as a global, branded food company", and said that the new snack business would further diversify the business from its core meat origins.
In recent years, Hormel's M&A strategy has focused on the Americas, snapping up a series of assets in the US, as well as a meat supplier in Brazil. It was the early weeks of 2013 that saw Hormel's last truly international deal when the company bought Skippy from Unilever.
Hormel forays out of the meat category
However, unlike Skippy, Snee conceded that Planters has "a nominal amount" of its sales outside the US. What Planters does, he underlined, is further broaden the Hormel portfolio into the growth areas of snacks. Once the Planters deal is completed (expected to be in the second quarter of this year), a quarter of Hormel's annual sales will be in "non-meat" products, he said.
Hormel's management was keen to talk up the opportunities it believes Planters, which will become the company's largest brand, offers the business.
"Planters truly is an iconic brand, with over $1bn in sales, leading positions in many snacking categories, universal consumer awareness, and a significant presence across the retail and C-store channels," Snee said.
The Hormel chief said that the Planters purchase could be a forerunner of more deals in snacks.
"The acquisition of Skippy allowed us to expand into other parts of the nut butter category, which led to the acquisition of [US nut-butter business] Justin's. We believe that Planters could act as a similar catalyst into other areas of the snacking space," he said. "Snacking continues to be a growth area for this business and for our business, and that's what we're projecting into the future."
There is, Snee told analysts, "a lot to like about this transaction, both financially and strategically". He emphasised the opportunity Hormel sees in the convenience-store channel.
"We are very excited about the C-store business. It's an area that we've had very minimal exposure with our portfolio, and this opens the door for us to learn more about it," he said.
Snee also said that Planters was "not only a perfect strategic fit, it was also financially attractive", adding: "We believe that by acquiring this business, we are leveraging our balance sheet in a responsible way, adding a margin-accretive business to our portfolio and unlocking significant value in the form of synergies to further enhance our shareholder returns."
In the wake of announcing the move for Planters, Hormel's shares closed down more than 3% at $48.17, having hit $47.74 earlier in the afternoon.
Hormel CFO Jim Sheehan said that included in the $3.35bn price tag is a tax benefit with "a net present value" of $560m, which adjusts the purchase price of $2.79bn.
"This adjusted purchase price implies a 2020 EBITDA multiple of 12.5 times, which speaks to our disciplined valuation process," Sheehan said.
Hormel said that the Planters business would be "accretive" to its margins. Management also told analysts that Hormel, as a home to nut-butter brands, expects to generate "significant supply chain, SG&A, and sales synergies" of up to $60m from the deal by 2024.
Nonetheless, the headline price tag works out at around three times Planters' annual sales, which is a healthy-looking sales multiple for what some may deem to be something of a tired brand.
The latest Kraft-Heinz disposal
For Kraft Heinz, the sale of Planters is the company's latest disposal under CEO Miguel Patricio as the ketchup and soup giant focuses on products it believes have better prospects.
In September, Kraft Heinz sold a clutch of cheese brands, including Breakstone's and Athenos, to French dairy giant Lactalis for $3.2bn.
That disposal came alongside the announcement of a wider "transformation plan" at Kraft Heinz as it seeks to grow more consistently after a period when its financial performance has been under scrutiny, its sales had been under pressure and its debt pile has been in the spotlight.
The announcement of the sale of Planters came alongside the publication of Kraft Heinz's 2020 financial results and Patricio was quizzed about the disposal on a call with analysts yesterday afternoon. The sale of Planters helped, alongside Kraft Heinz's Q4 results, push up its share price yesterday.
As perhaps would be expected by the seller in a transaction, Patricio sought to underline why Kraft Heinz was better off disposing of the business.
"Planters is a very iconic, very strong brand, so this is not something that we took lightly but, to improve our portfolio, we must focus on areas where we see the greatest competitive advantage, the greatest potential and returns," Patricio said.
"Planters is one of the brands that is most affected by private label in our portfolio. It's also, of course, affected as a commodity and so, when we looked at that, in order to have more flexibility towards the future on building a portfolio, I think that we made that choice. And we are very happy with that."
In its presentation to analysts and investors, Kraft Heinz said the price it was receiving for Planters represented a multiple of approximately 17 times the asset's adjusted EBITDA in 2019 and 15 times that of last year. Kraft Heinz said the 2019 figure "represents [the] estimated Adjusted EBITDA run-rate in an environment not impacted by Covid-19".
Nevertheless, Hormel remains upbeat about the prospects for Planters. AllianceBernstein analyst Alexia Howard reflected how the snacks business stayed with the then Kraft Foods Group after snacks-centric Mondelez International was spun off in 2012 "since it had been such a tough business to manage for many years".
Snee said that Planters saw "good growth really across the board" in 2020 even as gains in retail were offset to an extent by in c-stores and in foodservice amid the pandemic.
Hormel CFO Sheehan added that Planters "reacted well" to an increase in investment Kraft Heinz put behind the business last year. "I think that also supports our theory of running this business with a higher level of investment is going to pay a dividend on the long-term," he said.
Shareholders will not want to turn salty over Hormel's big-ticket move in snacks.
For the latest food deals analysis, visit GlobalData's Consumer Intelligence Centre.