Smuckerâs acquisition drive gears up after structured deal for Folgers
- June 12, 2008
||joint announcement of merger of business unit with company, June 2008
||Folgers brand and business (USA), leading domestic packaged retail coffee producer
||J.M Smucker Company (USA), leading domestic branded dry foods producer
||Procter & Gamble (USA), multinational FMCG group
||40% increase in scale, entry into large branded coffee market, strong brand
||final exit from food products, focus on core and growth businesses
||Folgerâs is 12th brand acquisition made by Smucker since 2002
This transaction between P&G and Smucker is almost identical to one earlier in 2008, between Kraft and Ralcorp over Post cereals; even down to the valuations. The only fundamental difference is that Smucker was already a brand -focused company, before the deal. For sure, this type of cash âfree, tax âefficient merger structure is now a pattern; one that could be replicated for other large âscale but mature businesses, especially now with harsher credit markets.
With private equity in retreat, there was no-one willing to pay a full price for Folgerâs which, at the end of the day, is a very mature packaged coffee brand, in an environment where specialty and authentic and to-go coffees are taking all the growth.
So, a clever âwin-winâ scheme is devised, where (i) P&G management gets the âgrossed upâ valuation it wants, and no longer has to manage this non âcore business; (ii) P&G shareholders gain 54% of a combined Folgers and Smucker entity; (iii) Smuckerâs management and shareholders acquire a major brand, quite cheaply, to grow their business by 40% and to enter the large branded coffee segment of dry foods. (Far bigger than the groupâs hitherto domains of jams, peanut butter, sandwiches and ice cream toppings).
The similarities with the Post deal are more than co-incidental. In both cases the deals are shares and assumed debt only; the transaction is cash free and tax free; the grossed âup valuation is not far south of a x4 Sales multiple; the buyer increases the scale of his operations by around 50%; the sellerâs shareholders end up keeping over 50% of the combined entity.
This will not be the end of Smuckerâs acquisition binge, which started in 2002 with the acquisition of Jif and Crisco, also from P&G, and has seen 10 further brand acquisitions since then. In 2008, for example, two-thirds of Smuckerâs 22% revenue growth came from acquisitions.
Management has stated that further purchases will be made, consistent with the groupâs top âline growth target of 6% p.a. One very âlow hangingâ candidate is the specialty salty snack brand Pringles. Thatâs an obvious one considering itâs also for sale now, and P&G is again the seller. There isnât likely to be a major bidding war for Pringles either, with Pepsico so dominant in that category.
We might see another structured deal, of this type, between these two groups, with respect to Pringles, in the near future. If not, there are other potential divestments out there, that could be packaged in this way. Not least of all, itâs still not too late for Dr Pepper Snapple to merge with Cott, especially now that the latter has progressed its turnaround and refinancing programme.