NEW YORK (TheStreet) -- The organic food category is abuzz on Tuesday following General Mills' (GIS) - Get Report plan to acquire Annie's (BNNY) , a maker of organic and natural food products, for approximately $820 million.
The companies announced the deal Monday night, saying that Annie's products would join General Mills' U.S. natural and organic products portfolio, which includes Cascadian Farm, Muir Glen, Larabar and Food Should Taste Good brands. For fiscal 2014, which ended in March, Annie's had net sales of $204 million. Net sales for General Mills' organic brands totaled $330 million for fiscal 2014 (ended in May), according to a press release by General Mills.
General Mills is offering to pay $46 a share in cash to Annie's shareholders, which is a 37% premium to Annie's closing price on Monday. The Minneapolis-based company will launch a tender offer within 10 business days to purchase all outstanding shares of Annie's.
"This acquisition will significantly expand our presence in the U.S. branded organic and natural foods industry, where sales have been growing at a 12% compound rate over the last 10 years," Jeff Harmening, General Mills executive vice president and chief operating officer -- U.S. retail, said in press release. "Annie's competes in a number of attractive food categories, with particular strength in convenient meals and snacks -- two of General Mills' priority platforms. Consumers know and trust Annie's purpose-driven culture and authentic brand. We believe that combining the Annie's product portfolio and go-to-market capabilities with General Mills' supply chain, sales and marketing resources will accelerate the growth of our organic and natural foods business."
Shares of Annie's were surging 37% to $45.99 on Tuesday. Shares of General Mills fell fell 0.37% to $53.31. The deal is expected to be completed by the end of the year. Here's what analysts are saying Tuesday about the deal.
Scott Van Winkle, Canaccord Genuity (Annie's: Hold; $46 PT)
General Mills' proposed acquisition of Annie's supports our thesis that BNNY enjoys one of the strongest brands in the natural/organic food industry, along with an efficient business model and favorable sector growth.
At ~20x C2015E EBITDA, over 3x forward revenue forecast or just under 42x C2015E EPS, the valuation is above industry averages and speaks to not only Annie's brand, but the attractiveness and growth of the natural/organic sector. While we don't rule out the emergence of a superior offer, we can't envision a superior bid could emerge. Expect sector multiples to expand, with BDBD and HAIN as prime beneficiaries, among others. The broadening distribution of natural/organic brands into supermarket channels only increases the likelihood of further deals.
Last week (9/3), we initiated coverage of Annie's Inc. (BNNY, at $32.72), Boulder Brands (BDBD) , and WhiteWave Foods (WWAV) with Outperform ratings. We assumed an initial positive view toward the space largely predicated on the potential for sector top-line trends to remain robust, driven by favorable consumer shifts to healthier eating, product innovation, grocery retailers aggressively embracing natural/organic products, increasing consumer awareness, and a strengthening US economic backdrop. Last night (9/8), Annie's announced a definitive agreement to be acquired by General Mills for $820M in cash. The price implies a nearly 40x P/E multiple to consensus FY15 forecasts. We expect the transaction to lift the valuations for both BDBD and WWAV near term and represent another positive for the space.
Robert Moskow, Credit Suisse (General Mills: Neutral; $53 PT)
General Mills announced it intends to buy Annie's for $46/sh in cash, representing a 37% premium to today's close. We think it is paying a full price for the business (29x FY15 EBITDA), but not necessarily overpaying given Annie's strong 20% per year track record for sales growth and the opportunity to improve the cost structure of the supply chain. As we have written in prior reports, the Annie's brand is uniquely positioned to capitalize on the growing demand for processed foods with organic and natural ingredients. General Mills needs to build more scale in its Small Planet Foods division, and this is a fast (albeit expensive) way to do it. Sales for this division will increase from approximately $350 currently to nearly $600 with the acquisition. By our math, the transaction will be only modestly accretive to year one EPS (excluding potential synergies) if we assume a 2% financing cost on new borrowings to fund the transaction (see Exhibit 1).
We don't have all the details, but we believe that Annie's board shopped the business to potential strategic acquirers this year. As a result, while it is certainly possible that today's news could attract another party of interest, we think General Mills already made the most attractive offer.
Jason English, Goldman Sachs (General Mills: Sell; $45 PT)
While we expect the proposed acquisition would dominate discussions on GIS in the coming days, we believe it is unlikely to have a material impact on the firm's trajectory. For perspective, BNNY's $204 mn of FY14 sales are only modestly over 1% of GIS' FY14 sales. Based on its size, and assuming consensus sales estimates for BNNY were achieved, we estimate it would accelerate GIS' organic sales growth by a modest 20 bps were the deal to be consummated and the business included in its base. That said, we view GIS' strategy of diversifying away from its challenged US center-store roots and into higher growth natural and organic categories as sound. GIS plans to fund the proposed acquisition through available credit and expects the deal to be accretive in the first 12 months, excluding one-time expenses. ... We believe GIS can produce and distribute the products in-house, and management stressed its ability to apply its supply chain, sales and marketing expertise to the business. We note the average synergy target for M&A in Food has been 7% of acquired sales.
TheStreet Ratings team rates ANNIE'S INC as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:
"We rate ANNIE'S INC (BNNY) a SELL. This is driven by a number of negative factors, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its generally disappointing historical performance in the stock itself, unimpressive growth in net income, disappointing return on equity, premium valuation and poor profit margins."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The share price of ANNIE'S INC has not done very well: it is down 24.49% and has underperformed the S&P 500, in part reflecting the company's sharply declining earnings per share when compared to the year-earlier quarter. Looking ahead, we do not see anything in this company's numbers that would change the one-year trend. It was down over the last twelve months; and it could be down again in the next twelve. Naturally, a bull or bear market could sway the movement of this stock.
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Food Products industry. The net income has significantly decreased by 156.2% when compared to the same quarter one year ago, falling from $2.17 million to -$1.22 million.
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. When compared to other companies in the Food Products industry and the overall market, ANNIE'S INC's return on equity is below that of both the industry average and the S&P 500.
- The gross profit margin for ANNIE'S INC is currently lower than what is desirable, coming in at 29.50%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of -2.81% is significantly below that of the industry average.
- You can view the full analysis from the report here: BNNY Ratings Report
-- Written by Laurie Kulikowski in New York.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.