Win-Win Peanut Butter Deal

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In the effort of expanding its business into general packaged foods and accelerate its growth in China, Hormel Foods (NYSE: HRL) has agreed to acquire the Skippy peanut butter business from Unilever (NYSE: UN) for total $700 million in cash. Skippy is considered to be the number two peanut butter brand in the US, just behind Jif brand, which belongs to J.M. Smucker Company (NYSE: SJM). Does Hormel become more attractive in investors’ eyes after the deal? 

Diversifying Product Portfolio with the Strong Brand

Skippy brand has a storied history, dating back as far as 1932. It belonged to Unilever when the company acquired Bestfoods for $22.7 billion thirteen years ago. The brand ranks the second in the US market and it holds the leading position in the Chinese market, which was reported to experience rapid growth in peanut butter business. With 11 varieties, Skippy owns roughly 18% of the US market, whereas Jif owns much more than that, of around 34% of the total peanut butter market. CEO Jeffery Ettinger of Hormel felt excited about the deal: “The acquisition of Skippy peanut butter business represents a significant opportunity for Hormel Foods. It allows us to grow our branded presence in the center of the store with a non-meat protein product and it reinforces our balanced portfolio. The fast growing international line will also strengthen our global presence, and should be a useful complement to our sales strategy in China for the Spam family of products." Indeed, Skippy is the good target for its plan to expand in overseas market and the plan to diversify its product portfolio with non-meat items. 

Generous Price? But on Good Purchases?

Skippy generated around $370 million in annual sales, whereas $100 million were generated from international markets including 30 other countries on all five continents globally. Out of the $100 million in international sales, China brought to Skippy around $30 - $40 million in sales in the recent year.  Actually, in October, when Unilever said that it considered selling Skippy, analysts estimated that the deal would be in the range of $300 million to $500 million. Thus, with the annual sales of $370 million, the deal would value Skippy at as high as nearly 1.9x sales. The deal seems a little expensive compared to its own price-sales valuation of 1.1x in the market. Hormel expected that by fiscal 2014, Hormel could see the benefit of 13 to 17 cents added to the EPS. With the current shares outstanding of around 269 million, $0.13 to $0.17 per share would translate into $35 million to $45.7 million in profit. On the deal, Moody’s also revised outlook for Hormel’s from stable to positive. Moody’s feels more confident that Hormel, even with the growth via acquisition strategy, would still be conservative and have stable operating performance. Hormel Foods is indeed quite conservatively structured. As of October 2010, it booked more than $2.8 billion in total stockholders’ equity, $760 million in cash and short-term investments, only $250 million in long-term debt and $615 million in pensions and other benefits.

Another Food Exit for Unilever

For Unilever, the sale of Skippy is another success to exit the food business, which hasn’t performed so well. In 2010, it has divested the last remaining unit in its European Frozen Food business, Findus Italy to private equity group Permira. In August, it already completed the sale of its North American frozen food business to ConAgra Foods for around $267 million, including Bertolli and P.F Chang’s. Unilever has shifted its focus to Beauty & Personal care including hair care, oral care, skin care, etc., via both organic growth in emerging markets and via acquisitions.

Valuation

Valuation-wise, at the trading price of $34.31 per share, Hormel Foods is worth more than $9 billion in the market. It is valued at 10.10x EV/EBITDA. Unilever is worth $108.84 billion in the market, and is valued at 11.52x EV/EBITDA. J.M. Smucker, the owner of Jif, the leading peanut butter brand in the US, seems to be the cheapest, at nearly 10x EV multiples, with the total market capitalization of $9.78 billion.

Foolish Take

Even with the generous price, the acquisition of Skippy would give Hormel good product portfolio diversification with the non-meat item. Unilever is also better off with its food business exit, to refocus on the personal and beauty care in the fast-growing markets. Those two businesses could be in the income portfolios of the long-term investors.


hoangquocanh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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